Monday, December 8, 2008

General Motors: Myths And Reality

Jerry Flint

The auto business is different from other endeavors, so some traditional business rules do not apply.

Forget what some people in the media are saying. General Motors is not going out of business. Yes, the company is in a terrible crisis, but even if the business here completely fails, GM's foreign empire--in Europe, Brazil and China--will carry on the fight.

In Europe, General Motors (nyse: GM - news - people ) newest sedan, the Opel Insignia, just won "car of the year" from the Continent's car writers. GM's sales in Brazil and Argentina--574,000 cars and trucks in 10 months--are 20% ahead of last year. This company will endure, regardless of what happens in the U.S.

Another misunderstanding is that the high price of labor is the company's greatest problem. Yes, labor costs are high, but that $75 an hour includes benefits, such as Social Security and health care. Base pay rates in the non-union auto plants are quite similar to the union rates, but older, higher seniority workers get more. The foreigners also do not have any pension costs--yet.

Keep in mind that volume is the key cost factor in this industry. Run a factory at three shifts and sell every vehicle at top dollar and the profits are great. Run at 50% capacity and the losses are great, whether you are General Motors or Toyota Motor (nyse: TM - news - people ).

The greatest problem for any automaker is creating vehicles that win customers. Today, the industry faces a new challenge: credit. Dealers need credit to finance their inventories and customers need credit to buy new cars.

Another myth is that retraining will help if Detroit goes down. Retraining does not work. I know because I read it in The New York Times--and I remember because I wrote that story. The people who get the most out of retraining are those hired to do it. If the trainees are paid, then it is little more than extended unemployment compensation.

General Motors' great gamble is the Chevrolet Volt. If it flops, GM falls on its face, bailout or no bailout. Just do not ask if the Volt will make money. That is not the issue.

GM promises that this vehicle, a plug-in electric hybrid, will travel as far as 40 miles just on electricity stored in its batteries. Then a gasoline engine will power a generator that will create more electricity to turn the wheels. Consumers will be able to plug in the car at home to recharge the batteries.

The Volt is a halo vehicle; its purpose is to lure people into showrooms to see it, and to get people interested in GM cars. Most important to GM, the Volt can help restore its prestige as a technological leader, in greenness and in an energy-efficient future.

Halo cars do not have to make money. Toyota Motor's hybrid Prius was a halo, created to show the world what Toyota could do technically--and it worked. Until recently, the Prius was not a profit center. The Dodge Viper was a halo for Chrysler, showing it was still in the car game and could excite people. The Pontiac Solstice is a halo, as are the "V" high performance models from Cadillac.

What the Volt must do is work. It must have an all-electric range of 40 miles every time. It must start every time. Its gasoline engine must work perfectly in running the generator. There is no "rebooting" for cars; it must recharge perfectly every night so it can do it all again the next morning. The Volt must turn out to be practical, which is no easy task with this new technology.

The Volt faces obstacles too. You cannot run a cord from your sixth-floor apartment to recharge it. To get those 40 miles on electric power, the car needs lots of batteries, maybe $10,000 or more worth.

Eventually those lithium ion batteries in the Volt should cost less than nickel metal hydride batteries in the Prius (now $3,000 to $4,000), since they use less expensive materials. "You don't need to carry 50 pounds of nickel," one battery company man told me.

General Motors has far more at stake with the Volt than Toyota ever had with the Prius. Toyota could afford a failure; GM cannot. The Volt will not turn around GM. To remain viable, GM needs many more winners in its conventional lineup, such as the Chevrolet Malibu and Cadillac CTS, and a home run with its new lower-priced car, the Cruze, which it plans to build in Lordstown, Ohio, in 2010.

In the future, there could be an entire line of Volt models. Remember, Toyota did not sell many Prius cars in its first years (5,562 in 2000; 6,254 in 2001). The Volt does not have to make money; it just has to work--and make sense to car buyers.

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Online journalists now jailed more often than other media

By Nate Anderson

If you think it's tough to be a blogger because your Google AdWords revenue has been in the toilet lately, the Committee to Protect Journalists wants to remind you that Internet journalist—including bloggers—can and do suffer much more around the world. According to the group's new report, Internet journalists now make up the largest single group of imprisoned journalists.

Of the 125 journalists imprisoned around the world for doing their jobs, 45 percent are "bloggers, Web-based reporters, or online editors." China continues its ten-year winning streak when it comes to tossing writers into jail, with Cuba, Burma, Eritrea, and Uzbekistan next in line.

The numbers are down slightly from December 2007, but CPJ notes that the arrests are hitting freelancers the hardest. Without the resources of a major media company behind them, lone bloggers and freelance writers often lack the resources to mount a vigorous defense when they are detained.

Data source: CPJ

"The image of the solitary blogger working at home in pajamas may be appealing, but when the knock comes on the door they are alone and vulnerable," said CPJ Executive Director Joel Simon. "All of us must stand up for their rights—from Internet companies to journalists and press freedom groups. The future of journalism is online and we are now in a battle with the enemies of press freedom who are using imprisonment to define the limits of public discourse."

The results of angering a regime can be severe; CPJ's complete capsule summaries of the detained journalists contain story after story of lives utterly changed by publishing information or opinion that displeased the government. In Burma, Nay Phone Latt wrote a blog of his own and ran several Internet cafes, but he irritated the Burmese ruling junta by publishing online caricatures of various generals. He was hauled away on January 29, tossed in jail, charged with "causing a public offense," and sentenced to 20 years and six months in jail during a closed trial.

The US makes the list, too, for its treatment of journalists in Iraq. According to CPJ, "US military authorities have jailed dozens of journalists in Iraq—some for days, others for months at a time—without charge or due process. No charges have ever been substantiated in these cases." This is the fifth straight year that America has made the list.

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Tribune Co. Taps Lazard,Weighs Filing for Chapter 11

Tribune Co. is preparing for a possible filing for bankruptcy-court protection as soon as this week, according to people familiar with the matter, in a sign of worsening trouble for the newspaper industry.

[Samuel Zell]

Samuel Zell

In recent days, as Chicago-based Tribune continued talks with lenders to restructure its debt, the newspaper-and-television concern hired investment bank Lazard Ltd. as its financial adviser and law firm Sidley Austin to advise the company on a possible trip through Chapter 11 bankruptcy, people familiar with the matter say.

A Tribune spokesman said the company doesn't comment on rumors or speculation. Tribune owns eight major daily newspapers, including the Los Angeles Times, Chicago Tribune and Baltimore Sun, plus a string of local TV stations.

A spokeswoman for Lazard didn't respond to requests for comment. Representatives of Sidley Austin couldn't be reached for comment.

Tribune's latest actions underscore the deepening distress enveloping Tribune and other newspaper publishers. Their businesses are being battered by dwindling advertising sales, and many are carrying debt loads that are unmanageable in current market conditions. Industry insiders expect some papers will need to fold in coming months or seek protection from creditors to reorganize.

Tribune has been on wobbly footing since last December, when real-estate mogul Samuel Zell led a debt-backed deal to take the company private. Tribune has stayed ahead of its $12 billion in borrowings with the help of asset sales. Now, however, shrinking profits are tightening the noose.

The company's cash flow may not be enough to cover nearly $1 billion in interest payments due this year, and Tribune owes a $512 million debt payment in June.

One of Tribune's most pressing concerns: The company is likely to be in violation of debt terms that limit borrowings at the end of the year to nine times its adjusted profits. The ratio stood at 8.3 at the end of the second quarter, before Tribune reported an 83% decline in operating profit for the three months ended Sept 28.

Violations of such debt covenants have become commonplace for newspaper companies as their profits have ebbed. Lenders so far have been willing to give the companies a pass in exchange for higher interest rates and other concessions, but Tribune has little wiggle room. Terms of the company's debt already are so loose and its financial standing so unsteady that a covenant waiver may not help.

To be sure, a restructuring outside of bankruptcy court remains an option for Tribune. Executives have indicated that its talks with lenders are amicable, and it remains possible the two sides can agree to rework the company's borrowings on their own, as other newspaper publishers are doing.

Tribune's hiring of Lazard, meanwhile, brings it a firm experienced in debt restructuring, and one that has become a go-to adviser for newspaper companies in financial distress.

Even as its financial performance worsens, Tribune has some options. A sale of its Chicago Cubs baseball team is under way, and Tribune owns valuable stakes in businesses including the cable-TV channel Food Network.

Tribune already has auctioned off pieces of the company, including the Long Island, N.Y., daily Newsday to raise cash. Now, frozen credit markets have depressed sale prices.

Selling off more newspapers may not be a viable alternative because buyers are scarce and Tribune may be better off holding onto the profits from its papers.

—Jeffrey McCracken contributed to this article.

Write to Dennis K. Berman at, Shira Ovide at and Matthew Karnitschnig at

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Obama may spell end of blank cheques for Israel

Agence France-Presse

JERUSALEM (AFP) — Israel can no longer expect "blank cheques" from Washington once president-elect Barack Obama's administration takes over in January, a former US ambassador to the Jewish state said on Sunday.

"The era of the blank cheque is over," said Martin Indyk, director of the Centre for Middle East Policy at the Brookings Institute who is considered close to incoming secretary of state Hillary Clinton.

"The Obama administration intends to be engaged, using diplomacy to try to bring about a safer and more peaceful place, that is different from the seven years of the (George W.) Bush administration," he said on public radio.

"President Obama surely will want to work with Israel on this (Middle East) agenda. But there are obligations on both sides (Israel and the Arabs). Both sides will have to respect these obligations," Indyk said.

Acting Prime Minister Ehud Olmert held a "long conversation" with Clinton earlier this week and welcomed her nomination in Obama's team, his office said. She vowed to work for peace and stability in the Middle East.

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