Two weeks ago, GM reported its first quarterly profit in nearly three years: net income of $865 million on $31.5 billion in sales. A month earlier, Chrysler’s first-quarter report included the news that the company had turned cash-flow positive after nearly bleeding to death in 2008.
Both companies are also doing better in the marketplace. Market-share declines have been arrested. Bloated inventories on dealers’ lots have been reduced dramatically. Use of sales incentives such as rebates and interest-free financing — the cocaine of the auto industry — has been substantially reduced…
How did this happen? First, the bankruptcies — terrifying to everyone — succeeded in wiping vast liabilities from the companies’ balance sheets, more than $65 billion in the case of GM. The government task force that evaluated the industry leaders — of which I was a part — also insisted on a cold-blooded look at operating costs. Tough, conservative projections replaced years of rosy-scenario forecasting. As a result, GM cut its North American expenses by $8 billion per year.
In overseeing the restructurings, we insisted that assumptions about sales be very conservative. We wanted GM, which used to need to sell 16 million vehicles a year in the United States just to break even, to be profitable at volumes as low as 10 million. Happily, annual sales are running above 11 million and are likely to keep climbing. Accordingly, what would have been losses at “old GM” are now profits at shiny new GM.
Join the conversation as a VIP Member