GM faces long road back to profitability

By DAVID NICKLAUS

Contrary to what you may have read, General Motors is not too big to fail.

It was, in the government’s estimation, too big to fail quickly, which is why both the Bush and Obama administrations stepped in with bailouts that total more than $60 billion.

However, a successful restructuring is by no means guaranteed. This giant automaker could still fail slowly, gradually closing more plants as it falls short of its sales goals. If that happens, GM’s shares will never be worth enough to keep two key promises: repaying most of the bailout money and providing health care to retired autoworkers.

Those promises are backed by the shares that GM will issue to the U.S. and Canadian governments and the United Auto Workers. The company’s projections assume that GM can achieve a market capitalization of $69 billion. That’s $22 billion more than its peak value a decade ago, when gas-guzzling sport utility vehicles were flying off dealer lots.

The old GM also turned a tidy profit from its financial division and European operations. With those being spun off, new GM must make money the old-fashioned way — by making cars that Americans want to buy.

John Wolkonowicz, senior auto analyst at IHS Global Insight in Lexington, Mass., likes the new GM’s chances. It will have far less debt and its labor costs will, for the first time, be competitive with those at Asian- and European-owned factories.

With just four brands to support, GM will be able to roll out new or restyled models more frequently. “They had too many mouths to feed” with resources spread across eight brands, Wolkonowicz says.

Rosy projections

Though he’s an optimist, Wolkonowicz thinks GM’s own projections are too rosy. The company expects to capture 19 percent of the U.S. market next year; he marks that down to 17 percent. The company says it will be running its factories at full tilt by 2011; IHS Global Insight says that will take until 2014.

The most important variable is also the hardest to predict: Will consumers buy what GM is selling? Some of its most loyal customers — the buy-American crowd — may be angry about the taxpayer bailout. Other buyers may question the company’s stability, given the wrenching changes of the past six months.

Young car shoppers will have a lot to say about whether GM and Chrysler succeed. Twenty-somethings, who haven’t yet formed strong brand loyalties, may look for something that isn’t their parents’ Toyota or Honda. “One of the brands that Generation Y likes a lot is Cadillac,” Wolkonowicz says. “They can’t afford it yet, but they like it. This generation is still up for grabs; there is an opportunity for GM.”

Perhaps. Right now, though, GM has more challenges than opportunities. A bankruptcy judge can eliminate debts and reject dealer contracts, but the company is on its own when it comes to building better cars and improving its image.

“I’m not seeing how the problems with technology, lack of design, long-term quality issues and the cost issues that have plagued GM are being dealt with,” says Glenn MacDonald, the Olin professor of economics and strategy at Washington University. “I don’t feel optimistic about the long run. They will come out of bankruptcy, but how do you take on Honda and Toyota or even Ford when everybody is concerned that you might go out of business?”

The answer to that question will determine whether this taxpayer-financed bankruptcy is a new beginning, or the beginning of the end.

X David Nicklaus is a columnist for the St. Louis Post-Dispatch. Distributed by McClatchy-Tribune Information Services.