GM has emerged stronger from the crisis but it is not yet in the fast lane


DELAYED for years by GMs mounting financial problems, then its bankruptcy and government bail-out, the promised revamp of the carmakers classic Corvette Stingray at times looked like it might never happen. But on January 13th, on the eve of the Detroit motor show, a gang of reporters and a crowd of sports-car enthusiasts (who paid $1,200 a ticket) gathered in an abandoned warehouse in a rundown part of the Motor City and, at last, to the sound of wailing guitars, the new Little Red Corvette drove onto the stage. It won wild applause, even from the hard-bitten hacks.

Things got even better for GM the next morning, when its Cadillac ATS sedan took the shows top prize, the North American Car of the Year. This boosted GMs hopes that Cadillac, its premium brand, can begin to catch up with pricey European marques such as BMW and Range Rover among the emerging worlds new rich. The Corvettes rave reception likewise lifts GMs dreams of elevating its image from successful plumbers car, as an executive recently put it, to being a must-have high-performance model for the global elite, up there with Porsche and Ferrari.

After years as a basket-case, pilloried as Government Motors, GM is back in profit, stepping up its output and creating jobs again. Mark Reuss, its North America boss, believes the double boost at this weeks show will help it gain momentum by fostering the sense that it is winning again: Winning can be very contagious, he said.

Halo cars like the Corvette do not sell in big enough numbers to have much effect on overall profits, but they do create a sense of excitement around a brand, drawing buyers to showrooms, where they may end up buying more regular models. Far more important for sales and profits among GMs launches at Detroit was the new version of its best-selling model, the Silverado pickup truck. Unlike Europeans, Americans love pickups, and will pay handsomely for them: profits on them can be around $15,000 a unit, compared with maybe $4,000 or less for regular cars.

The new models unveiled this week are the start of what may be the most drastic overhaul of GMs range in its century-plus of history, as it refreshes a line-up that was starved of investment and left to go stale following the bail-out. In the next year or so, reckons Peter Nesvold of Jefferies, an investment bank, models representing about half of GMs entire sales volume will be replaced.

The next year will be crucial for other reasons. GMs boss, Dan Akerson, hopes to persuade credit-rating agencies to restore the firm to investment grade in 2013it has been rated junk since 2005. More important, the US Treasury plans to sell its remaining 19% stake, erasing the stigma of Government Motors.

But GM badly needs that new line-up. In its American home market, its share slipped from 19.6% to just 17.9% last year, the lowest since GMs rise to pre-eminence under the leadership of Alfred Sloan in the 1920s. Although its worldwide sales last year rose by 2.9% to 9.2m vehicles, its best since 2007, its global share slipped by 0.4 points to 11.5%. It looks like being deposed as number one carmaker by a resurgent Toyota, with an expected 9.7m sales. And it is feeling the hot sausage-breath of Germanys Volkswagen on its neck: VWs relentless drive to become world leader took it to just under 9.1m sales.

GM is well ahead of Ford and Chrysler, its Detroit-based rivals, in the Chinese market, now the worlds biggest, where GM is profiting from its booming joint ventures with local makers. But growth in Chinese car sales has slowed markedly in the past two years, and there are also signs of excess capacity in Brazil, another big money-spinner for GM.

GM is alive and Osama bin Laden is dead, as Vice-president Joe Biden quips, which is great but not enough. Its shares, at around $30, are below the $33 at which it was refloated on the stockmarket in 2010, and way below the $70 now needed, after a recent share buy-back by GM, for Americas taxpayers to break even on the $50 billion they put into the firm in its bail-out.

In the buy-back GM paid the US Treasury $27.50 a share, reducing its stake from 26% to 19% (Canadas federal government and Ontarios provincial administration together own a further 9%). A recent analysis by Morgan Stanley, another investment bank, foresaw the shares reaching perhaps $47 if, among other things, American car sales rose again this year.

The report also considered a bull case in which the shares soar to $72, but that depended on GM finding someone to take its perpetually loss-making European division, Opel-Vauxhall, off its hands without a dowry. Opel has lost around $18 billion since 1999 and, despite recent management shuffles and plans to break even by mid-decade, the red ink may keep flowing, given the dire state of Europes car market.

Opel is building an alliance with Peugeot, an equally ailing French carmaker, in which they will share overheads, work together on various types of car and engine, and hope to save $1 billion a year each by 2016. This week, amid rumours that Peugeot might buy Opel, Mr Akerson reiterated that it was not for sale.

Profits and platforms

Although nowhere near as big a problem as Opel, GMs American operation has let its stocks of some models build in recent months, trying to shift them through big sales incentives. This worries analysts like Joe Philippi of AutoTrends Consulting, who recalls how GM brought about its downfall by overproducing unwanted cars and selling them at a loss. Mr Akerson promises to cut GMs incentives to around the industry average. But as GM brings in all its new models, it may struggle to clear stocks of the old ones without giveaway prices.

Of the Detroit big three, Chrysleralso bailed out by the government before gaining Fiat of Italy as its controlling shareholderwas the only one whose American market share rose last year. Like GM, Ford suffered a slight fall as Toyota and Honda recovered from their post-tsunami troubles. But Fords image has been burnished by the remarkable improvement in its profitability, even though it avoided bankruptcy and thus had no reprieve from its debts and other liabilities. Mr Nesvold points to one figure that best illustrates how Ford has made much greater efficiency gains and cost cuts than its bigger rival: North American pre-tax margins at Ford are now 11-12%, a level unthinkable a few years ago. GMs are still about half of that.

Besides its stale model range, the other main reason for GMs modest profit recovery is its slow progress in standardising the platforms, on which its cars bodies and interiors are built. By this year Ford plans to use just nine common platforms for 85% of all the vehicles it builds worldwide. Although GM has successfully reinvented Chevrolet as a global mass-market brand60% of its sales are now outside Americait has lagged Ford, and VW, in using common platforms to bring down development and production costs.

GM also needs to be bolder in cutting costs in other areas. Despite Mr Akersons image as a no-nonsense former naval officer, and a few top-level departures, few see signs of the tough action that Wall Street clamours for, to trim GMs notorious bureaucracy. It is inevitable that comparisons are being made between Mr Akersons management style and that of his counterparts.

One bold decision Mr Akerson has taken since becoming boss in 2010 has been to reverse the outsourcing of GMs massive IT systems, after realising how central they now are to its business (see our special report this week). He hopes that regaining control of the companys software systems will make it easier and quicker to change the way it does business, and give managers a clearer view of how much profit each vehicle produces (or not).

This will take time, as will the revamp of GMs models, the struggle to stanch losses in Europe and Mr Akersons battle with the companys internal bureaucracy. It seems unlikely that GM will revert to being the chronic loser it once was, but it will be another year, maybe two, before it is clear if it has been reborn as a winner, or just a plodder.

The Economist



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