Bankruptcy filing could put GM on road to profits

[June 02, 2009]  DETROIT (AP) -- General Motors' bankruptcy filing will do what its past chief executives could not -- cleanse the century-old company of burdensome labor costs, unprofitable old factories and a boatload of debt.

The price was one that no GM chief was willing to pay until now. The slimmed-down company will be a ward of the U.S. government, 60 percent owned by taxpayers, with half of its eight brands just memories.

Industry analysts, GM executives and even President Barack Obama say GM now has the cost structure to compete in the global automotive market and one day return to profits. The company says it can make money even if U.S. auto sales stay weak.

The question is whether GM can generate enough profit to free itself of government control before the president or Congress rethink promises not to muck around in day-to-day management of the company.

First, though, GM needs people to start buying cars and trucks again. Worldwide sales are around historic lows. And the GM has to convince buyers in its home market that its cars are as good as those made by the Japanese.

GM reached a pact with the United Auto Workers that it says bring costs more in line with Japanese automakers that have U.S. plants. Monthly debt payments will drop dramatically because GM will owe only $9 billion rather than $67 billion.

GM says that will help it break even when the U.S. market is a paltry 10 million vehicles annually, far below the peak of 17 million earlier this decade. That almost guarantees profits, says Tom Libby, an independent Detroit-area auto analyst.

"I'm very confident they'll be highly profitable in years ahead because the industry is not going to stay at 10 million," he said, adding that the number of people of driving age is rising and there's pent-up demand for vehicles.

Most economists expect sales to begin recovering toward the end of this year, rising to 12 million or 13 million in 2010 or 2011.

Any recovery for GM is predicated on selling cars that people want to buy.

Bob Lutz, a GM vice chairman who is retiring at the end of the year after more than four decades in the auto business, maintains that the automaker sold hundreds of thousands of pickup trucks and SUVs because that's what Americans wanted when gasoline was cheap.

The Obama administration wants a smaller, more efficient fleet to help end the country's reliance on foreign oil and cut greenhouse gas emissions.

Yet if gasoline stays cheap and SUV and pickup sales rebound, that would be diametrically opposed to the administration's goals. The administration says it has no intention of meddling in GM's products.

"What I am not doing, what I have no interest in doing, is running GM," President Barack Obama said Monday.

Some analysts say it may not be so clear-cut. Michael Robinet, vice president of CSM Worldwide, a Detroit-area auto industry consulting firm, is concerned that the government and the UAW, which will hold a 17.5 percent stake, could become too involved in GM's daily affairs.

"The decision-making matrix is very muddy," he said. "Will the union and/or the government step aside and let the decisions be made? That remains to be seen."

Government ownership of auto companies has had limited success in the past.

British Leyland was partly nationalized in 1975, joining all British car brands into a single company. When the move failed, critics blamed a lack of strong new car designs and ongoing industrial disputes.

The bulk of the business was sold to aircraft manufacturer BAE before being sold off in pieces to foreign investors. BMW acquired Rover and Mini, Ford bought Jaguar and Land Rover, and Nanjing automobile bought MG.

GM also needs a speedy trip through bankruptcy court to get past bad publicity.

John Pottow, a University of Michigan Law School professor who specializes in bankruptcy, said even a company the size of GM can make it through Chapter 11 in two to three months. Having the union, at least a majority of bondholders, and other agreements already in place will help, he said.

Once it's out of bankruptcy court, GM still has to address the issue of quality. Even its biggest boosters concede Detroit made poor-quality cars in the 1980s and 90s, sending many loyal customers to Honda and Toyota.

"Because of poor quality in the past, everybody out there thinks we're still producing junk," said Jim Harbour, author of a book on auto manufacturing and the man who developed a widely followed annual measure of factory productivity.

But Lutz and Robinet say GM is making far better cars now than in the past, pointing to the Chevrolet Malibu sedan. The Buick Lacrosse was the top midsize sedan in J.D. Power's three-year quality rankings, and Buick tied for the top brand.

The company has also been making the transition to fuel efficiency, rolling out six-speed automatic transmissions and new four-cylinder engine technology that pushed highway gas mileage higher even for midsize cars and small SUVs. Rechargeable electric cars are in the works.

GM must also overcome the stigma of bankruptcy and the buyers' fears that it won't be around to honor warranties or make parts. The government has guaranteed GM warranties.

At its peak in 1979, GM employed 853,000 people around the world and nearly 620,000 in the United States, and its chief executives concentrated mostly on keeping the company growing.

But John F. "Jack" Smith, who led the company in the 1990s, Rick Wagoner, ousted from the top spot earlier this year, couldn't shrink a company that had become huge and, bureaucratic. The United Auto Workers union had the power to shut down the company with a strike, and GM was crippled by health care and pension burdens of its aging force of active and retired workers.

"One of the reasons why the automobile business is so hard to run is that so many of the problems are intractable," said Lutz. "The room for maneuvering, short of being in a crisis like the one we're in, is very very limited," he said.

Today, GM employs 235,000 workers globally and 91,000 in the U.S., and new plans to close or idle 12 factories and make other cuts will mean shedding more than 20,000 jobs. Chapter 11 means the changes coming to the company, for better or worse, will be profound.

"We've seen some sort of evolutionary changes, but this is going to be a major change," Libby said. "Many of the things that have been pulling them down are going to be gone."

[Associated Press; By TOM KRISHER]

AP Auto Writer Dan Strumpf in New York and AP Business Writer Jane Wardell in London contributed to this report.

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