Chapter 11 in the U.S. bankruptcy code is intended to temporarily shield companies from creditor lawsuits, allowing them to restructure their business and get back to sustainable operations. The business would then use its profits to gradually pay off its debts. Through Chapter 11, corporations could escape the indignity of Chapter 7 bankruptcy, where all assets would be liquidated in a fire sale and creditors paid off.
Unfortunately, of the 16 largest Chapter 11 bankruptcy filings in the U.S., only a tiny minority have re-emerged almost as profitable as they were before. The vast majority have been sold off, ultimately cannibalized by competing companies. Though not in any way out of the woods yet, General Motors (GM) is quickly emerging as one of the lucky few that has risen from the ashes of Chapter 11 bankruptcy to get back on the path to profitability.
Of course, it would be unfair to compare any two bankruptcy filings as the reasons and circumstances surrounding each are often vastly different. Companies such as Enron and WorldCom collapsed in the face of fraud and accounting scandals -- their brands were inherently damaged beyond repair.
General Motors, on the other hand, is a well-respected brand closely intertwined with American culture that only succumbed to a difficult business environment. Also, General Motors had the benefit of tens of billions of dollars in government cash to count on during its reorganization. The threat of losing the goose that lays the golden egg also drove unions to adopt a more conciliatory stance in negotiations.
Still, you cannot take away the role of General Motors management team in the remarkable turnaround. With competition from "All American" carmakers like Ford (F) and Chrysler and the massive forays of overseas giants like Toyota (TM), Honda (HMC) and Hyundai, a successful turnaround was always far from assured.
To make matters worse, Americans' reputation of buying big trucks and muscle cars was rattled by soaring gas prices. Japanese and South Korean carmakers had efficient car models on the ready and pulled the rug out from under U.S. automakers' feet almost unnoticed. As General Motors was falling away from its position as the world's No. 1 carmaker, Toyota was asserting its dominance in the global and U.S. markets.
But things are looking up for General Motors. In addition to the TARP cash, the impetus for General Motors' recovery has come from an aggressive drive to slash expenditures. The company closed a number of factories and cut tens of thousands of jobs. But cutting costs has never been a sustainable growth strategy for any business. With much of the radical expenditure management out of the way, General Motors is banking on the U.S. economy's recovery, sales growth in emerging economies, and heavy investment in fuel-efficient and/or eco-friendly automobiles.
Rush for The Chinese Market
In addition, General Motors is banking on the growth of consumer spending in the world's second largest economy: China. The numbers are already demonstrating the shift from West to East with China overtaking the U.S. in 2009 as the world's largest car market. As the Asian country's No. 2 carmaker behind Volkswagen, General Motors has a substantial head start on its U.S. peer Ford, whose market share is below 5%.
Even though China's auto sales growth had a lot to do with a government policy that made the purchase of low-cost vehicles easier -- and which has since been discontinued -- the sheer size of the country's market means carmakers have barely scratched the surface. Total car sales in China are expected to hover close to 20 million units by the end of 2012.
General Motor's global competitor Toyota has struggled to gain a foothold in what would otherwise have been a perfect fit for the famously efficient Japanese automaker -- a massive market where price is a key driver of purchase decisions. Some analysts have attributed Toyota's lackluster performance in China to resentment by the Chinese that goes back to WWII. Whatever the reason for Toyota's collapse, General Motors can at least rest easy knowing that one formidable competitor is on its back foot in the race for the billion-person-plus car market. The company recently raised its stake in its China joint venture to 50%.
There have been a number of not-so-positive reports touching on General Motors of late. One of the more recent was a decision to recall 50,000 of its crossover SUVs in the U.S. as a result of a windshield wiper problem. The recall is all the more significant because it came less than one and a half months after the carmaker had issued recall notices for more than 16,500 crossover SUVs sold in China and 6,000 large SUVs and vans.
Fortunately for General Motors there has been no evidence that the defects discovered on the latest recalls had led to serious accidents. This situation also pales in comparison to Toyota's September 2009 recall of more than 3.8 million cars triggered by a fatal car crash. The negative publicity and the association of sudden unintended acceleration are the key reasons Toyota's U.S. sales slowed down considerably.
At its current price of about $23, General Motors' stock is trading at a P/E of 5.