Thursday, August 11, 2011

What's good for General Motors is good for America

In 1953, President Eisenhower nominated Charles Wilson,
the CEO of General Motors, to be Secretary of Defense. During the Senate hearings about his nomination, he was asked if he could make a decision adverse to the interests of General Motors if his position as Secretary of Defense required him to do so. He answered in the affirmative, although his actual response is slightly different than the line quoted above, and can be read below:

what did “Engine Charlie” really say?

General Motors was founded in Flint, Michigan in 1908. Over the years since that time, General Motors Corporation experienced strong and steady growth. By the early 1950’s, General Motors was the largest corporation registered in America, in terms of revenues as a percentage of GDP.

From 1949 until 1978, the full size Chevrolet was the best selling car in America in all but three years.

In 1955, General Motors became the first U.S. corporation to pay more than $1 billion in taxes. That same year, the only employers in the world that were larger than General Motors were the combined Soviet state agencies.

In 1963, one out of every 10 cars sold in the country was a Chevrolet.

Since those heady days of yesteryear, GM has seen its fortunes tumble rather dramatically.

In the third quarter of 2008, General Motors reported a quarterly loss of $15.5 billion, one of the largest quarterly losses in the company’s history. At the request of the White House, Rick Wagoner resigned as Chairman and CEO on March 29, 2009. Since that date, GM has had three more Chairmen. The most recent one is Dan Akerson, who assumed the post on December 31, 2010.

In September of 2008, Congress worked out a loan of $25 billion to help the company avoid bankruptcy, and in December of 2008, President Bush authorized an emergency bailout of an additional $17.4 billion. Ultimately, GM filed for bankruptcy protection on
June 1, 2009.

Lately, though, things have been turning around for “the General”. Surprisingly, the resurgence didn’t come about because of a huge increase in sales in the land of ”baseball, hotdogs, apple pie, and Chevrolet”. It happened because of China, currently the largest holder (at 26%) of all foreign holders of United States Treasury securities.

In 2006, Buick sales in China surpassed Buick sales in the United States for the first time, and the gap has widened considerably since then. For the first nine months of 2009, Buick sold 312,798 cars in China, and only 72,389 in the United States. As a result, when Buick redesigned the Lacrosse for the 2010 model year, the design studio that did the work was in Shanghai, not in America.

General Motors recently unveiled a new brand of automobile in China called the Baojun 360. It’s selling price ranges from $9,760 to $11,470, considerably cheaper than the similar-sized Chevy Cruze, which starts at $16,5256. Although it initially will be sold only in China, it could (with slight modification) be sold in America as well.

In the first half of 2011, GM sold more cars in China (1.27 million) than it did in in America (1.26 million). If the Baojun 360 becomes popularly with the rapidly increasing affluent Chinese middle class, that gap will continue to widen.

It’s still too soon to tell if the Federal Government will recover the money that it lent to General Motors. The U.S. Treasury currently owns 500,000,000 shares of the “new” GM, roughly 33% of the company’s worth. As of this morning, GM stock was going for just around $26 a share. At that price, the government would lose roughly $12 billion if it sold all of its shares tomorrow.

That’s still an ugly number, but a lot better than the $42 billion (plus) that has already been advanced to the company. On the positive side, though, General Motors DID report a PROFIT for the first quarter of 2011, so there is actually hope for the future.

If the Chinese auto market continues to expand, we’ll have to modify “Engine Charlie’s” convictions from almost 60 years ago to the following phrase:

“what’s good for Beijing is good for America”.

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