GM Takes One Step Forward, One Potential Step Back on Road to Recovery

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Researched by Industrial Info Resources (Sugar Land, Texas)--The total collapse of General Motors Corporation (GM) (Detroit, Michigan) last year was a result of a culmination of decades of poor policy decisions and business practices. In essence, the leadership of America's largest automaker failed to adapt to the changing landscape of the automotive sector as a whole and paid the ultimate price with the company's bankruptcy and takeover by the United States government in 2009. However, after several bouts of restructuring and billions of bailout dollars, GM is poised to return to greatness. The automaker showed its first quarterly profit in three years, a definite step forward in recovery. But at the same time, GM is attempting to regain control of its lending arm so that the company can sell more vehicles to subprime buyers, a potentially dangerous step backward.

During the first quarter of 2010, GM posted a net profit of $865 million, a significant improvement over the $5.98 billion loss posted only a year ago. Thanks to an improving economy in the U.S. that has led to increased demand for vehicles, GM has boosted production nearly 57% from this time last year. GM has been making the correct decisions on the road to recovery, taking things slow, and not attempting to bludgeon the market to death as it has in years past. The automaker's decisions to cut loose struggling brands, keep production in line with demand, and focus on models that the purchasing public actually wants have lead the company to the verge of a profitable year.

Provided GM's leadership does not make any drastically unwise decisions, 2010 could be the year the company returns to profit. The automaker has paid off the loan provided by the government and will, hopefully, be in a position to repay the bailout money once a public stock offering is made, something that could happen later this year. While the automaker is still producing some questionable duplicate models among its brands, the strategy appears to be working so far.

However, the move to take greater control over its former lending arm and begin to finance subprime car loans could be a significant step backward for the automaker, with the potential to blow up in their face. GM was forced to sell a majority interest in GMAC, its lending arm--now known as Ally Financial Incorporated (Philadelphia, Pennsylvania)--in 2006 to obtain some much-needed cash. Now GM wants to either purchase that interest back or start its own financial arm once again, with the goal of having the ability to be more flexible about to whom it lends money, specifically to allow subprime, risky loans to become available once again.

If GM does indeed follow through on this desire, the potential for irresponsible lending will be great and could easily lead GM right back to the path of financial instability. While it is easy to see how making these loans would allow the automaker to significantly boost sales, it also significantly boosts risk--a risk that is unnecessary at this point in the automaker's recovery. Having the ability to make these types of loans would help out GM tremendously. The subprime category, those who have a credit score below 620 on the 300 to 850 credit scale, currently makes up only 1% of GM's sales, while as much as 20% of other automakers' sales are to people in the subprime category.

While allowing GM access to these loans will not be a bad idea in the near future, now is probably not the time. The automaker is only beginning to show that it can show a profit after years of struggling to make ends meet. There is a distinct possibility that allowing GM to make these type of sales will open up the automaker to the same type of mismanagement that helped bankrupt the company only a year ago. The fact that the automaker has shown its first profit is certainly a step in the right direction, but there is no need to jump the gun and enter the risky subprime market so soon, especially when the company's stock symbol is not back on the New York Stock Exchange.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.