Friday, February 25, 2011

Tough Love Makes GM Profitable

General Motors emerged from bankruptcy court, where the Obama Administration forced it, the beneficiary of a tough love makeover that radically cut costs and made it profitable as long as the US car market has annual sales of approximately 10 million vehicles. Yesterday, GM announced a profit of $4.7 billion in 2010, its best year since 1999 and first profitable year since 2004.

Since 1970 GM had been in the process of slowly dying, a company that once had 50% of the US car market could not compete against Koreans and others that barely made a car in 1970.  GM was so inefficient that it lost money even when the national car market boomed with annual sales of 16 million vehicles, as was the case for the first 6 months of 2008.

When the near depression following the Lehman Brothers bankruptcy on September 15th cratered consumer demand, car sales plummeted from a rate of 16 million cars to a depression level of just 9 million vehicles sold.  GM couldn' turn a profit in a booming market and burnt through its remaining cash when the market crashed.

President Bush provided an interim bailout to keep GM and Chrysler on life support at the end of his Administration, leaving the big decision about what to do with both companies to President Obama.  The President tapped Pennsylvania native, Ron Bloom who had worked with the United Steel Workers, to figure out whether and how GM and Chrysler could be restructured and returned to profitability.

Bankruptcy court and a tough, even brutal restructuring that forced changes that GM had refused to make for decades was the only recipe for profitability.  Dealerships were closed and politicians attacked.  Brands were closed and politicians attacked.  Major labor concessions were made and politicians attacked. 

Forget the scalpel.  Bankruptcy court and Ron Bloom took out an ax and chopped. 

The results are now in.  As one analyst said, as long as car sales are above 10.5 vehicles, "GM can print money."

Those who said the government restructuring of GM could not work were wrong. This position was simple, pure anti-government ideology so those who took it will never admit they were wrong.  Reading their confident, wrong predictions is, nonetheless, enlightening. 

Moreover, the GM restructuring is a large lesson  about the role of government, markets, competition, and public-private partnerships that has broad applicability to winning the future and competing with China to make things.  America will be ruined if it stops manufacturing.

The question now becomes, will GM's  new Board and managers be able to run this company efficiently?  Is it positioned to gain major market share in now the world's largest car market: China?  Can it prosper in a world of high gasoline prices?

The Chevy Volt looks better and better the higher oil prices go.

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