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GM Gains, But Weaknesses Remain


It's a familiar storyline by now: General Motors is showing progress. Losses are receding. Cash burn is cooling down. GM even plans to ramp up faster payment of government loans. But profits still remain elusive. Progress without profit was a common refrain when now-deposed Chairman and CEO Rick Wagoner ran the company. And CEO Frederick A. "Fritz" Henderson had similar news on Monday, Nov. 16, when GM released its first earnings statement since emerging from bankruptcy in July. The difference is that this time GM is closer to making money than it has been for years. The company reported a $1.2 billion loss. Carve out restructuring costs of $505 million, interest payments of $250 million, and taxes of $135 million, and GM lost only $261 million, showing that the company's operations have improved. With its big debt load, though, GM will be shouldering interest payments for years. Look HomewardGM still has a lot of work to do, namely proving that it can start to gain market share and make real money at home. "The real key," says Joseph S. Phillippi, principal of AutoTrends, a New Jersey consultancy, "is what kind of performance they can get in North America." GM made $238 million overseas but lost $651 million in North America. Growth overseas helped GM boost revenue by $5 billion in the quarter, to $28 billion. That's the big problem GM has yet to fix: While bankruptcy helped slash costs and cut plants, GM still needs prove it can hold sales gains against its competition, if not start showing some market-share growth. For decades, the pattern at GM is to restructure and show progress, only to find itself back in the red a few years later. GM's cuts have helped a lot so far. By slashing hourly jobs, headquarters staff, and factories, GM has cut its structural costs from $22 billion to $9.1 billion. The bankruptcy reduced GM's debt from almost $95 billion to $17.2 billion now. Add in $12.2 billion of cash and preferred stock owed by the company to its union health-care trusts, and the total debt approaches $30 billion—a hefty load to carry, but still less than the debt at rival Ford (F). That's a big reason why the losses are much smaller now. GM lost $6 billion in the first quarter—the last quarter it reported before going bankrupt on June 1—and $31 billion last year. In the third quarter of 2008, GM lost $4.2 billion, including one-time charges. Falling Market ShareGM's North American business has been the culprit. In the U.S., market share has fallen this year to 19.8%, from 22.3% a year ago. GM has a target of 20% for the U.S., which doesn't seem like a stretch. But consider that GM will lose some buyers as the company phases out Hummer, Pontiac, Saab, and Saturn.

GM has pushed market share to 21% in October after running below 20% most of the year. But it took incentives of more than $4,000 a vehicle to get there. Docherty says she wants to try to pull back on incentives. GM also needs to boost sales to get its factories running more profitably. In the quarter, GM built just 53% of its production capacity.

There are some signs of life, however. In October, GM got 91% of its sales from its four remaining brands: Buick, Cadillac, Chevrolet, and GMC, said Susan Docherty, GM North America vice-president for sales. Those surviving brands gained market share during the month. GM has also been crowing about its newest models, especially its important family-oriented sedans and SUVs. Crossover SUVs like the Chevrolet Equinox and Cadillac SRX both sell for at least $4,000 a vehicle more than the models they replaced. The Buick LaCrosse sedan sells for $9,400 more than the old model. Docherty says GM has added third shifts to the plants that build the Chevy Malibu, LaCrosse, and Equinox and GMC Terrain SUVs. When the company gets up to full production for those new vehicles, "we can get market-share increases," Docherty said. GM is also finding a lot of buyers for its new Chevy Camaro retro muscle car, which fetches more than $34,000 a copy. Shifting the CostsGM does have more cost cuts coming, too. Next year, it will set up a Voluntary Employee Beneficiary Assn. (VEBA) trust, to pay union employee health-care benefits the same way a pension funds pays retirement benefits. When the fund is up and running, GM can save $2.5 billion to $2.8 billion a year in cash, Henderson said. Debt-Free in 2010?The latest results are strong enough that GM has started to repay loans to the various governments that helped keep the company afloat. GM has paid €500 million back to the German government and owes a further €400 million. Henderson said GM plans to start repaying the U.S. and Canadian governments. The company will pay the two of them $1.2 billion in December, with $1 billion of it going to the U.S. Treasury. GM owes the Treasury $6.7 billion and an additional $1.4 billion to the Canadians. Henderson said that GM could have the debt portions of its obligations to those governments paid off by June of next year. However, some of the money could come from $17.4 billion held in an escrowed account from the U.S. and Canadian governments. Can GM completely repay U.S. taxpayers? The federal General Accounting Office says that GM is unlikely to fully repay the public for its investment of nearly $50 billion. Obama Administration officials have said that the initial $9.4 billion lent by the Bush Administration will likely not be paid back. The rest depends on how much GM's stock will be worth, Henderson says. The company hopes to issue new stock next year, but the timing depends on GM's health and a rebound in the car market, he says. If GM gains momentum, then the government could get a big piece of its investment back through its 60% ownership of the company. If the company can't make a serious comeback, taxpayers will fall short. Henderson and Obama's Auto Task Force originally hoped for a summer 2010 initial public offering, but GM has backed off that timetable. The company needs to make sure it shows results, financial markets must fully return to health, and the economy needs a rebound. "Clearly, they wouldn't be ready to go public in the first or second quarter," Phillippi says. "This is more likely a fourth-quarter event." And that only happens if GM stops talking about its progress and starts backing it up with some real profits.
David_welch
Welch is a reporter for Bloomberg News and Bloomberg Businessweek in Detroit.

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