What does it take to make a domestic car company profitable? Many things really - some things are obvious to us but other things, which can make a dramatic difference to the companies bottom line, are things which get burried into company process and policy. One of those things, which the average consumer (and apparently GM manager) never looks at, is cash flow.
Cash flow, quite simply, is the amount of money an entity brings in vs. the amount of money an entity spends in a given period of time. If you spend more money in a month then you earn, you have negative cashflow. If you bring in more money than you spend, you have positive cash flow. This financial force is upon every business and person existing in a capitalist society (you and me) but it's impact is greatest felt by businesses that require large amounts of capital in order to offer a product or service. Automakers certainly fall into that high category since they require to spend billions of dollars (build a factory, product R&D) just to bring 1 single vehicle to market.
Right from the start, a car company is in the red for every model it brings to market. It hopes that over a few years, it can develop enough positve cash flow through sales of a particular model, to cover all of the initial and on-going cash demands and hopefully have a few bucks left over that would be registered as profit. That profit can actually increase per unit by simply changing when you pay your supplier and (in GM's case) when you get paid for your product.
To help you better understand this theory, let's take a look at the new camaro. I speak regularly to GM employees who work at the Oshawa plant as well as GM employees involved with the development of the product so my take on this is from that perspective. It takes no more than 5 days (on average) to build a camaro from start to finish. Very little of a camaro's parts are manufactured by GM anymore. In fact, the only thing that GM manufactures is the sheetmetal and the engine - that's it. Everything else is built by companies such as Magna, Martinrea, and American Axle, then transported to the plant for assembly. My point is not that a car plant has little to do since that's so far from the truth (watch "Ultimate Factories - Camaro" the next time it's on the SPEED channel) but rather that most of the parts and pre-assembled pieces from suppliers are on Net 30 payment terms.
What does this mean? Simply that GM has 30 days to pay the supplier from the date of invoice before incurring any additional costs such as interest, penalties or God forbid, part supply disruption. Most often, GM is invoiced every month by it's suppliers which means that a part supplied on December 1st, does not have to be paid for until January 31st. But for the sake of simplicity, let's just assume that GM get's invoiced with Net 30 terms the moment it receives a part for a car. As I indicated earlier, it takes 1 week to build a car and 3 weeks at the very max, to deliver a car to the dealer (continental US and Canada). If a dealer can get the car into the customers driveway within 24 hours, GM can actually pay the suppliers with the money they have earned from the sale of the unit!
This has an incredible impact to the bottom line because now, GM only needs to worry about it's engine and vehicle assembly costs before the car gets sold, not the cost to build the entire vehicle. This means that a car which costs GM 20K to build, may only require a 10K investment or cash outlay provided it can recoup the proceeds of the sale before the supplier invoices become due. Assuming 50% of the cars cost is due suppliers (I believe it is more), the unit profit is 50%! The more upscale the product, the more profit can be earned by the quick turn over. In some cases, profit can be 100% of initial investment. Keep in mind, that this only applies to vehicles which have been ordered before the car was built, not current inventory where carrying costs start to eat away at profit. Obviously, the quicker GM fills a pre-order, the more profit it will make.
So is the new GM doing anything to focus on quick turn over? To some degree yes (turn and earn program), but it's not enough and when required to decide between building a pre-ordered allocation vs. an unsold allocation, they will not take this valuable cash flow model into account. Instead, they argue that building pre-ordered cars from a small dealer before building inventory cars for a large volume dealer, violates state and federal franchise laws. That is why there are literally thousands of Equinox pre-order customers as I write this (those who actually went into the dealership and ordered a car) who currently have to wait months for their vehicle because some high volume dealership wants to put 20 Equinox vehicles on his lot so he can ask above MSRP for it. I'll cover this dealer problem as well as the whole allocation issue in a future article but for now, it should be clear that GM still has plenty of work to do in order to be profitable.
