For GM, New Promise Balanced by Old Problems

For GM, New Promise Balanced by Old Problems

By Michelle Krebs May 31, 2010

It took 101 years for the "old" General Motors Corp. to run itself out of gas, officially going out of business on this day one year ago. It won't take that long to determine if GM 2.0 is structured to hold up for another century.

Today's General Motors Co., formed when the remnants of the original company emerged from bankruptcy July 10, 2009, closes in on completing its first year of existence in better shape than even optimists thought possible. This is the company whose former CEO, among others, insisted bankruptcy would destroy it.

So GM lives. The "new" GM looks -- and is -- healthier.  But can it last? It is a vastly different company now, for better and worse. And bankruptcy didn't fix everything.

 

Reduced to the bare essentials, GM wants to generate an initial public offering to once again become a public company and shed the stigma of being "Government Motors." The U.S. Department of Treasury and taxpayers would like nothing better. The United Auto Workers union's retiree health-care trust, which owns 17.5 percent of GM, would like nothing better. So would Canada (12 percent of GM's hide) and bondholders (10 percent).

But the hard numbers might get in the way.

Market Capitalization vs. Reality

All told, GM needs to generate, by selling stock, probably between $80 billion and $90 billion to buy back all the equity these stakeholders own. This from a company that has slimmed down to four marketing divisions, two of which -- Buick and Cadillac -- have a market share of around 1 percent each. GM's total market share in the U.S. is less than 19 percent.

GM reported a profit of $853 million in the first quarter and said it generated $1 billion more in free cash. And the financials were stunted by one-time charges. The first quarter was the first time in three years GM could boast a quarterly profit. But even if that trend continues many analysts have difficulty equating GM's balance sheet and business footprint with a market capitalization that would justify investors buying enough GM stock for the company to promptly buy back its equity.

In a lengthy report last November, the federal Government Accountability Office seemed to agree. It said GM would have to "grow substantially in order to reach values at which Treasury would recover the entirety of its equity investment upon sale of its equity, which Treasury and others consider to be unlikely."

To buy back just the government's 61 percent stake in GM, the GAO report added, the company would have to achieve a market capitalization of $66.9 billion. The most GM ever was estimated to be worth was $57 billion -- and that was in 2000, when GM had eight marketing divisions, controlled considerably more market share and sold more than 17 million vehicles in the U.S.

Things Definitely Have Changed

For GM, bankruptcy and the forced reorganization that went along with it truly was a cleansing thing.

First and foremost, GM's Chapter 11 bankruptcy allowed it to ditch tens of billions of dollars in debt. The slimmed-down GM has cut its operating costs more than $10 billion -- annually. The company has fewer dealers, fewer divisions and fewer employees. GM's bloat needed to be burst decades ago; now that it's happened, profitability is more likely -- even with the currently depressed sales in almost all global regions except China.

But apart from financials, GM has made the moves to be successful in several areas:

Management: Most of GM's old-guard management is gone. For right or wrong -- but mostly right.

Advertising/marketing: GM has demonstrated it's no longer reluctant to sever longstanding -- or at least well-established -- advertising-agency relationships, highlighted most directly by the recent canning of Chevrolet's storied association with Campbell-Ewald, a coupling almost as old as Chevrolet itself.

The company also decided to pick up its marketing game in an ostentatious way, hiring current top gun of the industry Joel Ewanick, architect of Hyundai Motor America's recent marketing successes including the seminal Hyundai Assurance program.

Product: Ridding itself of four divisions that largely sold redundant products was another decision long needed but never coming from the hidebound former management. There will be years of argument about whether GM kept the right four divisions, and whether all of the remaining four are necessary.

What Might Work, What Might Not

Before it became a "new" company GM had more than its share of rip-ups and reorganizations.  Who's to say this is any different? A few ideas on what the new GM's second year might look like:

Management: Ed Whitacre is chairman and CEO. He shouldn't be CEO, particularly considering his famous naivete about the auto industry.

North American President Mark Reuss seems competent and knowledgeable -- if slightly locked on message -- and Ewanick certainly won't hurt the team as GM's lead marketer.

But what about the filling the shoes of its just-retired product champion, Vice Chairman Bob Lutz? Company skeptics see potential for GM backsliding into its old, finance-driven methods without a Lutzian presence to keep it all real. The executives typically mentioned as having the potential to assume the role are not up to the job. This is a worry.

Advertising/Marketing: Advertising relationships as old as the Chevy and Campbell-Ewald tie-up probably aren't healthy. But the same might be true of the merry-go-round GM has cranked up, changing agencies seemingly as quickly and as often as the most-recent moribund campaign falls flat.

Cadillac has shuffled agencies and taglines to little benefit. Chevy's weak new tagline, "Excellence For All," some of the first creative output from its new agency, already is headed for the scrap heap. These flailing efforts seem to indicate GM's newly installed divisional structure isn't helping on this front.

Product: Many industry watchers continue to argue GM still needs to consolidate to just Chevrolet and Cadillac. There could be merit in that speculation.

More important, GM's market share continues to wobble -- and despite Whitacre's admonitions for improvement, share is unlikely to markedly increase with the loss of the Saturn and Pontiac divisions. Same for sales volumes, a big factor in the revenue stream Wall Street surely will be scrutinizing. GM is a smaller company now and its financials and market  performance are going to be downsized accordingly.

  Chevrolet: Intended GM Leader

Even the like-a-rock Chevrolet division isn't a sure bet to lead GM to IPO Valhalla. The division has an important new product coming this fall in the Cruze compact car. The Cruze looks promising, but will see strong competition from Ford's edgier Focus. And GM made a late-game decision to cancel the promising-looking Orlando compact crossover, a choice that has yet to be fully explained.

Another Chevy with sliding sales underscores the damage done by GM's pre-bankruptcy financial straits: The Corvette desperately needs to be reengineered and restyled. The current Corvette looks little different from a 10-year-old model, yet nothing's scheduled to happen for the Chevy halo car until the seventh generation is launched in mid-2012. With sales plunging, that's a lifetime.

The Impala fullsizer won't get a redo until the '14 model year and that's too long, too.
The potential train wreck also comes from the redesign of the to-now-successful Malibu, which precedes the Impala makeover. Some insiders worry the Malibu's planned enlargement is neither good for the car nor good for the Impala, creating two sedans with little perceived difference in size.

  Buick: In Need of More Models

Buick's three current models cover a lot of ground, but sales at least are split evenly. The new LaCrosse has been a breakout success, particularly when measured against its dowdy predecessor, but the Enclave large crossover was the lifeline that kept Buick going during the dark days.

The all-new 2012 Regal looks like a solid play to anchor the middle of the Buick lineup, but some are less convinced about an entry-level compact sedan GM has shown. And there is a smaller CUV companion to the Enclave coming.

Whether these new models will work for Buick is a matter of speculation, but the brand certainly needs more product -- Buick's 1.2 percent of market share and 6.7 percent share of GM sales has to improve if GM is to improve.

Cadillac: SRX Dependent

Cadillac is the wild card in GM's future. The luxury division's 1.2 percent of market share is wildly inadequate. And after years of deep investment the brand digressed into a one-car proposition, the entry-level CTS, accompanied by the contribution of the Escalade SUV. There will be a new Escalade for 2013, but GM reputedly plans to keep Cadillac's uber-ute on a truck chassis, so expect it to remain a declining commodity.

The new SRX crossover is working so far, but its success has come in large part from comparisons to its lame predecessor.

The division's potential for growth rests on the success of the XTS sedan coming next year. Replacing both the nearly nonexistent STS and the DTS fullsizer, the XTS has to do something Cadillac hasn't done for years: make an impact with its flagship. The problem: GM is leveraging its global front-drive architecture for the XTS -- and history has proven that to joust with the segment's real players, rear-wheel drive is non-negotiable.

Also vital will be the ATS, Cadillac's planned entry car to sell below the increasingly pricey CTS. Plenty of body styles are expected, which is good. But there's as yet no confirmation about the ATS' drive layout. In the ATS segment, front-drive isn't the death sentence it is for flagships, but then again even the smallest BMW is rear-wheel drive, right?

GMC: GM's No. 2

What might surprise is that GMC, the division often cited as the one GM should lose without hesitation, is the company's second-strongest sales unit. In terms of market share and volume, GMC outsells and out-shares Cadillac and Buick combined.

That comes on the relative strength of pickup trucks, of course, and most argue GMC isn't selling any pickups Chevy couldn't be selling if the upscale GMC didn't exist.

GMC is trying to shift itself into less-profligate segments, but it really needs to either establish a new reason for being in the truck segments or face irrelevancy. GM's decision to delay development of the light-duty Chevrolet and GMC pickups until the 2013 model year has put a crimp in sales and has the automaker at a disadvantage in the market; it might be worth it, however, if GM can truly change the game with the next-generation pickups.

-- Bill Visnic, Senior Editor

Jeremy Acevedo and Ivan Drury provided the analysis and charts for this report.

Editor's Note: This post is part of a month-long series about the "new" GM. The series is a collaboration with sister Edmunds.com Web sites AutoObserver.com, InsideLine.com, and GreenCarAdvisor.com.  The entire series can be found on a specially designated section of AutoObserver.com

 

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.