Thursday, 17 June 2010

Companies Focus – The Western 8 - General Motors Co LLC : IPO Dressing with 'The General's New Clothes'? Given the Benefit of the Doubt.

Having previously reviewed the 4 western auto companies that are 'in shape' to better face the near and mid terms (ie 'in the light' as depicted by the accompanying graphic) investment-auto-motives continues to survey the remaining 4, arguably less well positioned. In a renewed yet hopefully temporary time of new angst, industrial structure, regional market reliance, political attitudes, credit tightening and a more cautious consumer all add headwinds to the fortunes of large EU centric players.

Thus positioned incrementally 'in the twilight' are typically those that whilst enjoying boosted sales from 2009's governmental stimulus spending, must now face a new round of partial re-structuring to create more efficient, powerful and cost vs income relative: R&D initiatives, product development procedures, supply chain linkages, manufacturing bases, marketing platforms, retail channels, and of course pertinent product.

Relieved of many of its legacy problems after Chapter 11 re-birth, New GM sits in the shadows of an independent Ford, yet theoretically ahead of Chrysler. Whilst all 3 have either directly shown or announce from internal accounting methods a Q1 profitability, given the lack of true transparency regards GM and Chrysler relative to their 'umbrella protection' by Washington and FIAT respectively, the investment community will obviously be trying to assess both's true bottom-line contribution beyond the PR rhetoric.

New GM, now devoid of the 'bad baggage' hived into Motors Liquidation Co, faces the world with optimism citing its renewed product range, renewed North American customer attraction, Chinese market history/penetration and the renewed efforts of global reach and value-car pertinence of its Chevrolet brand.

Thus GM once again seemingly prides itself on what it sees as a largely right-sized, globally relevant, re-invigorated US multi-national, with a business model designed to muster both region-specific relevance and the ability for inter-regional demand off-setting. This was always the historical intent set out by Alfred P Sloane in another age. Chapter 11 bankruptcy and the $65bn state aid package provided the catch-all to initiate contraction of GMNA's operational obesity, protecting NA jobs at more competitive labour rates and re-balancing the worldwide business platform from which it could seize the EM high-growth opportunity and re-orientate itself to new Triad market product demand trends.

' Flight of the Phoenix' is the obvious cinematic metaphor - a semantic sub-text used by the IR team through the inclusion of 'phx' at the beginning of the web address for the Q1 presentation. Thus New GM is a new lightweight corporate structure created from the broken old, but in the film the newly created vehicle performed an impressive but short lives hop skip and jump to the nearest oasis. That cannot be the case for GM, none should see the intended IPO as the final stop oasis, even if it be a destination of choice for Washington and perhaps certain executives.

Instead it must credibly demonstrate that IPO is simply an enabling milestone towards a tenable future, and not a finish line unto its own ends given parental pressures to redress the balance of the the US national debt. The parental governmental protection is ideally given to both act as a safety net and offer enough guidance over the appropriate time-frame to ensure the entities long-term contribution to shareholders, employees and society at large.

[NB the recent UAW convention (miraculously) indicates that union leaders and staff see GM as healthy, a new era of union-building and demand-setting will begin, ahead of the 2011 contract talks. This seeming militancy can only be damaging to NA's operational flexibility and cost-bases, and so employee's futures].

Q1 2010 Performance -

Growing global car demand from Q309 to Q1 2010 saw an increase in GM's global deliveries reaching 1,998,000 units from 1,972,000 units two quarters earlier, but market share if the TIV slipped to 11.2% from 11.8%. (Likewise across the three quarters GMNA deliveries slipped to 563,000 in Q1 2010 from 690,000 in Q309, a 37,000 drop in core brand vehicles of Chevrolet, Buick, Cadillac & GMC, whilst the run-out brands of Saturn, Pontiac, Hummer & SAAB slipped from 102,000 to 12,000 over the period, so helping to decrease over-capacity issues).

Having risen impressively from Q309 to Q409, the Group's Q1 Net Revenue (via GAAP) remained nonetheless strong in Q1 2010 at $31.5bn, which was $800m down on the previous peak quarter. Q1 Operating Income climbed out of the red, reaching $1.2bn, allotting $0.9bn to primarily government stockholders, rated at $1.66 per share.

GMNA market share peaked in Q409 at 19.3%, with at a similar Q4 high of 20.2% for US market share, the 4 core brands representing 18.6%. But Q1 2010 saw a respective slip to 17.8% GMNA share and 18.1 regards the core brand market share. However, incentive sums steadily reduced in Q1 from $3,150 per unit in January to $2,800 by March – before unfortunately climbing above $3,000 in April. Across the year, only in March 2010 did GM managed to fractionally beat the industry average incentivisation package figure, the general monthly figures showing extreme volatility/reactivity which no doubt reflect the end-of-month 'shift deals' undoing the pricing stability achieved previously. And now with the incentives cost creeping back upwards it looks like that March was an historic anomaly. Q1 GMNA Net Revenue increased over the last three quarters thanks seemingly largely to speedy QoQ dealer inventory reduction and re-stocking, reaching $19.3bn from Q4's $18.3bn and Q3's $14.6bn. Through the effects of lesser sales volume with improved unit margins and gained re-structure cost savings this fed through to a GMNA Q1 EBIT of $1.2bn, having seen losses of $-3.4bn and $-1.4bn in the preceding quarters.

GME market share has generally eroded since the slow-down and stoppage of EU government led eco-product credit availability, yet it did picked-up in Q1 thanks to the new compact product launch of Astra, basic EU share latterly at 8.5%. share slides in Germany of 1.2% over 6 months doesn't bode well, probably as a result of GME's begging bowl requests, but a return to nearly 12% in the UK looks promising. The only problem investment-auto-motives envisages is the credit-worthiness (and so future default possibility) of some of its sales base demographic, many purchasers often state employed by a contracting government or equally prone in government affiliated private sector employment. However, Q1 EU deliveries were up 405,000 nearly touching the Q309 high of 409,000 thanks largely to what was an eased retail credit environment. GME Net Revenue fell for the third quarter, reaching $5.5bn, this possibly due to reliance on what could have been limited vehicle availability of the severely contracted previous quarter production. [NB to provide a better picture GM should set Q1 EBIT against Q4 production figures, not Q1 production figures to provide a more relevant cross-comparison of the actual cars produced/sold and accordant revenue].

However, the massive Q2 ramp-up of 90,000 additional units should cure availability issues, and boost Q2 revenues, as long as demand meets supply. Overall Q1 EBIT was negative at $-0.5bn, though improved upon Q409's $-0.8 and apparently heading back toward's Q309's breakeven.

GMIO (International Ops) markedly grew Q1 deliveries in the rest of the world, primarily due to China's rise to 623,000 units from 478,000 units six months previously; whilst remaining Asia-Pacific, Latin America and African sales effectively staid flat at 395k / 403k / 407K units over the preceding 6 months. Market share in China and Brazil staid flat over preceding quarters even if sales were lifted by the 'rising tide', with India showing market share improvement at 4.2% from 3.1% half year earlier, this thanks to its well positioned broad line-up of small, compact and 'high-ride' Chevrolet vehicles. However the additional sales to maintain market share come at the cost of Net Revenue, GMIO down to $8.1bn from Q409's $9.1bn, that quarter's income boosted by China's temporary reduction on small car purchase taxation. However EBIT continued to grow impressively reaching $1.2bn in Q1(of which $0.4bn was equity driven) from $0.7bn and $0.5bn in previous quarters.

Strategic -

Although obviously under the GM conglomerate umbrella, since early 2009 management has tried to perception ally distance its marques from the parent so that they might be divorced from any immediate cross-contamination. Yet in truth, especially for non NA public, the parent and off-spring brands are synonymous.

However, whilst efforts are made to keep North American momentum and China, Asia-Pacific and Latin American regions happily 'bubble', the real operational issue is of course GM Europe. Namely, the manner by which the RenCen can gain additional free/low-cost funding and other corporate benefits from its European host nations, specifically from Germany for Opel, as part of its $3.7bn regional restructure.

[NB investment-auto-motives was always a keen proponent of Opel/Vauxhall's partial or possibly full divestment of its manufacturing base within the GM empire. Then ideally freed from present obligations and hyper-competition, and put under a strict business rational by co-owners or new owners. So as to create a globally cost-competitive, large contract manufacturing base that could serve EU clients such as the remaining commercial shell of New GM Europe, and others including Daimler, FIAT, Renault etc; a model more adept for Europe's new seemingly long-term sales ceiling. This done to create a world class, technology led and well funded B/C-segment industrial base, thereby introducing the much needed horizontal supply model, as opposed to the vertical supply model of the 20th century industrial archetype which still is being run, resuscitated, and run today; as we see with GM].

It is the remit of he GM Board to maximise its cost-benefit of all its divisions, in GME's case by way of externally lenient short-term funding arrangements for what it sees as the precious technical centre of the empire. GM recognises that maintaining its A, B & C-segment technology contacts with Germany's supplier-base is critical to access world class engineering R&D and integration . Hence its attitudinal turnabout regards Opel's release at a time when across the EU injections of sizable state aid were being offered. However, economic and political times move quickly, and Nick Reilly (head of GM Europe) will have known that the receipt of the previous bridging loan guarantee (made largely available to keep the CDU party in power given voter attitudes to Opel), would in all probability not be followed up by any further central funding guarantee of the E1.1bn requested as part of GME's $3.7bn re-structuring plan. Now instead relying on the German provinces to offer 25% of the sum and presumably negotiating the remaining E825m value by way of additional fiscal benefits.

Of course since provision of the bridging loan, another high impact event has come to pass - the European Debt Crisis came into being and keeps rumbling even after the E750m backstop. Its demands spot-light all EU governments' debt levels and constrain future 'savior' expenditure. Now that financial back-stops must be put in place to save the Eurozone from shattering, industry – especially if owned by supposedly 'back on track' companies – has a comparatively empty case.

Reilly and the Board must now be considering what options are left regards the possibility of a self-sustaining GM Europe, something that must take a very different guise if it is not to fall back into the old ways of being internally supported by GM's more profitable NA & EM divisions.

One probable preferential option may be to formulate a deal similar to the NA turnaround model, by way convincing the unions that the conversion of pension debt into equity and so working capital is a good solution for all stakeholders. Alternatively re-visit past suitors as co-owners. Thus to Marchionne's satisfaction re-negotiate the tabled deal with FIAT....or possibly a rekindled deal with Magna International (given the Canadian company's acquisition of certain ex-GM US assets)....or one that sees an extended GM-Avtovaz Russian relationship (in accordance with Merkel's German-Ruso philosophy but a bitter pill for Washington). A PE re-emergence from the likes of RHJ International now seems slim given such tight liquidity access and desire for short-term exit horizons. Singularly, combined or including other new party interests, the ownership and operational shape of a future Opel/Vauxhall remains to be seen – but it must alter to suit the 'new norm' if it is to prosper.

Lastly a topic that sits on the side-lines and is still of curiosity to investors. The devolved 'toxic' side of the old company, Motors Liquidation Co sits quietly in the shadows; its stock being traded over the counter with pink slips that portends reminiscence of the bygone 1920s era which echoes the origins of MLC's asset base of tracts of real estate. Beyond the physical assets which are presently split between mid-valued plant and low-valued ground, interim managers endeavor to seek buyers for the corralled brands of: Pontiac, Saturn & SAAB. As well reported, SAAB has been sold to Spyker Cars and its owners, itself forming SAAB-Spyker Automobiles. Saturn has been destined to to be sold to Roger Penske, but negotiating hurdles emerged regards product supply and dealer contracts. Pontiac, like HUMMER, remains effectively dormant.

[NB HUMMER was not transferred to MLC, retained by GM, and is now 'retired' given the previously failed acquisition agreement by China's Sichuan Tengzhong Heavy Industrial Machinery Co, due to disapproval by the PRC's Ministry of Commerce. Allied and other PE interests emerged from Western China via and the US, but issues of credibility and credit access from the buyer perspective and GM's use of valuable executive resource on increasingly marginal prospects scuppered deal momentum ].

Operational -
GM must be concerned that the the tail-off of CARS (with no CARS 2 forthcoming) may mean a consequential drop-off in sales, especially as the econometric indicators of non-farm payroll and productivity reports, and EU contagion fears, highlight the still fragile state of the US nation.

As Automotive News reports, May sales saw GM's market share drop by 0.4% whilst its per unit sales incentives cost it an additional $61. This contrasts the respective incremental gains by Nissan, Ford, Hyundai-Kia and even Chrysler at 0.3%, 0.4%, 0.5% and 1% respectively, with reduced incentives costs.

In the shadow of reduced sales impetus, renewed focus is being put onto input costs, especially in vehicle systems areas where cost can be more easily abated. With steel contract prices re-set at high levels (+30% or so) after the recent round of iron ore miner vs steel processor talks, it was inevitable that automakers targeted non-engineering critical plastic components as the area to make cost savings. Maintaining showroom activity is of course corrolaristic to pursuing profits. Thus it came of little surprise to investment-auto-motives when - as part of all manufacturer's efforts to maintain consumer credibility via vehicle recalls - GM recently announced a low-safety-critical recall for approximately 1.5 million vehicles dating from 2006 to 2009 to have a “heater washer fluid module” replaced. Originating from 5 instances of low-threat under-hood fires, GM will now replace the possibly faulty unit with an all new item, and offer $100 disruption compensation.

Of course not all owners will return their vehicles, but this event – as with all recalls – promotes the chances of the owners of older vehicles to tour the refreshed 2011 model year showroom, tempting them into replacement deals and so avoiding customer loss to other manufacturers. The typical re-call rate on low-safety items is about 35%, so expecting 500,000 or so people to peruse new product will theoretically cost $50,000,000, but could generate a 50% new buyer conversion rate so securing 250,000 additional new car sales, without the required large incentive packages needed for conquest customers. This follows a previous March recall for steering system faults on Pontiac compact & medium cars that would have pulled otherwise 'promiscuous' customers back into the GM fold.

Chevrolet US sales in May grew by 31% YoY, highlighting eased economic concerns and critically available credit.

GM's intent with Chevrolet has been as the globally rolled-out vanguard that would create a worldwide foundation-stone for the distribution, retail and latterly production of its sibling upmarket brands. After what has been decades of fragmented efforts by the individual divisions to do likewise, and constant emphasis on Buick in China, it seems that albeit painfully GM is growing its foothold in EM & RoW markets thanks to the tenacity of Chevrolet. Gradual success has come in most markets, but problems persist in Europe, where presence and brand positioning has not as successful as originally envisaged given the brands use of below quality GMDAT sourced vehicles and the stiff competition from the likes of Hyundai, Kia, Skoda and Dacia which offer better small product or similarly priced larger vehicles.

This incursion by the Korean and E. European players will only continue to persist on an ever broadening world stage, so Chevrolet must properly define itself globally.

Furthermore, GM fears an image degradation problem (and so profitability) with Chevrolet: specifically use of the term 'Chevy' - given its blue-collar heartland & pick-up truck connotations within the US. Thus – not for the first time – a memo was put out to employees that the supposed image cheapening 'Chevy' nickname should be avoided. Unsurprisingly an internal and public backlash emerged defending the emotionally charged shortened title, given that it is engrained in American popular culture.

[NB This issue is also of importance in international markets, a special case in point is that Indian customers enjoy vocalising and emphasising “Chevy”, since it demonstrates their familiarity with aspirant and 'hip' US culture; and so a reason to maintain and create further cultural currency from “Chevy”.].

The remainder of the 2010 product pipeline includes release of the 2011 model year Cruze compact sedan in GMNA, and the launch of the long-awaited, Volt. In truth the Cruze is of far more importance to GMNA's bottom line than the heavily publicised, but in all probability limited availability Volt, given its high production costs and still broadly untested sophisticated technology in volume real-world customer conditions. Investment-auto-motives expects Volt to be essentially a spiritual successor to the EV1, more practical from package and powertrain stand-points but still far too exotic and expensive a proposition for mass adoption. The Orlando MPV is presented by GME, whilst GMIO continues the roll-out of Spark small hatchback and continues the Sail (rebranded from Buick).

Buick's US sales in May was up 37% YoY, showing that new product and easier financing availability underpinned demand.

As is evident, Buick has been regenerated as a core marque, a consequence of its early availability and popularity in China, with this 'Chinese capacity pull' the rationale for its effective re-invention back in the US. The model range has been seemingly sporadic over previous years as the result of a transition from GMNA's typical badge-engineering policy across many models to instead greater brand-relative product focus.

The ambition is to exploit lower cost Chinese manufacture and the higher margins available from near luxury positioning. However its seems very likely that Buick will continue to introduce smaller vehicles into its range sourced from China and elsewhere in Asia, this GMNA Asian import business model created by the soon to be launched 'baby LaCrosse'

GMIO gains the new 2011 Excelle, which is expected in itself to be superseded by the aforementioned compact.

Buick must of course 'find itself' and its raison d'etre amongst a Pan-Pacific audience. Its offering of near-luxury is in tune with the times and regional demand – as seen 2010MY LaCrosse's reception - yet this may prove harder to secure given that Buick is still offering 'all things to all men', including large sedans, compact sedans, compact hatches, SUVs and 4WD. GM has reviewed the USPs of its separate competitors and apparently tries to fight across all strengths by dipping into the extensive GM tech & parts bin.. This then follows in the footsteps of Cadillac and Lincoln, which have yet to prove that such a catch-all approach is successful against far stronger competitive product and competitor organisations.

Buick's recent product history has been patchy, now it must properly explain its identity and relevance moving beyond the upscale yet unlasting formulas of yesteryear Oldsmobile & LaSalle..

Cadillac's US sales in May was up over 53%, showing renewed near-luxury vigour and the depth of the previous May 2009 low

Since its early glory days Cadillac's re-invention as a serious luxury brand has been GM's ambition so as to gain the advantages of scale cost efficiencies and market pricing leverage. As GM shrunk decade on decade it was able to exploit its SUV products to ensure good margins, but as SUV demand withered and the very size of the manufacturing capacity base necessarily withered, so there has been raised pressure to make Cadillac perform. Present margins come from an aged and presumably tooling amortised product range, with expansion into smaller sedan territory via the ATS model using the Epsilon 2 platform (EU only BLS) in mid 2011. With mid-size CTS presently on the Sigma 2 platform but moving onto new Alpha base, and the platform merging of STS and DTS onto the Super Epsilon 2 base.

However, even with ongoing technical rationalisation, accordant cost savings and the geographic expansion of the smaller car. Cadillac's main concern is its lack of meaningful psychological connectivity to worldwide customers, replacement product after replacement product consistently poorer than German, Japanese and British rivals.

GMC's US sales in May grew by 26%, demonstrating the effect of new SUV product, pertinent to the brand, and slow, specific re-growth in the commercial vehicle arena.

The historical machismo of the GMC brand in commercial trucks, buses, large pick-ups & latterly SUVs echoes meaningfully with the North American spirit. As such it became the #2 GM brand after Chevrolet, and continues as a somewhat uniquely placed division within the GM empire, with perhaps more room for exploration and exploitation that its sibling divisions.

Economic recovery in the US and Canada will bode well for GMC commercials and America's GMC should play into the hands of GMC's value pricing of generally older product compared to Daimler's Freightliner or Navistar Int. Corp.

Note -

Thus having established Chevrolet as its global platform, GM now must 'weave in' Buick, Cadillac and possibly GMC, a task made harder by FIAT's ability to leverage FIAT geographical coverage for Chrysler and Jeep.

As previously stated the machinations over GME's future continue with CEO Nick Reilly now approaching the 4 German states for financial aid assistance, aswell as no doubt continued efforts targeted at the UK and other less fiscally strained nations – ie exempting Spain etc. Given the UK's relative buoyancy for GM versus other EU nations, sales and marketing efforts will undoubtedly be directed here.

Regards new product, new Meriva launches with its 'theatre doors' (also known as clap-hand or suicide doors), that should entertain families given that the only other cars with such apertures are the Rolls-Royce Phantom & Ghost and RX-8. Unlike these 3 cars though Meriva still has an obvious structural B-post which demonstrates style over substance, still nonetheless a USP very much in the innovative Opel tradition after Flex7 seating in Zafira and pull-out bike rack on Corsa. Old Meriva is apparently being 'run-out' but given the large higher price differential compared to new Meriva, investment-auto-motives suspects that in reality it is simply a marketing ploy to demonstrate the suppose value of the replacement car. (A similar pitch for old vs new Astra, but listed at the same presumably to enable dealers in face to face negotiations to heavily discount the old car yet maintaining the price floor on the newer car). Otherwise the line-up remains as is, with discounting envisaged for most models given the level of 'talk-down' available from French and Italian competitors.

This division continues to fight for its place in the GM empire, trying to balance domestic manufacture and consumption with the export of large car (sedans and coupes).

Domestic consumption consists of primarily GM imported small and medium cars, with ever decreasing purchase numbers of its home assembles large cars thanks to a mix of higher oil/petrol prices and product substitution from MPVs and 1-ton pick-up and chassis-cab trucks.

Exports were/are sold under other GM nameplates; primarily in the Middle East (largest market), USA, China, South Korea, Brazil and other smaller markets . That has been the modus operandi since 1998 with its peak between 2003 and 2007, but the demand for large car exports flailed with Pontiac's discontinuance in the US and GM's ability to assemble the Buick Park Avenue in China

Thus the business model has been under severe strain over the last few years and Holden must seek volume growth in regions with low petrol prices and taste for 'affordable eclectic personal cars'. However, this will continue to prove increasingly problematic give n the squeeze between globally extending near luxury players like Nissan's Infiniti and Hyundai's Genesis and the entrenched luxury players such as Mercedes, BMW, Audi etc.

Traditionally the business model has relied upon relatively low cost labour and the higher pricing afforded by differentiated & tailored large car products and fleet sales by nationalised enterprise, but with labour costs rising as a consequence of the general Asian demand wage-spiral and domestic consumption of specialised product falling so Holden finds itself in a business model squeeze; one in which government assistance is unlikely to be forthcoming as it once was.

It seems into the future it will be required to expand its operations as a prime GM Asian engineering centre, with possible continuation of the Zeta and Super Epsilon 2 platforms development and other R&D ambitions, aswell as export continuance of partially and fully dressed engines.

Though not seen as an integral division as such, Delphi has played an increasingly important role in GM, both in terms of component supply and previously creditor for some years. Originally spun-out of GM to diversify its own customer base through the 1990s, GM has recognised that integration of portions of Delphi would be beneficial so as to better control supply chain costs and speed NPD. Thus it took over 4 of Delphi US plants and its global steering business.

GMAC / Ally Finance Inc*:
In 2006, prior to GM's restructuring, it sold GMAC off which latterly coined the name 'Ally' and suffered through its exposure to sub-prime mortgage lending, only to be part nationalised with 56% government ownership. Ally has historically large exposure to the sub-prime lending market, a customer-base that makes up 16-20% of NA sales (so Experian reports). For some months GM has increasingly hinted that it should like to regain a sizable captive finance ability so as to once again tap into sub-prime buyers, which it feels is required to maintain sales levels.

GM recognises the problems of creating from scratch its own finance division, especially given the potential political opposition, so seeks to acquire one. Extending the present arms' length relationship with Ally so as to give it the power of lending arbitration obviously makes most sense,but understandably Ally executives are far from convinced having had its figures burnt previously in mortgages. Though they'll admit that car loan defaults were lower than that of housing at the peak of the toxic asset crisis, they also know that these are different times and default danger still exists given the fragile economy and the willingness of less than wholesome car buyers willing to 'arbitrage' such credit availability for a new car, even if towed away at a later date.

Furthermore, Ally was government appointed as the preferred lender to Chrysler, and obviously Marchionne would attempt to block any effort by GM if it was waived through by Washington.

Ultimately GM having supposedly rid itself of its bad ways, and talking of a new cultural era, must expect a level of concern from investors, if it resorts to such sub-prime targeting practices – even if industry normal - 12 months out of Administration and with a supposed attractive product range at attractive pricing. It must bolster its financial credibility and image credibility, something that cannot be done if vehicle residuals suffer from near new cars rolling through auction houses.

Financials -

As of today, the Q1 figures presented previously look on the surface promising, they reflect the new era attitude of the organisation that has pronounced itself as having paid back the (primary) US & Canadian governments loans of $6.7bn and $1.4bn (@ 7%), prior to the June deadline. The statement with accompanying publicity intimates that all government debt was paid-off. Yet as analysts and Forbes' financial journalists have summised, it seems a distinctly separate $13.4bn 'working capital' loan held in an escrow account was used to pay-off the primary high-profile loan.

It has been suggested that this apparent early pay-back was undertaken to give GM the credibility to access another US dept of Energy loan to the tune of $10bn (@ 5%), so in effect gaining re-financing, easing company debt levels and improving its nominal credit standing.

Without the legal requirement to publicly publish in depth quarterly reports or full accounting of the P&L, Balance Sheet and CashBook, GM has been offering a level of fiscal transparency since the re-emergence from its Chapter 11 filing. Of note was the Sept 09 update which highlighted Q309 actuals vs the Q3 viability plan used for Chapter 11 restructuring. Having reduced last year's $94bn debt pile to only $17bn overnight on June 10th, and dramatically improved net Liquidity and so Managerial Cashflow, GM was set to pounce out of the starting gates and into Q3 & Q4.

Given the massive level of leeway involved – 'pessimistic' pitched plan versus (probably) achieved – it was not surprising to see GM out-perform the Q3 plan. As GM foresaw, Q4 and Q1 2010 experienced greater headwinds with slowing Triad markets set against flattening EM markets with greater cash burn due to increased input materials costs, engineering costs, S&M costs, overall CapEx demands, foreshortened supplier payment terms, debt payments to Delphi etc.

Of greater relevance are the operational achievement figures of recent times and today, now that the easier function of beating overtly dour, self calculated expectations has passed. The business returns to more normal operating assessment. However, relative to this, even it has warned that completing the remaining restructuring steps that impact the heart of the business and not simply the Balance Sheet will be tough.

The seeming increasing lack of deep operational detail being presented appears to be in contrast with the good news Q1 results submitted. At that point investment-auto-motives presumed that Ed Whitacre was underplaying GM's near-term capability, giving little away and letting the numbers speak for themselves. But that approach, if indeed the case, seems to be unravelling with some of the more concerning news leaked, such as GM's desire to access sub-priming lending facilities as the notional deadline date of the intended IPO approaches. But such moves, whilst temporarily boosting revenues, only serve to add risk to the new and improved entity, ironic when GM's de-risking was the prime intent. Better a smaller operation that capacity boosted in such a manner.
And if that means additional rounds of cost-savings prior to the IPO then so be it.

Surely, discussions with the various IPO managers – who themselves are competing for their inclusion in the bookrunner consortium – would have echoed that fact. It may not bring in immediate fees, but adds to their professional credibility, and brings in greater latter-day rewards if the IPO is phased structured.

Today, more than ever, Washington, GM Co LLC and the investment banks must realise that creating the foundations for 'the long game' is what matters to one and all.

Conclusion -

At this end-point juncture, it proves worthwhile to state exactly which entities presently own General Motors Co LLC, agreed via the 363 sale (via Title 11, Chapter 3, Sub-Chapter IV of the US Code).

#1 – The US Government with 60.8% (paid $49.5bn)
#2 - The UAW VEBA with 17.5%
#3 – In Right of Canada & Ontario HRH Queen Elizabeth II with 11.7% (paid $8.1bn)
#4 – Unsecured Creditors with the remaining 10%, primarily 'Old GM' related.

Acting primarily in the role of economic stabalising agents, these entities – largely with their engrained societal responsibilities – stood as the effective patrons of GM's transformation.
As such the US populous, GM employees, Canadian Sovereignty and particularly largely anonymous unsecured creditors, deserve to be rewarded above nominally low base interest rates for their enormous contribution to the industrial welfare of North America.

To ensure this the IPO must be carefully tended so as to achieve a successful launch price and for the stock to maintain an upward momentum well into its open trading period. This in turn relies upon corporate credibility that the GM business model – both in NA and worldwide – has substance. Furthermore, ideally the release of shares onto the market would be done in a phased manner typical of state asset privatisation given its inherent size, the 4 owner groups presenting similar percentage proportions of their holdings for floatation at the different stages. Such a phased full IPO should then better ease the transition into what will largely be domestic and foreign institutional funds ownership.

Much to date has been thrown toward, and undertaken internally by New GM, with the danger that it may appear wholly fixed and self-sustaining in readiness for its renewed capital markets listing. So the real question for investors is exactly what competitive advantages GM holds in the way of: direct customer access/retention, proprietary (and applicable) enabling technologies, manufacturing cost structure, domestic and international shipping rates, dealer-base enthusiasm and reduced customer credit default occurrence?

In the 1920s under Alfred P. Sloane's vision for expansion GM was a leading light in the still nascent auto-sector. But by the 1960s it increasingly became a parody of itself. To re-appropriate Gilbert & Sullivan's words it became with few personnel and product exceptions “the very model of the modern major general”, where once it led the way and taught others, it for nigh on 50 years as the world's No 1 player effectively sat effectively stagnant using its scale as leverage but still loosing market share decade after decade.

Today, even after its 'obesity operation' and its cultural shock, there is still a danger that the innate old GM culture of convention, politicking seniors, staff intrasingency and automatic expectation re-awakens. GM has been through the grinder, it was forced to for its and the US nation's own good. So it must continue to change any in-built old-order habits to in the mid and long-term once again re-capture the role as the true global auto-sector teacher... not the brash, bombastic, self-unaware character that 'sat outside', enthusiastically echoing hand-me-down words and in reality bringing little to the party.

After the massive blow dealt to the stock-holders and bond-holders of the old company – now trying to gain a lowly cent on the dollar via Motors Liquidation Co - to generate credibility and belief prior to any IPO GM must be seen to be advancing on all fronts, strategic an operational, in the critical battle for future US and EU custom.

As of today, simply reciting the good GMNA over Q4 & Q1 together with the rising tide of EM countries set against the lightly put 'problems' of GME is frankly not enough. At a time when the GM Board should be communicating its prime attitudes, viewpoints and actions to the investment community, the lightweight Q1 presentation charts (versus the likes of Ford, Daimler or VW) indicate a case of GM trying to manage expectations rather than conveying very necessary deep insight. Presently unlisted the company can afford to do this, presumably with the intention that more will be forthcoming as the intended IPO launch date approaches.

Yet, what with renewed capital markets' fragility across the world, especially so regards IPO launches (with many recently pulled or post-poned) GM's successful floatation still seems some time away – even though it is presently identifying book-runners and under-writers - probably at this point sometime in early 2011, as opposed to within the next 6 months as intended. The company has well ridden its orchestrated tailwinds as part and parcel of what was to be an early exit from effective nationalisation, but the unfolding reality is that it must demonstrate its mettle in increasingly testing times, and be able to convey sustained multi-region sales performance based on well received products, stable and ideally increasing market share and proven QoQ EBIT numbers

Hence, investment-auto-motives places GM ahead of the Renault-Nissan, FIAT-Chrysler and PSA on the basis that its fresh start, devoid of past responsibilities (and also seen in its accounting procedures) can be exploited. Yet it is a test of the new Board's supposed understanding of a global marketplace and commercial adroitness. This rank (5th of the 8) reflects not so much a case of hope over experience, though from historical evidence it suggests the fact, but more a case that never before in the modern era has GM had such an opportunity to demonstrate its worth as a massively re-calibrated conglomerate with both the scale leverage, global reach and the necessary external pressure/incentive to perform.

Sloane gave GM its 20th century vision, Whitacre et al must provide a credible 21st century vision, that may need to ultimately be truly radical' given the need to convert $46bn worth of Goodwill and Intangible Assets allocated 11 months ago. Even with the sliced debt levels from $46 to $16bn, and the government eased cashflow, the sooner GM shows its intent and methods to maintain the recent artificially inflated buoyancy the better.

In the meanwhile, much of what has been witnessed has been a co-creation of GMNA tailwinds afforded largely by the Obama administration and a fragile uptick in the US economy. Of real significance must surely be the proof of the GMNA pudding, something which should be communicated to investors and the public alike in the form of productivity metrics and a host of benchmark indicators that reflect the ideals set out for the goals of the original re-organisation.

Very much a case of “watch this space”, though no one should be holding their breath until the rising tide of global sales TIV returns. For today, unlike the old adage of “what is good for GM is good for America”, the shrunken company experiences the more converse relationship of “what is good for the global economy is good for GM”.

Post Script:
As of today (17th June) it was announced that GME would no longer be seeking state aid from the German central government, instead seeking to self fund operations.