Text 3.Now it’s time to step on the gas

DELAYED for years by GM’s mounting financial problems, then its bankruptcy and government bail-out, the promised revamp of the carmaker’s classic Corvette Stingray at times looked like it might never happen. But on January 13th, on the eve of the Detroit motor show, a gang of reporters and a crowd of sports-car enthusiasts (who paid $1,200 a ticket) gathered in an abandoned warehouse in a rundown part of the Motor City and, at last, to the sound of wailing guitars, the new “Little Red Corvette” drove onto the stage. It won wild applause, even from the hard-bitten hacks.

Things got even better for GM the next morning, when its Cadillac ATS sedan took the show’s top prize, the North American Car of the Year. This boosted GM’s hopes that Cadillac, its premium brand, can begin to catch up with pricey European marques such as BMW and Range Rover among the emerging world’s new rich. The Corvette’s rave reception likewise lifts GM’s dreams of elevating its image from “successful plumber’s car”, as an executive recently put it, to being a must-have high-performance model for the global elite, up there with Porsche and Ferrari.

After years as a basket-case, pilloried as “Government Motors”, GM is back in profit, stepping up its output and creating jobs again. Mark Reuss, its North America boss, believes the double boost at this week’s show will help it gain momentum by fostering the sense that it is winning again: “Winning can be very contagious,” he said.

“Halo” cars like the Corvette do not sell in big enough numbers to have much effect on overall profits, but they do create a sense of excitement around a brand, drawing buyers to showrooms, where they may end up buying more regular models. Far more important for sales and profits among GM’s launches at Detroit was the new version of its best-selling model, the Silverado pickup truck. Unlike Europeans, Americans love pickups, and will pay handsomely for them: profits on them can be around $15,000 a unit, compared with maybe $4,000 or less for regular cars.

The new models unveiled this week are the start of what may be the most drastic overhaul of GM’s range in its century-plus of history, as it refreshes a line-up that was starved of investment and left to go stale following the bail-out. In the next year or so, reckons Peter Nesvold of Jefferies, an investment bank, models representing about half of GM’s entire sales volume will be replaced.

The next year will be crucial for other reasons. GM’s boss, Dan Akerson, hopes to persuade credit-rating agencies to restore the firm to “investment grade” in 2013 – it has been rated “junk” since 2005. More important, the US Treasury plans to sell its remaining 19% stake, erasing the stigma of Government Motors.But GM badly needs that new line-up. In its American home market, its share slipped from 19.6% to just 17.9% last year, the lowest since GM’s rise to pre-eminence under the leadership of Alfred Sloan in the 1920s. Although its worldwide sales last year rose by 2.9% to 9.2m vehicles, its best since 2007, its global share slipped by 0.4 points to 11.5%. It looks like being deposed as number one carmaker by a resurgent Toyota, with an expected 9.7m sales. And it is feeling the hot sausage-breath of Germany’s Volkswagen on its neck: VW’s relentless drive to become world leader took it to just under 9.1m sales.

GM is well ahead of Ford and Chrysler, its Detroit-based rivals, in the Chinese market, now the world’s biggest, where GM is profiting from its booming joint ventures with local makers. But growth in Chinese car sales has slowed markedly in the past two years, and there are also signs of excess capacity in Brazil, another big money-spinner for GM.

GM is alive and Osama bin Laden is dead, as Vice-president Joe Biden quips, which is great but not enough. Its shares, at around $30, are below the $33 at which it was refloated on the stockmarket in 2010, and way below the $70 now needed, after a recent share buy-back by GM, for America’s taxpayers to break even on the $50 billion they put into the firm in its bail-out.

In the buy-back GM paid the US Treasury $27.50 a share, reducing its stake from 26% to 19% (Canada’s federal government and Ontario’s provincial administration together own a further 9%). A recent analysis by Morgan Stanley, another investment bank, foresaw the shares reaching perhaps $47 if, among other things, American car sales rose again this year.

The report also considered a bull case in which the shares soar to $72, but that depended on GM finding someone to take its perpetually loss-making European division, Opel-Vauxhall, off its hands without a dowry. Opel has lost around $18 billion since 1999 and, despite recent management shuffles and plans to break even by mid-decade, the red ink may keep flowing, given the dire state of Europe’s car market.

Opel is building an alliance with Peugeot, an equally ailing French carmaker, in which they will share overheads, work together on various types of car and engine, and hope to save $1 billion a year each by 2016. This week, amid rumours that Peugeot might buy Opel, MrAkerson reiterated that it was not for sale.

(The Economist, 2014)