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Experts expect long road to profitability for GM

- The Washington Times - Tuesday, June 2, 2009

General Motors Corp. and the White House sought to portray the automaker's landmark bankruptcy Monday as a quick and easy affair that would end within months.

But some experts expect GM's troubles to linger for years, even if it emerges from bankruptcy within a few months as President Obama hopes. And it could take years, if ever, for the taxpayers to recover the $53 billion of federal funds invested in GM.

In a single day, two of the Big Three automakers -- once the very symbol of American industrial might -- changed their statuses dramatically. GM filed for bankruptcy protection, the fourth-largest such filing in U.S. history. In the same New York court, a judge approved the sale of Chrysler LLC to an Italian-led consortium, putting the smaller automaker on track to emerge from bankruptcy within days.

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Mr. Obama touted the ease in which his restructuring plans have been accepted but also acknowledged the gravity of the bankruptcies and public skepticism about the wisdom of government intervention. He said it was necessary -- despite the pain and high costs -- to put what was once the nation's largest automaker on the road to a healthier future with the help of so much taxpayer cash.

"I recognize that this may give some Americans pause," he said. "What we are not doing - what I have no interest in doing -- is running GM. ... Our goal is to get GM back on its feet, take a hands-off approach and get out quickly."

On Wall Street, the Dow Jones Industrial Average surged 221.11 points, partly in reaction to the bankruptcy filing.

Republican lawmakers criticized the GM deal, which will give the government 60 percent ownership. They questioned how and when the government will exit the car business. Officials from Capitol Hill to Wall Street also expressed concern that the auto program could turn into a long-term dependent relationship with ailing industries that would sap the federal budget.

"This agreement may buy some time, but does nothing to ensure GM's success," said House Minority Leader John A. Boehner, Ohio Republican. "The only thing it makes clear is that the government is firmly in the business of running companies using taxpayer dollars. Does anyone really believe that politicians and bureaucrats in Washington can successfully steer a multinational corporation to economic viability?"

While Mr. Boehner and many others have called on the White House to reveal its "exit strategy," even senior administration officials could not say when or how the government would get out of the car business.

The administration insisted that it would invest no more than the $53 billion outlined in the reorganization plan and would not involve itself with day-to-day corporate matters after appointing most of the reorganized company's board of directors.

The monumental bankruptcy plan listed more than 100,000 creditors and proposed to close nine factories and idle three more. Meanwhile, the German government picked Magna International, a Canadian car-parts maker, to buy GM's Opel unit in Europe.

But even after GM emerges from bankruptcy, senior officials said, the government will have to engage in major decisions at the company while also playing the role of "passive investor," overseeing its investment in the company for an indefinite time.

Some executives in Detroit have suggested that the White House Auto Task Force could become a permanent agency similar to Japan's Ministry of International Trade and Industry, which nurtured Japan's auto industry into an international juggernaut in what is sometimes referred to as "Japan Inc."

"There has never been this level of interaction and cooperation between the government and the auto industry in the United States, despite the familiarity of such organizations in countries such as China or Japan, where the government is intimately involved in the health of the industry," said Aaron Bragman, auto analyst at IHS Global Insight.

But there's little doubt that Chrysler and GM would have failed by now without the government support, he said, and the government's efforts to quickly restructure the companies seems to be working.

IHS and other analysts say the success of the reorganization plan in the long run depends on whether American consumers are willing to buy the smaller, more fuel-efficient cars that GM and Chrysler will focus on making under orders from the White House. Both companies made their marks in the past selling large cars, trucks and sport utility vehicles - and that is where the companies made most of their profits.

Moreover, the new mission to make cars that conserve fuel puts them squarely in competition with Japanese and Korean automakers, which have made their reputations producing high-quality, fuel-efficient cars in the United States and elsewhere. Many analysts expect the foreign automakers to make inroads at the expense of GM and Chrysler as they battle for dominance in the fuel-efficient segment.

While stripping the companies of their huge debt loads in bankruptcy should give them a fresh start, some analysts see potential problems in the failure to impose big cuts on so-called legacy costs of high union health care and retirement benefits. Legal challenges to the plans have centered on the favorable treatment accorded the unions versus others with claims against the companies.

"Our biggest concern with the restructuring plan is the potential for governments and unions to influence production, product, work force and management decisions in ways that could jeopardize the automakers' chances for survival," said Thomas J. Donohue, president of the U.S. Chamber of Commerce.

He pointed to evidence that the United Auto Workers already pressured GM to build a new line of smaller cars in the United States rather than in China, where costs are much lower. Also as part of the spinoff of GM's Opel unit in Europe, the United States insisted on banning the sale of Opel cars that would compete with GM in the United States and China.

These are "clear examples of market manipulation and protectionism," Mr. Donohue said. "If members of Congress, along with government officials from the United States to Germany to Canada, are allowed undue influence over management's decisions, then you can write this down: These companies will not return to profitability and their survival will be seriously challenged."

Whether taxpayers get their money back depends on whether the companies become profitable again. Anthony Currie, an analyst at Breakingviews.com, an investor news service, said GM will prove to be a "sinkhole" for taxpayer money.

"For taxpayers to recoup their dollars, the whittled-down carmaker must be worth $90 billion -- a value it never even achieved in its heyday," he said. Some analysts say it could take years for GM to attain that much market value, and it may never do so if it continues to encounter problems.

But Mr. Obama insisted that he would "refuse to let these companies become permanent wards of the state, kept afloat on an endless supply of taxpayer money."

White House officials indicated that they might cut the company loose if it stumbles after emerging from bankruptcy rather than invest more to keep it alive.