Not Even General Motors Could Fumble This

Imagine a struggling global industrial giant. Burdened by huge debt and legacy obligations, it struggles with overcapacity after decades of mismanagement. Nonetheless, it has solid sales and surprisingly deep reservoirs of goodwill in the marketplace.

Now let's make some changes at that company:

  • Lend it a ton of money on favorable terms.
  • Make that massive debt load largely disappear.
  • Get rid of most of the legacy obligations, and impose a new structure that will ratchet down the remaining ones over time.
  • Eliminate its surplus production capacity -- along with a few whole brands and divisions.
  • Fire key members of its inept management culture, and replace them with talented outsiders who aren't beholden to the old ways of doing things.

To top it all off, we give the new managers a recovering economy and a few months to get their bearings. Then they announce a profit.

And people are acting surprised?

Not even GM could have messed this up
General Motors, in case you haven't heard, announced its first-quarter earnings on Monday: $863 million in profit (versus a $6 billion loss a year ago -- a quarter after which GM effectively went bust), $31.5 billion in revenue (up 40%), and a billion dollars in new cash in the bank.

It was GM's first profitable quarter in three years -- a fine result. But I don't get why analysts were surprised, as The Wall Street Journal's report suggested. GM's sales have been strong in the face of stiff competition from Ford (NYSE: F  ) and Toyota (NYSE: TM  ) , it has several hot products driving demand, and the U.S. government gave the company every advantage it could. How could GM fail?

GM's old management might well have found a way to fail anyway -- but new management is making all the right noises. New CFO Chris Liddell avoided declaring victory, characterizing Monday's results as "important steps" toward recovery as GM works to rebuild. And while he said that there was "no reason" why GM's core North American business shouldn't be sustainably profitable, he was careful to temper enthusiasm for GM's prospects later this year.

And that IPO, the one expected to (maybe) pay back the $43 billion or so that the company still owes American taxpayers? Don't hold your breath: Liddell said -- as he has been saying for weeks -- that the company will do it when the moment is right, and not before. Maybe that will be later this year; maybe it won't.

None of this news was surprising, if you've been watching GM in recent months. But the comparison to the GM of a year ago remains striking.

Just one more step on a long road
It's good to see a profitable quarter, but as Liddell pointed out, GM still has a long way to go:

  • GM's European operation still isn't profitable, and it may not break even until next year.
  • The Chinese auto market -- a growth engine for GM -- seems to be slowing.
  • Critical product launches -- including the Chevrolet Cruze small car -- are coming soon.
  • As GM's recovery gains steam, stakeholders such as the UAW will demand a share of the new wealth. Managing the union relationship is a perennial Detroit challenge, and CEO Ed Whitacre's skills on that front are as yet untested.

But there are plenty of promising signs:

  • Like Liddell before him, new marketing chief Joel Ewanick, who replaced GM lifer Susan Docherty, looks like an inspired hire.
  • Early reactions to the new Buick Regal sedan have been positive.
  • GM's new relationship with Google (Nasdaq: GOOG  ) suggests that the company is serious about responding to the push toward advanced in-car technology Ford has made with partners Sony (NYSE: SNE  ) and Microsoft (Nasdaq: MSFT  ) . It could also give the company's OnStar division a new lease on life.

The next two or three quarters will be crucial, since those results will determine the value of GM's IPO -- which, in turn, will determine the value of We the People's "investment" in the carmaker.

Will GM's IPO be enough to repay that $43 billion? Scroll down to leave a comment and let me know.

More auto coverage from the Fool:

Fool contributor John Rosevear owns shares of Ford. Microsoft is a Motley Fool Inside Value selection. Google is a Motley Fool Rule Breakers recommendation. Ford is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2010, at 4:19 PM, BozoKnows wrote:

    Nothing much has really changed at GM ! Just the other day an article cited labor as the biggest cost . I always wondered how someone could sell millions of cars and still lose money . One need only study GM for the answer. And today the Union is already screaming we need to be rewarded soon. My friend recieved his largest raise in 25 years of working at GM. Bonus was paid for what reason ? Here in Michigan these people were not about to find jobs anywhere else. My unemployed friend from Ford with 20 years there has yet to find a job anywhere in the Country with a Ford paid for MBA from U of M no less ! What has changed ? Take home cars for all,pay raises ,bonus and just wait for the new UAW contract . All while the Company exsists for one reason the tax payer . Now if we had cut white collar salaries , taken benis from them etc then all this would make sense. GM will go belly up down the road maybe not in 5 or 10 years but in 20 we will be right back where we started .

  • Report this Comment On May 18, 2010, at 4:49 PM, Electricfish wrote:

    I hope they give ack tax payer money, but it is sad that Ford is now going to be in a very bad situation with 30B+ in debt, and us taxpayers are responsible. They should have gone bankrupt in 2006 when they were down in the tank, instead of taking in the mountain load of debt and restructured.

  • Report this Comment On May 19, 2010, at 8:57 AM, fug57fug wrote:

    GM did not get rid of any legacy obligations. The pension and retiree healthcare obligations were restructured and remain. Not sure where you got your information.

    Do you think Obama was going to allow anything negative to happen to his Unions? GM shareholders and bond holders got the shaft and the Unions kept their goodies.

  • Report this Comment On May 19, 2010, at 10:43 PM, baldheadeddork wrote:

    John, God knows GM has screwed up every spin off it's touched in the last decade or two, but what do you think about spinning off OnStar? Especially now with the Google partnership, I think there's something to be said for setting up the service and the software design as an independent entity that can sell to other companies.

    About GM's IPO, the longer they wait the better. I wouldn't mind if Treasury collected an ownership share of the profits for the next couple of years or longer and GM only did the IPO when it was fully back to health.

    Any more about GM getting back into captive financing?

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