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Is GM’s progress a sign Big 3 are back?

Alisa Roth Aug 12, 2010

Is GM’s progress a sign Big 3 are back?

Alisa Roth Aug 12, 2010


Tess Vigeland: So here are the undeniable signs of progress emanating from General Motors today. There’s that $1.3 billion in profits I just mentioned. Second quarter in a row of good news from the balance sheet. There’s also the word on the street that the company will file papers for an IPO as soon as tomorrow. And CEO Ed Whitacre announced he will step down on September 1, little more than a year after being tapped by the Obama administration to help turn GM around. A board member, Daniel Akerson, will succeed him.

Joining us from New York to talk about what all this means for GM and the Big Three is our own Alisa Roth. Hi, Alisa.

Alisa Roth: Hello, Tess.

Vigeland: Remind us where GM was when it declared bankruptcy last summer. I know we’re going back in history, but…

Roth: We are, and you have to remember that GM’s troubles started well before bankruptcy and well before the financial crisis. For starters, it had too many factories. It had too many workers who were costing the company tons of money. It was building far more vehicles than the market needed, which meant that it had to offer all kinds of incentives in order to sell those vehicles. And there were too many dealers trying to sell those vehicles. Meanwhile, despite or because of all this, the company was actually losing market share. And I mean, there was a period where it seemed like it could actually go out of business.

Vigeland: And it wasn’t the only one that it seemed could go out of business. I mean, the Big Three were really in a lot of trouble. But here we are, barely a year later and at least General Motors is posting a profit of $1.3 billion in the second quarter. Possibly getting ready for a huge IPO — what happened?

Roth: Well, as one of my sources put it, GM went through a big rinse cycle. Michael Robinet is an auto analyst at IHS Global Insight. He says GM and the other Detroit carmakers, to some extent, have finally figured it out.

Michael Robinet: In terms of building residual value, building better product, making sure your facilities are better utilized and really focusing more on the bottom line, rather than expanding the top line.

Roth: So what that means in practical terms is renegotiating with the unions on both salaries and benefits, which was at least as important. It shut down a lot of plants, it really streamlined the manufacturing process. So it’s making vehicles more cheaply. It got rid of half of its brand, so it can focus much more on the brands that it kept. And it’s cut its dealer network by about 25 percent.

There are two other key factors here. One is that bankruptcy let GM wipe out its debt, so it really got to start over. The other thing is GM is finally building vehicles that drivers want.

Vigeland: Well, it certainly sounds like things are now going swimmingly for GM, and of course, Ford has been in repair for the last year as well. So, back to GM, when they do do the IPO, should we be rushing to invest?

Roth: Maybe. First of all, we should remember that the auto industry globally is doing much much better than it was. So yes, GM is doing very well, but it’s partly because the whole industry is in better shape.

I asked Michael Robinet that same question you asked me. He said he thinks the heavy lifting at GM has been done, that the company just needs to be pushing its plans forward, maybe make a few minor tweaks. But GM does still have some real issues to deal with. Sales are up so far this year, but they’re up less than the industry average. Sales at rival Ford are up about twice as much as at GM. And GM is also still paying above average incentives on its vehicles. Still, GM is convinced that things are moving in the right direction — of course, it says that. But it’s hopeful, among other things, an IPO will get it out from its government ownership, which GM at least thinks is key.

Vigeland: All right. Marketplace’s Alisa Roth, joining us from our New York bureau. Thanks so much.

Roth: You’re welcome.

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