Bailed-Out GM Returning to Failed Past?

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GM logoIt seems that what is new is old again at General Motors. New GM has rehired Old GM executive, Bob Lutz, to advise New GM executives on how to run a car company. Certainly, the new executives could use the help as GM share price has fallen about 40% year to date. While there are some negative aspects of having one of the leaders of a failed company giving advice on how to run the business, Mr. Lutz (unlike current GM leadership) at least knows the auto industry.

While Bob Lutz is generally well regarded in the auto world, GM should be careful relying on any one source of guidance to plot their future course. It should be remembered that Lutz was part of a regime that drove GM into bankruptcy and he was a big proponent of the Chevy Volt, which is not exactly knocking the cover off the ball. Autoblog.com reports that Ward's Auto has confirmed my assertions that the demand for the Volt is not all it was cracked up to be. Volt sales went from a terribly dismal 125 units in July, which GM management claims was an anomoly, to a more normalized dismal level of 302 in August.

The last group that had control of the path for GM was Obama's Auto Task Force. The problem was, these guys did not have auto industry knowledge and were more concerned with politics and the intricacies of bankruptcy laws (and how to manipulate same) than they were with assuring that GM had a viable path to success. The people they placed in control of GM, including CEO, Dan Akerson, do not seem to have a grasp on what needs to be done to assure future profitability of the company. The decision to hire Lutz is either another ploy to try and gain credibility (which has been plummeting) on Wall Street, or a genuine admission that the current leadership needs some guidance from someone that actually might know what he is doing.

It would be a positive sign if GM was admitting that it could use some help getting its turnaround plans back on track. In an effort to save GM from repeating its first trip through bankruptcy court, I will also offer up some suggestions to help with the plan. Of course, I have no delusions of being a brilliant car guy like Lutz, but there have been some observations I have made that may be of use.

The first step for GM would be to admit the problems. Stop making false representations that are designed to give the appearance of a company that is the picture of health and prosperity, Wall Street isn't buying it. That means, do not continue to hype the Chevy Volt as a car that is the future for GM, stop claiming that China is the crown jewel for GM and is a sure bet to be the major source of profits in the future, and stop floating rumors like the company has so much cash that it may buy back Treasury's stake in the company. Proclamations about the pension obligation situation need to be rethought, as well.

During the last earnings conference call, statements were made that US pension funds were now only under funded by about $9 billion after a $2 billion stock contribution; the question was not raised why new stock is being issued to fund pensions when GM supposedly has so much cash. The statements gave only half of the story, as overseas obligations were not mentioned. Nor was the risk to pension funds from a declining stock market, a point I have also made in the past. These types of misrepresentations do nothing to help the company, as evidenced by the recent downturn partly attributed to a Bloomberg report that warns of a potential pension shortfall of about $35 billion.

GM also should get out of its old habits of questionable accounting practices, such as stuffing truck inventory channels leading up to earnings reports. This, along with pumping up earnings reports through the use of non-operating income like gains from the sale of securities or from tax credits, will only give a false picture of strength for the short term. Eventually, the piper will have to be paid. Along these lines, incentive spending should be managed without resorting to tricks like diverting incentive spending to areas that are not measured. During GM's last sales conference call, it was discovered that spending for the GM card incentive program was not included in the overall incentive costs.

In a nutshell, just be honest. Credibility and trust need to be built for many Americans to invest in a GM vehicle, or in the stock of the company. In addition, when a GM vehicle has a defect that needs to be fixed, just fix it, regardless of whether or not the bankruptcy proceeding relieved liability. How can consumers trust a company that hoses owners of defective vehicles like the Chevy Impala?

If GM's earnings do not reflect the projected optimism of the company and its proponents in Washington, it will be time for some big moves. I do not believe the current management has the ability to lead GM for the long haul. Treasury should sell the taxpayers stake in GM and it may be time for the government selected leadership to step down. A management team that believes that consumers would buy cars based on a premise portrayed by a lame marketing theme that the company "runs deep" does not inspire confidence; nor does the embarrassment of having hyped an over-priced, money losing hybrid vehicle that costs taxpayers billions of dollars to produce and is now not selling.

Current management at GM may have a chance at success if the economy improves and a rising tide of car sales keeps all auto manufacturers afloat. Redemption is possible if leadership regains credibility by returning to a focus on building profitable, quality vehicles that have an appeal to the mass market. On the other hand, if we enter a double-dip recession and car sales suffer (as GM share price trend is warning of), GM's taxpayer provided cash hoard will diminish quickly and accountability will be unavoidable.

Mark Modica is an NLPC Fellow Associate.