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GM faces hard road back to profitability

GM, the world’s second-largest automaker, filed for Chapter 11 bankruptcy protection Monday that the automaker and the U.S. government hope will be quick and painless.

It’s an outcome that was nearly unthinkable just six months ago. General Motors, a company once synonymous with America’s industrial might, is following its smaller rival Chrysler into bankruptcy court for a government-forced reorganization.

Now, for the sake of taxpayers, investors and the economy as a whole, GM needs to emerge from the largest industrial bankruptcy in U.S. history as a leaner company that makes cars people want to buy. By every measure, it’s a tall order.

Chrysler, which filed for a government-backed bankruptcy April 30, has demonstrated that it is possible for a large enterprise, pushed by the strong arm of the federal government, to move smoothly and rapidly through bankruptcy court. Chrysler, which plans to sell most of its assets to Italian carmaker Fiat, is nearing a quick exit from bankruptcy protection.

But it is unclear whether the smaller GM that emerges from bankruptcy court will ever be able to find its way back to standalone profitability, or whether it will remain permanently reliant on its new majority owner, the U.S. government.

President Barack Obama said Monday he was "absolutely confident that, if well managed, a new GM will emerge" from the process. A collapse of GM would have been “devastating” for the U.S. economy, he said.

“If you look at how Chrysler is progressing, you could say things are going well for them, and so it looks like GM will also be a success, but to assume that would be naïve,” said Jeremy Anwyl, chief executive of the auto research Web site

“With its greater size and global scope, GM is more complicated, so I would be concerned if I was the one pulling the trigger on this bankruptcy,” he said. “It could go off the tracks. ... There are just a lot of potential sides who could argue against this, and they all have to be heard in the bankruptcy process. But I guess the bottom line is: What alternative do they have?”

As part of its restructuring, GM will permanently close nine more plants and idle three others to trim production and labor costs under bankruptcy protection.

Assembly plants in Pontiac, Mich., and Wilmington, Del. will close this year, while plants in Spring Hill, Tenn., and Orion, Mich., will shut down production but remain on standby. A union spokesman at the GM plant in Spring Hill confirms the 2,500 employees there have been told the plant will be idled.

The job losses, coupled with a ripple effect at suppliers and dealers could be enough to tip the economy deeper into recession, warned David Cole, chairman of Center for Automotive Research in Ann Arbor, Mich.

“The supplier network’s structure is in pretty serious trouble now,” Cole said. “It’s not profitable, and critical suppliers are on the edge of failure, so if we were to see a cascading failure through the supplier base it could to take down all automakers and quickly spread to the rest of the economy — that’s the scale of this industry.”

However, if the “quick rinse” bankruptcy planned for GM were to revive the automaker’s fortunes, the new GM could pay handsome dividends for taxpayers and investors, said Cole. That would be good news for U.S. taxpayers, who will own 60 percent of the new company based on $30 billion in new government loans on top of a previous $20 billion invested.

It would also be good news for the UAW union and bondholders, who will hold stock warrants in the new GM. A smaller GM with a leaner inventory and a more focused product offering could generate a profit of about $10 billion a year, assuming the economy rebounds and about one million new U.S. households are created a year, Cole said.

“We are at the threshold of a dramatic increase in profitability for the industry, and we are increasing household formation in this country by one million a year, so demand is growing,” said Cole.

George Magliano, director of automotive industry research for the Americas at consulting firm IHS Global Insight, points out that a restructured GM will be positioned for a U.S. auto market of 9.5 million to 11 million new vehicles sold annually, matching his projections for this year and next, although those levels are abnormally low.

It will be at least a couple years before sales rise back to the historic level of 15 million vehicles annually, which was the benchmark for more than a decade, he added.

“We are starting to feel pretty good about the economy right now, but the recovery is going to be anemic,” Magliano said.

Like Chrysler, GM is expected to go into a government-managed “prepackaged” bankruptcy, in which the government provides so-called debtor-in-possession financing to let the automaker continue its daily operations while the bankruptcy court splits operations between a “good” and “bad” GM.

The idea is that the “good” GM, which would include the automaker’s most competitive brands like Chevrolet and Cadillac, would emerge from bankruptcy within a few months with a cleaned-up balance sheet. The company’s poor-performing brands, like Pontiac and Saturn, and other unwanted liabilities would be left behind in the “bad” GM. Those assets would be sold or liquidated over a longer period of time.

GM’s ousted Chief Executive Rick Wagoner vehemently opposed bankruptcy, fearing that the bankruptcy proceedings would last for years and that consumers would shun its vehicles, not wanting to make a major investment in products made by a company with a sullied reputation and an uncertain future.

So far there is no evidence that Chrysler sales have suffered since President Barack Obama announced its bankruptcy on April 30, Anwyl said. Customer intentions to buy a Chrysler dipped slightly in the week following the bankruptcy announcement but have bounced back since then.

In recent years, GM has suffered from a reputation for building poor-quality cars and has been unable to persuade the public that its quality has vastly improved, said Jack Nerad, executive market analyst for Kelley Blue Book, an automotive research Web site.

“I would say that in some ways bankruptcy could give GM to get a fresh start with the public,” Nerad said. “If they can portray themselves as being changed, maybe that would persuade people to give their products a try, and once people are in these vehicles they would find them perfectly tolerable. The best of them are very good. We picked the Chevy Malibu over Honda’s Accord, Toyota’s Camry and the Nissan Altima, so they have the goods to succeed.”

Magliano reckons some of the products that retiring GM vice chairman Bob Lutz, an advocate of “emotional cars,” has steered the automaker toward building, such as the revamped Chevy Camaro muscle car, could fall by the wayside as a government-run GM reinvents its product line.

“The world has changed, and the kinds of products that they’ve been dreaming up were developed for a world of cheap gas,” Magliano said.

GM has started working on building more small cars, like the Chevy Aveo and the Chevy Cruze, and they have the Chevy Volt extended-range electric vehicle planned for 2010, but they are going to have to do more, according to Magliano.

“GM has been working on a whole host of medium-sized cars,” but they will now have to reassess their mix of product, said Magliano. “With the change in environment some of that is not suitable now, and I doubt it will be suitable for the government.”