Perception: GM’s recent profits means that the federal bailout worked.
Reality: The bulk of the profits came from the sale of two divisions. GM’s stock is still trading below the IPO price paid by the government.
Economist brainiac Megan McArdle makes her usual impressive points. The highlights:
- GM sold off big stakes in companies to generate the bulk of their profit.
- GM still excessively dependent on big incentives and fleet sales to move cars.
- GM’s most profitable sales are heavily dependent on gas guzzling SUVs and trucks, not the best position to be in when gas prices are exploding.
- Even though GM’s largest competitors just had their supply chain badly damaged by an earthquake/nuclear meltdown, GM’s stock is trading below the IPO price.
The entire McArdle column is copied at end of post.
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GM Makes a Big Profit: Time to Celebrate? — By Megan McArdle
GM turned a very nice profit this quarter. That’s good news! I certainly hope we taxpayers get our money back. But I think journalists have gone a little far in celebrating this event. Jon Cohn writes, “Will the voters will ever give President Obama credit for rescuing the American auto industry? I have no idea. But it looks more and more like they should.”
On Thursday General Motors announced that, for the fifth consecutive quarter, it had made a profit. And not just a measly one, either. The $3.2 billion was higher than experts had predicted and more than three times the profit of the same quarter in 2010, when the company was still struggling to emerge from its bankruptcy.
Okay, let’s not get too excited here. GM sold off big stakes in Delphi (formerly its captive parts supplier) and Ally Financial (formerly its capital arm) to generate the bulk of that profit; the company’s not making record money because it sold three times as many cars. GM is still excessively dependent on big incentives and fleet sales to move cars off of its lot, which means that despite quality enhancements made possible by the bankruptcy (which lowered fixed costs, and allowed them to put more money into making cars), their brand still hasn’t recovered from decades of neglect. And while later in the post, Cohn makes it sound as if GM has suddenly turned itself into the world’s premier small-car maker, it is still heavily dependent on the same old gas guzzling SUVs and trucks that have been shoring up GM profits for decades as foreign competitors steadily eroded their car sales. Right now in America, small cars are largely an economy business, which means that unless you can command the sort of quality premium that Toyota and Honda get–and I think the reliance on incentives shows that GM can’t get that sort of markup–it’s still very hard to make money in that space.
All of which is sort of a problem given that gas prices may well hit $5 a gallon this summer. The last time it happened, the market for trucks went into freefall. Maybe the Volt will save GM, but unless people become very willing to invest in electric cars, GM is going to see its margins fall.
All of this can be seen in the stock price: even though GM’s largest competitors just had their supply chain badly damaged by an earthquake/nuclear meltdown, GM’s stock is trading below the IPO price. We needed the stock price to rise substantially in order to have any hope of saving the taxpayers’ money; instead it’s fallen. Will the voters give Obama credit for handing a lot of their money over to special interests who had spent decades driving themselves further into the hole before they finally stopped and demanded a bailout? I’m not sure that’s something Obama wants to take credit for.
This article available online at: http://www.theatlantic.com/business/archive/2011/05/gm-makes-a-big-profit-time-to-celebrate/238503/
Think Good Finances 