GM (Finally) Makes a Profit

[CSpec]

GM (Finally) Makes a Profit, But Some Worries Remain

The Atlantic

A year after the bailouts that I, among others, opposed, General Motors has announced its first real profit--$1 billion in positive cash flow, and $865 million in net income. At this pace, GM may emerge from bankruptcy and go public by the end of the year, which will allow the government to recoup some of its investment.

This is great news for taxpayers, and for GM employees. The company didn't just achieve the profit by cutting costs, but also by improving the revenue side. However, there are still some dark spots on the record:

1. GM achieved its profits at a time when the number one Japanese carmaker was taking a giant hit to its reputation for quality. Yet The Truth About Cars points out that it still slightly lost market share compared to Q12009--which, you will recall, was not exactly a stellar moment for the firm.

2. The Truth About Cars also points out that percentage of fleet sales actually rose, to 31% of all vehicles, and 40% of cars. Fleet sales are often less profitable than retail sales, particularly to car rental firms, and they also depress the secondary market for your product--which in turn makes retail sales less profitable.

3. GM is looking to move back into the auto financing business. It was a truism for years that automakers were actually financial firms with an auto business on the side, and this was one of the reasons that they were hit so hard by the financial crisis. I'd like to see GM develop its core competency as an auto manufacturer again before it dips its toes back into the banking industry.

4. Europe is still struggling, while trucks are performing slightly better than the rest of the company. That means that GM is still having trouble in small cars, doing better on big ones . . . at a time when gas prices are probably headed upwards.

But still, it's good news! Everyone should want to see GM do well.

• Bailouts are, on principle, a bad idea--they murder economic dynamism, and breed really unhealthy relations between corporations, labor unions, and the state. (Yes, unhealthier than what we have now, on the relevant dimensions) Doing this one will make it harder to avoid bailing out other struggling firms. Even if this one had been individually worthwhile, it would still be dangerous because of the precedent.
  
• That said, the cost-cutting that made this turnaround possible is an effect of bankruptcy, not of government bailouts. Arguably, the government interest in maximizing the number of UAW jobs has made things worse (though arguably, the financing terms have made things better).
  
• The taxpayer is still going to end up losing a giant amount of money on this thing.
  
• The notion that America could not have survived the collapse of GM is seriously overwrought. They basically relied on the assumption that if GM was liquidated, all of GM's manufacturing capacity would have disappeared, along with all of the buyers who bought GM cars. But of course, profitable lines would have been sold to other manufacturers, and those other manufacturers would have produced more cars to satisfy market demand, for which they would have purchased more stuff from suppliers. The dislocation would not have been zero, but it would not have rivaled, say, the construction industry.
  
• The civic cost of this was large. Rightly or wrongly, this was seen as a payoff to powerful Democratic interest groups in a large state. Not that this is exactly unheard of, but this was very public, and the price tag was very large. Though I think that government should do less stuff, I do not actually think it is a good thing when public trust in institutions erodes further; I want a government that is highly trusted to do the relatively few jobs for which it is uniquely suited.

[Drew Dowdell]

it still slightly lost market share compared to Q12009

And? As I've stated before, market share isn't any measure of the health of a company. GM only slightly losing market share while shedding 50% of it's brands is actually a win.

percentage of fleet sales actually rose

Rental fleet sales are the bad kind. Many of the fleet sales were government or commercial. Ford's fleet sales are going to rise a lot... and that's a good thing....because they brought out a fleet specific vehicle in the Transit connect.

The taxpayer is still going to end up losing a giant amount of money on this thing.

For the government to break even, GM needs to be valued at around $70 billion..... even skeptical analysts are predicting around a $68billion value for GM. So, no, the taxpayers aren't going to lose a ton of money on it.

The notion that America could not have survived the collapse of GM is seriously overwrought. They basically relied on the assumption that if GM was liquidated, all of GM's manufacturing capacity would have disappeared, along with all of the buyers who bought GM cars. But of course, profitable lines would have been sold to other manufacturers, and those other manufacturers would have produced more cars to satisfy market demand, for which they would have purchased more stuff from suppliers. The dislocation would not have been zero, but it would not have rivaled, say, the construction industry.

This point shows a gross lack of understanding of out the automotive industry is structured. GM going out of business would have immediately killed Chrysler. The collapsing of GM would have taken out parts suppliers. Those parts suppliers also supply to current golden child Ford, and former golden child Toyota. The only reason Ford is still in business is some wise finance sage mortgaged everything up to the Ford name just before the credit crisis. If Ford were to be hit with supplier problems brought on by a GM collapse, it is unlikely they would be able to continue to service their debt and would themselves collapse.

As for liquidating GM... I ask... to whom? Toyota might be able to buy GM from a financial standpoint, but why would they want to? Toyota has a couple of their own pots already boiling over that need attention. Honda and BMW are too small, Daimler-Benz still has that nasty Chrysler taste in their mouth, Volkswagen is already full from an earlier acquisition binge, Nissan-Renault is being held together with paperclips and bubble gum. Tata stretched themselves as far as they could just to buy Jaguar and Land Rover. Fiat is barely able to digest Chrysler.

The idea that a company like Honda could suddenly take up the sales from the largest automotive seller in the country doesn't pass the laugh test. Honda already runs at or near capacity as part of their lean production system. This author's impression that Honda could buy a production line from GM today and start building Civics tomorrow just shows that she is out of her industry.

[CSpec]

Who said anything about converting factories? I would assume she meant other companies (either straight up investment houses or another car maker) would buy profitable factories along with the rights to the cars themselves...

[Drew Dowdell]

uh... seriously?

We haven't seen that spectacular failure already with Cerebus?

"Oh I'd like to buy LGR and build me some Cadillac CTSes... I'll get the engine from... ooh... wait...."

[RjION]

Any profit for anyone is good news ...........

[CSpec]

Last I checked Ford sold off the entire Jaguar and Land Rover operations no problem. Cerberus bought a crap product, an investment that didn't work out.

[Drew Dowdell]

Yeah, and that kind of deal was gone just a few months later.... and it most certainly wasn't "no problem". Tata had to have massive financing in place that it struggled to get.

[avant1963]

When you use TTAC as your source, do you think you are going to get 1. unbiased reporting about GM 2. anything worth anything?

[Drew Dowdell]

And.... as I said yesterday.... taxpayers aren't going to lose any money on the GM bailout.

[CSpec]

CBO expects Treasury to lose $34B on the combined auto bailouts (as of March).

[Drew Dowdell]

Did you read the link?

And Treasury thinks it's going to lose $1.6b on Chrysler

[CSpec]

I did indeed. Better news, but by no means guaranteed.

[Drew Dowdell]

Well lets apply some critical thinking to the CBO estimate from March.

Is 34 billion a reasonable number?

[Drew Dowdell]

The losses on the automotive company bailouts could only be $34b if GM's value went to zero. Since even in liquidation that wouldn't be possible, the $34b is just a big number meant to scare people.

Even skeptical analysts peg GM's value at around $68b, which makes the Government's share a little over $41 billion.