The Beginning of the End for “Government Motors”

This week, the U.S. Treasury will sell private investors a stake in General Motors. The manufacturer found itself 61 percent in the hands of Uncle Sam as of June 2009, when it was forced to place itself under the protection of the bankruptcy system.

Strong corporate demand should allow the Treasury’s stake in GM to fall to around 41 percent. The Canadian federal government, the Province of Ontario and the United Auto Workers union, who are also GM shareholders, will benefit from reducing their shares and getting cash.

Naturally, the return of GM stock is good news. It should mark the beginning of the end of a dramatic governmental experiment to rescue an industrial giant. However, the first phase of privatization does not mean that the experiment has succeeded.

1) GM has not yet proved to be a competitive company.

GM can only prove it is competitive if it regains market share in North America and produces innovative, quality and appealing vehicles. It is too early to judge GM on this crucial point.

It will be difficult to judge GM on its sheer profitability alone, because the manufacturer will be able to limit its future tax payments by playing up its colossal past losses. Ford, its rival, has not been saved from bankruptcy by $50 billion of public money, which has been a big blow…

2) Uncle Sam remains strong within the company.

The U.S. Treasury will remain GM’s largest shareholder. Its employees still dominate the board of directors and management team.

3) The union wants raises.

Having agreed to lower workers’ wages in order to save GM, the union (UAW) is now seeking raises, as GM is once again earning a profit. It is unhealthy that old production line workers earn twice as much as new ones. This anomaly is not going to last forever. The cost structure of GM’s workforce will grow, probably in the wrong direction.

4) GM is still losing money in Europe.

Ford is abroad as well. GM’s success in China should not make them forget that the old continent is still making things very difficult for the Detroit giant with its Opel and Vauxhall brands.

5) The first phase of privatization loses money for the Treasury.

Even at $33 a share, which seems to be the highest price reached by any of the securities placed with corporate groups, the Treasury is losing from a purely financial point of view. Share prices would have to climb to around $50 to enable the Treasury to continue selling its shares and recover its entire investment. It’s possible, but it is not guaranteed.

6) From an industrial and social point of view, it is a short-term victory.

GM has shrunk but GM still exists. The North American automotive industry has survived. Its disappearance would have cost much more than the $50 billion paid to GM. Even by adding what was given to others such as GMAC (a financial services company) and Chrysler, helped by the resumption of economic growth, the operation has been successful so far.

7) From an electoral point of view, it is a lost bet.

Not only have Barack Obama and the Democrats been penalized for their nationalization, but the Republicans have even regained the Michigan governor’s office! It just goes to show that Americans are very different from the French and do not like the state meddling in business affairs. GM’s commercial image has also suffered: Even though the cars have the same quality, many Americans prefer Ford to GM because Ford was not nationalized.