That’s why it was so critical for GM to close the ailing Pontiac marque and revamp the dealer network, which everyone except the auto dealers agreed was hopelessly bloated with a lot of dealers who didn’t sell many cars—and thus didn’t generate enough profits to afford a shiny, updated facility and small army of service staff. The lackluster customer experience further eroded the brand.
The actual process of closing dealerships was mishandled. Cole says that Washington is “incredibly naive” about the car business; the administration initially pushed the firm toward Toyota’s model of fewer, higher-volume dealers, even though this approach would have undercut GM’s traditional competitive advantage in smaller towns. Then things lurched in the other direction, as politically connected dealers lobbied frantically against closings. After Congress passed a law in December of 2009 giving shuttered dealers the right to arbitration, GM mailed letters to 660 of them, offering reinstatement.
Nonetheless, the company says it is now happy with the number of dealerships, which has been trimmed to about 4,500 from the original 6,000. GM believes that these cuts, along with the other changes the firm made in bankruptcy, have left a company that can break even in a recession. So far, so good: the “new GM” posted strong net income in its first two quarters, even though U.S. auto sales look likely to be less than 12 million units this year. Compare that with 2006, when 16.5 million light vehicles were sold in the U.S.—and GM still lost money.
Post-bankruptcy, GM is unquestionably a more viable firm than the stumbling giant we put on life support two years ago. The worst fears of many critics—including me—were overblown. The government did not simply leave the bloated legacy costs intact in order to protect its political friends.
Still, there are reasons to worry—to worry about the future profitability of the new GM, and to question whether the government will recover enough of the money we spent to make this a good deal for the American public.
To start with, GM hasn’t shed all its legacy costs. The pension plan, which is underfunded by $26 billion, was not terminated in the bankruptcy, as such plans often are, with their assets turned over to the government’s pension insurer, and the beneficiaries frequently forced to accept a reduced payout. Instead, GM’s earnings will face a drag from that underfunding for years to come.
More worrying still is the possibility that GM’s labor woes are not over. Though the bankruptcy brought the firm’s hourly-compensation cost down to within spitting distance of what foreign-owned manufacturers pay their U.S. employees, Bob King, the new president of the UAW, already faces intense pressure to roll back some of the concessions.
Dealing with any new wage demands will be particularly sticky because starting in the middle of this decade, the automakers must comply with new CAFE standards, which raise the required fuel efficiency of cars from 27.5 miles per gallon to 39 mpg, with similar increases for trucks. The administration says the new rules will raise the cost of a car by $1,300, but data from the National Research Council suggest that the real cost could be at least twice that. With those higher costs, GM—which still has a major brand handicap—may have trouble making inroads into the small-car market.