GM Slashes Costs: Implications for Satellite Radio

GM (GM) announced that they are taking measures to cut costs. GM is not alone. Cash strapped OEMs are suffering from slower vehicle sales, and many are caught with a large supply of gas hungry models that consumers are hesitant to buy with current gas prices. GM is making “Bold Moves” by making cuts such as:

• More than 20 percent reduction in salaried employment cash costs
• Dividend on common stock suspended
• Asset sales and capital market activities to raise $4-7 billion of additional liquidity

For satellite radio watchers, the health of the OEM industry is an important factor to consider. Satellite radio is installed into millions of automobiles each year, and if those cars are not selling, the subscriber rolls do not grow as expected. Yes, eventually the cars sell, and eventually the subs will come, but the subsidy costs for installation and chip sets in many cases have already been paid. A prolonged sales process means that the cash flow of the OEM deals is also stretching.

With auto makers looking to improve their own cash flow, do not look for them to absorb new costs. This is perhaps one reason HD radio is having trouble getting into the dashboards of cars. Unlike satellite, which absorbs some costs associated with installations, Ibiquity is selling the concept that consumers will demand HD, rather than offering an installation subsidy or revenue share. The Ibiquity plan costs OEMs money. Thus, with OEMs cutting costs in every possible way, there is only one natural conclusion: OEMs will not install HD.

For this reason, the Ibiquity proposal that their chip sets be included in all SDARS receivers is more important than ever to Ibiquity. Such a rule would circumvent the need to negotiate with the auto manufacturers, and ensure that HD radios get installed into dashboards. Auto makers like GM and Toyota (TM) have balked at the Ibiquity proposal, but the lobbying efforts are strong. In my opinion SDARS is not locking HD out of the dashboard, it is the economy in general, and the lack of a subsidy on the part of Ibiquity.

Slow OEM sales are a concern for many. Keep an eye on the sector.

Position - Long Sirius (SIRI), XM (XMSR) - No position GM

Comments

[muley101]

Negotiations with auto makers has cost SIRI and XM hundreds of millions. Building the satillite market has cost billions, with terrestrial radio fighting them for every set and opposing themerger all the way. SIRI nad XM can not and should not give that work to HD radio for free. If HD radio will reach 90% of the market by including their chips, then terrestrial radio should pay 90% of the historical development costs of SIRI and XM. Plus they should pay billions in the future from their advertising revenues.

[casey00001]

Where are you getting your information that the dividend was "suspended". All the price releases say it was cut (probably in half)?

[RBF]

They were cut in half last year, GM suspended dividends on all GM common stocks on July 15 2008!