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Here comes the new GM

The struggling automaker will likely emerge from bankruptcy this week. Can it return to profitability?

July 08, 2009

Having won the blessing of a federal judge, a new version of General Motors is expected to emerge from bankruptcy this week with fewer brands, dealerships and debts. Those cost-cutting measures will certainly help the reorganized company; in fact, without them, GM may have been unsalvageable. But they don't guarantee success either. And unless the company makes even more fundamental changes in the way it does business than it has already, it may not be able to halt its debilitating slide in sales.

The reorganization was financed by federal taxpayers, who will have invested about $50 billion in the automaker by the time the new GM launches. In return, taxpayers will become the largest owners of the new company, holding about 61% of the equity. It's hard to imagine GM's shares ever being worth enough to repay Washington in full; instead, the best return one can hope for is a carmaker that can sustain itself.

The downsizing directed by the Obama administration will help GM deliver more car for the money. Another factor in the company's troubles, however, has been its slow response to changes in consumer demand. Car and truck designs fall in and out of favor like fashions, and the old GM developed a reputation for being the last to embrace a trend. Its development cycles were painfully long, reflecting its size and bureaucratic management. And on the rare occasions it took the lead, its innovations were either quixotic, as with the billion-dollar effort to develop cars powered by hydrogen fuel cells, or ill-fated, as with its EV1 electric car. Then there's its upcoming foray into plug-in hybrid vehicles, the Chevy Volt. Expected to cost $40,000 or more, it's both late and overpriced compared with other high-mileage cars.

Complicating matters, the new GM arrives at a time when ambitious federal fuel economy standards are forcing every automaker to rethink how cars are shaped and powered. They'll all need to be quick to embrace technological breakthroughs. That's been a challenge for U.S. automakers. Yet the success of aftermarket parts suppliers is teaching manufacturers to look beyond their own engineers for help in designing products that consumers want. The new GM needs to go one step further and follow the example set by the computer industry, which builds platforms that give parts suppliers broad freedom to improve performance. Rather than trying to design the next generation of cars in-house, GM should position itself to capitalize on innovations outside its walls, whether at an established supplier or an entrepreneurial start-up with a single great idea. That way, the new GM could not only survive but thrive.

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