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Successful GM Share Sale Boosts Image, But Work Remains

GM’s Biggest Problem Is In Europe As Opel/Vauxhall Struggle
China, Brazil Volatile But Promising Markets

“Next year’s contract negotiations with the United Auto Workers union will indicate how much Detroit has, or hasn’t changed.”

General Motors, the world’s biggest car manufacturer until it plunged into bankruptcy, can wallow for a while in the feel-good factor generated by the successful sale of its shares.

But this is no time for complacency.

“Now the real work begins. GM and its bosses still need to prove the longevity of financial improvements seen in recent quarters and their ability to make further strides on product quality,” said ThomsonReuters’ Breaking Views analyst Richard Beales.

General Motors is heading back into private hands after the U.S. government sold some of its shares back to the public.

Investors believe that the new GM’s prospects were impressive enough to ward off fears about its loss-making European subsidiary.

The U.S. government now owns 33 per cent of GM, cutting its stake from 61 per cent. The Canadian Government now also owns about 10 per cent and the United Auto Workers union has a small stake.

GM has had a successful 2010, reporting an EBIT (earnings before interest and tax) profit margin of 6.7 per cent in the third quarter.

Rating services company Standard & Poors (S&P) reckons that the sale of shares was well timed because it will difficult for the company to improve much on this level of profitability in the near term.

One big problem remaining for GM to solve is the fate of its ailing European subsidiary, which makes Opels and Vauxhalls. In the first nine months of 2010 GM Europe lost more than $1.2 billion. GM Europe CEO Nick Reilly has said he hopes net profit will reach four percent to five percent of sales in 2012, but said this might take until 2013 to attain. Break-even is all that can be hoped for in 2011, although Reilly said recently there is now a chance to make money in 2011, although he didn’t say how much.

Lack of Astra impact
The new Opel/Vauxhall Astra has failed to make much of market impact. GM Europe has said it plans to spend $4.6 billion restructuring, which involves cutting 8,300 jobs from the 48,000 workforce.

Some experts worried that the sale of GM shares would lead to competitors and foreign governments buying strategic stakes in GM, with the risk of it being forced to give up high technology secrets.   In the event that didn’t happen, with U.S. mutual finds emerging as the biggest buyers of shares. SAIC Motor, GM’s joint-venture partner in China bought a stake of just under one per cent. Saudi tycoon Prince Alwaleed bin Talal al-Saud also bought one per cent.

Moody’s Investor Services said the successful share sale showed financial markets that things really are getting better at GM.

“The highly publicised success of the IPO (initial public offering) is an important positive for a company that is attempting to rebuild the credibility of its vehicle portfolio among U.S. consumers and is striving to shed any link between “GM” and the term “Government Motors”,” said Moody’s analyst Bruce Clark.

“The IPO came on the heels of important product-related messages about GM from Motor Trend magazine and Consumer Reports. During the same week as the IPO launch, Motor Trend named the Chevrolet Volt its 2011 Car of the Year. We expect the Volt will remain a low-volume vehicle for the foreseeable future and will have negligible impact on GM’s financial performance. Nevertheless, the Motor Trend award is an important message to consumers about GM and its ability to develop competitive vehicles,” Clark said.

China, Brazil promise much
After GM collapsed under the pressure of its huge debts, it eliminated  four brands – Saturn, Pontiac, Hummer and Saab and retained Chevrolet, Buick, Cadillac and GMC.

According to S&P, GM should be able to sustain its return to profitability in North America, and could do well in growth markets like China and Brazil, where sales remain vibrant but potentially volatile.

S&P had no comment on GM’s potential European problems.

As well as the problems in GM Europe, GM still has $17.1 billion in unfunded pension requirements.

Auto industry expert Paul Ingrassia, in an article in the Wall Street Journal called “Motor City Sceptics”, said the share sale paints a better picture not only for GM, but for the other U.S. manufacturers.

“After dramatic restructuring, Ford and GM are solidly profitable, and Chrysler is close to breakeven, despite a tepid economy in which U.S. car sales remain near historic lows. Americans will buy fewer than 12 million new vehicles this year, far below the peak of 17 million a decade ago,” Ingrassia said.

Ingrassia also warned about the dangers of complacency.

“Next year’s contract negotiations with the United Auto Workers union will indicate how much Detroit has, or hasn’t changed.”

“Detroit’s downfall in the past has been to confuse temporary comebacks with victory, and then to lapse back into arrogance and complacency. Here’s hoping that doesn’t happen again,” Ingrassia said.

GM has been displaced from the number one spot by Toyota of Japan. Germany’s VW is coming up fast on the rails and wants to be number one by 2018.

Neil Winton – December 1, 2010

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