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Business

At last, General Motors sees a get-in-gear year

2013 will be crucial for GM, which hopes to boost its offerings and restore its credit rating.

Article by: THE ECONOMIST

Updated: January 20, 2013 - 12:52 PM

Delayed for years by General Motors' mounting financial problems, then its bankruptcy and government bailout, the promised revamp of the carmaker's classic Corvette Stingray at times looked like it might never happen.

On Jan. 13, however, on the eve of the Detroit auto show, a gang of reporters and a crowd of sports-car enthusiasts -- the latter of whom had paid $1,200 a ticket -- gathered in an abandoned warehouse in a rundown part of the Motor City to watch as, 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 show's top prize, the North American Car of the Year. This boosted GM's hopes that Cadillac, its premium brand, can begin to catch up with pricey European models.

After years as a basket case, pilloried as "Government Motors," GM is again making money, stepping up its output and creating jobs.

Mark Reuss, GM's North American boss, believes that the double boost at last week's show will help it gain momentum by fostering the sense that it is winning again.

"Winning can be very contagious," he said.

The Corvette's rave reception likewise lifts GM's dreams of elevating its image from "a successful plumber's car," as an executive recently put it, to being a must-have high-performance model for the global elite, alongside Porsche and Ferrari.

"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 less exotic models. Far more important for sales and profits, among GM's launches at Detroit was the new version of its best-selling model, the Silverado pickup truck. 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 last week are the start of what may be the most drastic overhaul of GM's offerings in its century-plus history, as it refreshes a lineup that had been starved of investment and left to go stale after the bailout. In the next year or so, reckons Peter Nesvold of the investment bank Jefferies, models representing about half of GM's entire sales volume will be replaced.

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

GM badly needs that new lineup, however. In its American home market, its share slipped from 19.6 percent to 17.9 percent last year, the lowest since GM's rise to pre-eminence under the leadership of Alfred Sloan in the 1920s. Although its worldwide sales last year rose by 2.9 percent, to 9.2 million vehicles, its best since 2007, its global share slipped by 0.4 points to 11.5 percent. It looks likely to be deposed as the world's No. 1 carmaker by a resurgent Toyota, with an expected 9.7 million sales. And it is feeling the breath of Germany's Volkswagen on its neck: VW's relentless drive to become world leader took it to slightly less than 9.1 million sales.

GM is well ahead of rivals Ford and Chrysler in the Chinese market, now the world's biggest, where GM is profiting from its joint ventures with local makers.

The company's shares, which closed at $29.28 Friday, are below the $33 at which it was refloated on the stock market in 2010, and way below the $70 now needed, after a recent share buyback by GM, for America's taxpayers to break even on the $50 billion they put into the firm in its bailout.

In the buyback GM paid the Treasury $27.50 a share, reducing its stake from 26 percent to 19 percent, with Canada's federal government and Ontario's provincial administration together owning a further 9 percent. A recent analysis by Morgan Stanley foresaw the shares reaching perhaps $47 if, among other things, American car sales rise again this year.

The report also considered a bullish 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. Opel has lost around $18 billion since 1999, and the red ink may keep flowing.

Although nowhere near as big a problem as Opel, GM's 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. Akerson promises to cut GM's incentives to around the industry average.

The competition

Of Detroit's Big Three, Chrysler -- also bailed out by the government before gaining Fiat of Italy as its controlling shareholder -- was 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.

Ford's image has been burnished, however, by the remarkable improvement in its profitability, even though it avoided bankruptcy and thus had no reprieve from its debts and other liabilities. 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 pretax margins at Ford are now 11 percent to 12 percent, a level unthinkable a few years ago. GM's are still about half of that.

Besides its stale model range, the other main reason for GM's modest profit recovery is its slow progress in standardizing the "platforms" on which its cars' bodies and interiors are built. By this year Ford plans to use only nine common platforms for 85 percent of all the vehicles it builds worldwide. Although GM has successfully reinvented Chevrolet as a global mass-market brand, with 60 percent of its sales now outside America, it has lagged Ford and Volkswagen in using common platforms to bring down development and production costs.

GM also needs to be bolder in cutting costs in other areas. Despite Akerson's image as a no-nonsense former naval officer, and despite a few top-level departures, few see signs of the tough action to trim GM's notorious bureaucracy.

One bold decision Akerson has made since becoming CEO in 2010 has been to reverse the outsourcing of GM's massive IT systems, after realizing how central they now are to its business. He hopes that regaining control of the company's 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 doesn't produce.

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