Sector Outlooks

GM, Chrysler's New Ink Color: Black

The retooled General is cooking up a plan to finance a comeback -- and broaden its offerings.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

January 12, 2010

The government takeovers of GM and Chrysler will bear fruit this year. Having shed billions of dollars’ worth of liabilities and shuttered outmoded manufacturing plants through bankruptcy proceedings, both companies are on their way to becoming much tougher global competitors.

They’re successfully transforming themselves into leaner, more efficient operations, with about a $2,000-per-vehicle cost advantage over Japanese and European car manufacturers -- at least on paper. That’ll let the two U.S. companies plow big bucks into new product development, spiffy interior designs and high-end technologies.

Despite a sluggish U.S. auto market -- likely under 12 million vehicles this year -- both GM and Chrysler should be in the black by the end of 2010 or so. After years of sustaining annual losses in the billions of dollars, Ford, which didn’t accept federal bailout money and skirted bankruptcy court, had a head start on new vehicle development and will likely post profits each quarter of 2010.

Giving GM’s new car development a lift: an initial public stock offering from the company, possibly this summer. The whole firm won’t be up for auction, though. Most companies prefer to dribble out stock sales, betting that share prices will rise, making subsequent offerings more lucrative. Moreover, the federal government, which holds 60% of GM, will likely hang onto its shares for a while, figuring taxpayers will get a better price for the stock later on. Still, even a limited public offering is expected to raise billions of dollars, making GM more competitive with other automakers, especially Ford.

GM’s stronger financial position will allow it to produce a wide array of niche vehicles, such as small sports cars, crossover SUVs and large cars, while simultaneously accelerating its development of big-production-volume passenger cars. The niche cars should prove to be profit centers for GM, says David Cole, chairman of the Center for Automotive Research, an auto industry consultancy. That’s a big change from the old GM’s modus operandi -- churning out hundreds of thousands of the same model in order to wring out a profit despite sky-high operating costs. And it’ll give GM a considerable advantage over its smaller, crosstown rival, whose new car development is just gearing up under Fiat after a two-year hiatus imposed by Chrysler’s previous owner, Cerberus Capital Management.

For weekly updates on topics to improve your business decisionmaking, click here.

• Print
• Comments
• Email
• RSS