Should You Believe in General Motors?

This may seem like crazy talk, but I think General Motors is about to rock the world.

Before you laugh and hit the back button on your browser, hear me out. I've been cynical -- seriously cynical -- about General Motors for years, and I didn't hesitate to get on the company's case while they stumbled around after their bankruptcy last year. The recent history of GM has exemplified, sometimes in cartoonish ways, the ridiculous head-in-sand approach that all but sank Detroit in recent decades.

But I spent Tuesday listening in on a full-day presentation by GM's management to the investment community, waiting for the telltale signs of Old GM thinking -- the focus on market share over profits, the delusions about their products' competitiveness, the overpromising in advance of underdelivering, the "gosh we're in great shape" talk that ignored harsh global realities -- to show up in the executives' presentations.

It never did. And I think that's enormously significant.

Meet the new GM, nothing like the old GM
Tuesday's IPO by Tesla Motors (Nasdaq: TSLA  ) might have grabbed headlines (and investors' cash), but GM's investor shindig was probably the more significant IPO-related story. While no one explicitly said anything about GM's upcoming IPO -- the topic was strictly off-limits -- this exercise was clearly intended to give the investment community reasons to get excited about investing in GM.

I think there's a lot to be excited about. The meeting covered a great deal of ground, and I'll be looking at GM's foreign operations and several points in more detail in coming days. But a few themes stand out strongly as Big Changes from GM's longtime way of doing things, most notably including the new managers' straight-talking candor about GM's past and present.

Costs finally contained
Between the company's bankruptcy restructuring, a new labor contract that allows GM to pay future hires on a much lower scale, and the historic deal to move retiree health-care liabilities to a UAW-administered fund, GM's longtime cost disadvantage relative to its global peers has vanished.

This is huge for two reasons. First, GM has reduced its costs far enough that it can make money even if global sales approach the low point of the recent downturn, according to CFO Chris Liddell. Rather than swinging from profits to losses with the economic cycles, GM should be able to swing from large profits to "break-even at the bottom," says Liddell.

Second, it means GM has more money to spend on products -- not only for development, but to add more content per car.

Getting really serious about product
For years, GM was forced by its cost disadvantages to make "maybe OK" (executives' words -- see what I mean about candor?) cars that would be adequate for GM's longtime customers, but which lacked the content or refinement of vehicles from class leaders like Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) . The story told over and over was that GM's designers and engineers would start out with world-class designs, only to have them dumbed-down by the "beancounters," as GM's financial staff has been disdainfully called.

But Liddell was clear: His staff will not stand in the way of making "best in the world" products. And CEO Ed Whitacre and GM's product czar Tom Stephens also vowed that GM is aiming to lead every product segment it competes in by 2014 or so. The company's cars have been edging closer and closer to the top tier in recent years, despite the company's financial handicaps. With the additional money available, GM's next generation of products should really shine.

Why it's believable
CEO Ed Whitacre, formerly AT&T's boss, was regarded with skepticism by many during his first few months as GM's CEO. Lacking a nuts-and-bolts background like Ford's (NYSE: F  ) Alan Mulally, a former Boeing engineer, some thought that Whitacre might be in over his head trying to run a teetering Rust Belt colossus like GM.

But Whitacre turned out to have some culture-changing ideas of his own. He has filled key executive slots with a mixture of talented outsiders and longtime GM employees -- retaining the veterans' expertise, while adding new people who were free to ask the "basic stupid questions" that didn't always get asked in the past. Whitacre has also streamlined the product development process, refocused the company on profits over market share -- a sea change -- and driven other changes that have reduced incentives and increased the company's profit per vehicle sold.

More to the point, he has set an expectation that GM's problems will be confronted honestly and without pretense. Over and over, GM's managers explained where the company had messed up in the past, and what they were doing to avoid repeating the mistakes.

That's what really got my attention. These people can see where GM went wrong, and I suspect that they recognize that they have an historic opportunity to make it work. And from all appearances, they're doing everything they can to seize that opportunity.

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Fool contributor John Rosevear owns shares of Ford, which is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 03, 2010, at 12:22 PM, baldheadeddork wrote:

    GM may not have said anything about focusing on market share over profits, but that's what they're doing.

    I keep harping about incentives, because GM is using cash on the hood to sell its cars even more today than they were a year ago. Have a look at the June numbers. (http://www.fortmilltimes.com/2010/07/01/1169197/edmundscom-r... Once again, GM and Toyota are the only brands who have raised their incentives compared to last year, and GM is still leading the industry by a wide margin. GM is giving away $700 on every vehicle compared to Ford. That's $136 million in lost profits last month if GM just managed to bring their incentives down to Ford's level.

    It was easy to explain away GM's much higher incentives when they were liquidating the remaining Pontiac, Saturn, and Hummer models, but those are gone and GM's incentives are still playing limbo with $4K per vehicle. Last month the average incentive on every Cadillac sold was $5,500.

    GM is nowhere near being out of the woods. What Whitacre is doing today will bear fruit three or four years from now. In the meantime, they're stuck with all the half-assed cars designed in those bad old days.

    An IPO this year won't be the dumbest thing GM has done in the last decade, but it will be on the list.

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