GM, Chrysler Back From the Dead

FOXBusiness

General Motors Corp. (NYSE:GM), for decades the No. 1 car seller in the world, has been derided in recent years as ‘Government Motors.’ Meanwhile, fellow Big Three Detroit auto maker Chrysler was all but left for dead.

Then, as quickly as you can say bankruptcy, all that has apparently changed.

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Just two years removed from Chapter 11 both companies are profitable again and looking to reclaim their dominant positions in the revitalized global car market.

Perhaps more than any other factor -- downsized operations, fresh leadership, new product lineups -- GM’s and Chrysler’s revivals can be attributed to the mountains of debt that disappeared when the two companies emerged from bankruptcy in mid-2009.

“Bankruptcy allowed them to shed an enormous amount of debt,” said Bill Visnick, an analyst with auto research firm Edmunds.com.

GM was carrying about $65 billion in liabilities when it filed for Chapter 11 protection, according to court filings, while the much smaller Chrysler owed $6.9 billion to its creditors. Restructuring that debt meant the two companies could vastly reduce their debt service payments and direct that money elsewhere into their operations.

If not for that debt restructuring, it’s highly unlikely either company would have generated a profit for many years regardless of their respective Draconian cost cutting measures. And that’s if they survived at all.

“Both companies vastly restructured their balance sheets. That debt had been hanging over their heads for decades, cutting into their profits and weighing on their balance sheets in many other ways,” said Visnick.

On Thursday, GM said its first quarter profits had tripled from a year earlier, soaring to $3.2 billion during the first three months of 2011, up from $900 million a year ago. It was the fifth straight profitable quarter for GM.

Chrysler on Monday reported its first profitable quarter since it, too, emerged from a government orchestrated bankruptcy in the summer of 2009. Actually, it was Chrysler’s first profitable quarter since 2006.

What’s more, both companies are inching closer to paying back their controversial government bailouts. GM has paid off nearly half of the $50 billion in taxpayer funds it received at the height of the financial crisis, and Chrysler is currently negotiating private loans and a debt offering in an effort to pay off the $7 billion it received from the U.S. and Canadian governments.

The Chrysler turnaround is perhaps even more remarkable than GM's. In the first quarter, Chrysler took in $116 million after losing $197 million during the same quarter a year ago. The company’s revenue jumped 35% to $13.1 billion primarily due to an 18% increase in global sales of its vehicles.

Yet less than two years ago, Chrysler’s long-term viability was in serious doubt. In fact, if Italian carmaker Fiat hadn’t stepped in as a partner it’s very likely Chrysler wouldn’t have survived.

Timing has also played an important role in GM’s and Chrysler’s turnaround.

Certainly the earthquake and tsunami that devastated coastal regions of northern Japan in March have provided an opportunity for American car makers to play catch up with Toyota (NYSE:TM) and Honda. But the foundation for a reversal of fortune was being laid well before disaster struck in Japan.

“GM and Chrysler entered and emerged from bankruptcy at perhaps the perfect time, getting a fresh start at the bottom of a down economic cycle,” said auto industry expert David Magee, author of the book How Toyota Became #1.

After decades of allowing costs to soar, the bankruptcy proceeding forced both companies to do what they should have done years ago: slash payrolls, close factories and cut their product lines.

In other words, they aligned their operations and costs with actual demand for their products. Consequently, in the past two years they’ve been making just enough cars to meet demand without creating inventory surpluses. That’s allowed them to price the cars at a level that in turn generates a profit.

In the past, both GM and Chrysler -- especially GM -- were churning out far too many vehicles, which resulted in bloated inventories at dealerships. Those surpluses required dealers to slash prices to levels that cut deeply into profits.

GM and Chrysler are doing something else: they’re making cars Americans want to buy. Namely, smaller, more fuel-efficient models.

“GM was quickly in gear with smaller cars, the Cruze being a prime example,” said Magee.

The Cruze, which is priced moderately at around $16,500 and gets about 36 miles per gallon on the highway, was credited by GM as a significant contributor to its strong first quarter numbers.

Chrysler is retooling several of its popular Jeep models to reflect the shift away from gas guzzlers, and is reportedly planning to add a 40-mile-per-gallon small car to its Dodge brand in the next year or two.

Ford (NYSE: F), which alone among the Big Three U.S. car makers never needed a bailout, was well ahead of its Detroit competitors in this area. Even its wildly popular F-Series pickups have been refitted in recent years with more fuel efficient engines, and the Ford Focus has emerged as a perennial best seller now that car buyers are once again trying to cut down on gas costs.

It may have taken a financial crisis and a near-death experience for GM and Chrysler, but both companies seem to have finally gotten the message.