GM: Getting Burned on Both Ends by High Commodity Prices

Even though frequent Spend Matters readers know that I'm not a GM fan, I am beginning to feel a bit sorry for the auto giant. The latest news that their logistics and commodity related costs are rising is bad news for everyone -- shareholders and suppliers especially. The excellent Reuters' article that is linked above states that, "rising oil prices are driving up the cost of shipping parts to General Motors Corp. plants, just as the auto maker is grappling with higher prices for other key components like aluminum, steel and resins." According to the article, rising oil prices are also driving up costs for resins (which are used for plastic injection model parts and other applications). According to the article, each $1 increase in the price per barrel of oil adds roughly $4 million to GM's overall logistic costs. In a market where GM is already, "paying an average of about $550 per vehicle for steel and more for aluminum, which has run to a near 20-year high in price," this rise in pricing is particular damaging. At the same time, GM is getting burned on the sales side, as "high fuel prices have crimped sales of sport utility vehicles in the U.S. market, a profitable niche for GM, which is banking on the success of a new line of redesigned SUVs this year."

Low cost country sourcing is not the answer for all of GM's woes. The article cites GM's purchasing head as also saying that "buying all of the 10 million tons of steel that GM uses per year would be cheapest in China, but quality and shipping problems made that impractical." However, sourcing other components from China makes more sense: "fixed rates on electricity and aluminum from the Chinese government have made aluminum wheel exports from China highly competitive …[GM is] the largest buyer of wheels from China [today]."

Jason Busch

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