Is Detroit Turning The Corner?

[rickaren]

Is Detroit Turning The Corner?
04.21.10

DETROIT -The government-supported carmakers General Motors and Chrysler Group are producing something they haven't made in quite some time: cash.

While both carmakers have more work to do to return to health, they've made substantial progress since last April, when they were on the verge of bankruptcy and needed government aid to survive.

On Wednesday GM announced that it had paid off its government loans in full, while Chrysler reported a $143 million quarterly operating profit.

Before anyone gets too excited about GM's loans being repaid, it's worth remembering that the U.S. government still owns 61% of the automaker and $2.1 billion in preferred GM stock. Taxpayers will have to wait until GM returns to the stock market with a public offering of its shares to know whether they'll recover their entire $50 billion investment.

The same is true of U.S. taxpayers' 8% stake in Chrysler. A retiree health care trust owns the majority of Chrysler. The carmaker is managed by its strategic partner, Italy's Fiat, which holds 20%. Neither carmaker has scheduled an IPO yet.

What's promising, though, is that both GM and Chrysler are generating cash that will support their comebacks.

"GM's ability to pay back the loans ahead of schedule is a sign that our plan is working, and that we are on the right track," said Chairman and CEO Edward E. Whitacre Jr., speaking at a GM plant in Fairfax, Kan. "It is also an important first step toward allowing our stockholders to reduce their equity investments in GM," he said, while acknowledging the tough work ahead.

Treasury Secretary Timothy Geithner said he is confident that GM is on a path to viability. "This continued progress is a positive sign for our auto investment--not only more funds recovered for the taxpayer but also countless jobs saved and the successful stabilization of a vital industry for our country."

In fact, GM is in the rare predicament of not being able to produce enough cars to keep up with demand. The company said Wednesday it will invest $257 million to increase production of the mid-sized Chevrolet Malibu at two factories near Detroit and Kansas City.

"The markets are asking for more, but we're not in a position to do that as much as I'd like right now," said Mark Reuss, president of GM's North American operations. He said GM's newest models, including the Malibu, Chevy Equinox, Cadillac SRX and Buick Lacrosse, are in particularly short supply.

Several GM factories are already working on three shifts, 24 hours a day, and still can't produce enough cars, Reuss said. He's working on ways to increase production capacity but said the company can't go overboard with expansion. "We're growing the company back in a very profitable, a very responsible and a very disciplined way," he told reporters on a conference call.

Chrysler's operating results, meanwhile, were reported Wednesday in Turin, Italy, where Fiat also announced plans to separate its car-making operation from its truck and farm equipment businesses. Sergio Marchionne, chief executive of both Chrysler and Fiat, said the two carmakers will work even more closely together.

Marchionne attributed Chrysler's $143 million operating profit (before interest and taxes) to cost cuts and improved sales following the repositioning of its Chrysler, Dodge, Jeep and new Ram brands.

"This positive operating result in the first quarter is a concrete indication to our customers, dealers and suppliers that the 2010 targets we have set for ourselves are achievable," said Marchionne. On a net basis, Chrysler lost $197 million.

Its total liquidity grew to $9.8 billion as Chrysler generated $1.5 billion in cash during the period. Chrysler is on track, he said, to break even on an operating basis this year.

"Fiat/Chrysler deserves a lot of credit for the progress made so far," said Edmunds.com senior analyst Michelle Krebs. "It was questionable whether they'd survive 2010, but now the company seems to be on track for better days."

Taxpayers can only hope.

LINK: Is Detroit Turning The Corner? - Forbes.com