It is a rare day when a major company can announce a quarterly loss of over a billion dollars and have it regarded as good news, but General Motors (GM) managed to pull it off.
The auto industry is a highly important contributor to the nation’s economy and a source of employment for millions. In addition to the obvious manufacturing and retail trade sectors, the industry plays highly significant roles in numerous others sectors including energy, credit and finance, advertising, highway construction, repair services, freight hauling, recreation, recycling, business and professional services, and personal mobility. It has been estimated that every direct automotive manufacturing job accounts for approximately 6.6 spinoff jobs.
For most Americans, automobiles are the second most expensive possession (following housing). The majority of households own at least one, and they are engrained into many aspects of our personal and professional lives. Purchase decisions are normally tied to economic conditions and family prospects.
Because the auto industry is so significant to the American way of life, apprehension has been growing over the past few years in light of continuing losses and declines in market shares for domestic automakers. Following a dramatic drop in sales due to the recession and other factors, concerns about the industry’s future swelled to historic proportions in recent months.
In June, General Motors followed Chrysler into bankruptcy. It was an unprecedented move that would have been unimaginable a few years ago. It has resulted in the closure of dozens of facilities and the loss of more than 20,000 jobs. Many dealerships have also been eliminated. The situation eventually resulted in the government’s allocating billions of rescue or “bailout” dollars to keep the wheels turning and then adding even more funds to facilitate GM’s reorganization.
These moves were widely praised and condemned, and though far from a perfect solution, they undoubtedly served to help turn the industry around and provide greater confidence in its long-term sustainability. Understandably, buyers were reluctant to purchase from companies that might not be around for service, preserving trade-in value, parts availability, and other consumer priorities.
Now after bankruptcies, restructuring, and changes in management, signs of recovery are beginning to emerge. In July, Chrysler Financial, the main lending arm of the Chrysler Corporation, became the first auto-sector company to pay back loans from the Federal government. Ford Motor Company earned a $1 million profit over the July-September period and required no government assistance. The Ford strategy of establishing liquidity implemented a few years ago, allowed management through the crisis to preserve design and development advantages.
The Cash for Clunkers program this summer certainly stimulated Americans’ automotive appetites, and the desire for new vehicles is continuing and even growing. Sales of light-vehicles in October saw the best performance in a year excluding the Clunkers’ incentive month of August. Some industry leaders believe that total sales for the year’s final quarter could be stronger than the pre-Clunker level.
This week, General Motors, though still losing money, has stabilized sufficiently to announce plans to begin quarterly reimbursements of the billions of “second-chance” government grants it received years ahead of schedule. Even though GM is not faring as well as some of its competitors, the auto giant appears to be moving in the right direction.
Paying back some of the money it was loaned, however, is just one step for GM in its long pilgrimage of rehabilitation from the depths of heavy losses and poor marketplace decisions. Implementing additional changes in the corporate culture, getting executives and unions on the same page, creating value for shareholders, and attracting back consumers are still in the wings awaiting their moments on stage. With a positive and increasing bank balance consisting of billions of dollars in cash and marketable securities, GM now has sufficient funds not only to pay back its loans, but also to invest in design and production that may well increase its standing in worldwide sales.
The test of its comeback, however, will be the amount of profit the company is able to make from North American consumers. The company’s global market share rose three points in the third quarter to 11.9%, but its US share remained flat at 19.5%.
Smaller and mid-size cars appear to be the wave of GM’s future due to the pressures on manufacturers to do their part to reduce dependence on oil and decrease carbon-dioxide emissions. Many vehicles in GM’s line already compare favorably to cars from other manufacturers in terms of mileage and options.
Moreover, alternative-fueled vehicles are waiting their chance on the horizon. As one example of a returned interest in GM products, buyers are making bids on an electric car that has yet to be built. It’s the Chevy Volt which is supposed to be able to go 40 miles even before using any gasoline. It is due out next year.
As the nation’s economy recovers and people become better able to make large purchases, the demands for new designs and greater fuel efficiency in motor vehicles will increase and undoubtedly become the driving force of changes. The responsiveness of manufacturers to consumers’ desires will be the key to the level of success they will achieve in the future.