It doesn't seem so long ago that General Motors' executives were throwing themselves at Washington's feet and begging for a bailout. Last week, however, the company reported its second consecutive quarterly profit — $1.3 billion — paving the way for an initial public stock offering that would trim the government's stake.
The turnaround helps redeem the decisions by the Bush and Obama administrations to lend GM nearly $50 billion to stave off liquidation. The bailout appears to have done what it was designed to do: help GM slash costs and reinvigorate its leadership. Yet the apparent success comes at a cost that's yet to be measured.
Some critics argue that the bailout prevented GM's most valuable assets from being acquired by more nimble and productive rivals, which could have made better use of them. But liquidating the company could have disrupted the entire auto industry, devastated hundreds of parts suppliers and idled millions of workers. Given the magnitude of the risks, it's hard to imagine any U.S. president rolling the dice while the economy was in a deep recession.
What happened instead is that GM was able to complete the transformation it started in 2007, when it won crucial concessions from the United Auto Workers on pay and benefits. Under pressure from an Obama administration task force and the industry outsiders it installed on GM's board, the company closed factories, shed brands, dumped dealerships and installed new leaders. Just as important, the task force helped persuade lenders to write off much of GM's debt, enabling the company to emerge from bankruptcy in record time.
Removing billions of dollars in debt and retiree healthcare costs from GM's books slashed the company's manufacturing costs by thousands of dollars per vehicle — so much, in fact, that its cost per car is a couple thousand dollars lower than many of its rivals'. The reductions, combined with improvements in quality (and Toyota's well-publicized troubles), have enabled GM to make profits on all types of cars, not just the trucks and SUVs it relied on in the past — even at a time of lackluster demand.
The downsides of GM's rebound include the impact on Ford, which wasn't magically rescued from its debts. The bailout also reminded companies that the larger they are, the more likely they are to be spared the full cost of imprudent contracts and failed strategies. And by negotiating a deal with the UAW that gave its claims better treatment than some other creditors received, the administration invited accusations of political favoritism, even though parts suppliers and warranty holders also received better deals.
All of those issues are long-term concerns. The more immediate test for the GM bailout is how the market reacts to the company's IPO, which is expected by the end of the year. The more faith the market shows in the company's transformation, the more taxpayers will eventually recoup from their role in making it happen.