General Motors: On the Road to Recovery, but Moving Slowly

General Motors Corp. just logged its first quarterly profit since 2007. The company also claims to have paid back its government loans "in full," and is rumored to be interested in buying back its financing arm.

But the truth of the matter is that GM isn't as far down the path to recovery as it would like the public to believe. The company's strong first quarter was greatly aided by Toyota Motor Corp.'s (NYSE ADR: TM) highly publicized recalls. Its claims that it has paid back government debt have been greatly exaggerated. And the United Automobile Workers (UAW) union is already pushing for restoration of many of the perks that it lost during the auto industry's near collapse.

General Motors reported first-quarter profit of $865 million as its revenue surged 40% to $31.5 billion. That made for the company's first quarterly profit in three years. GM - a company that took millions in taxpayer money to remain viable and came close to running out of money in 2008 - reported free cash flow of $1 billion.

GM in April repaid the balance of its $6.7 billion loan from the U.S. government, as well as smaller loans from Canadian authorities. The company aired several ads with GM Chief Executive Officer Ed Whitacre touting that achievement.

Whitacre claimed that his company repaid the government loans "in full" and "with interest five years ahead of the original schedule." But what Whitacre didn't mention in the ads is that the loans were paid back with money from another government kitty. The government extended $43 billion in bailout funds to GM in addition to the nearly $7 billion in loans the company claims to have repaid.

At this point, the U.S. taxpayer still owns a 61% stake in General Motors and a 56.3% stake in Ally Bank, formerly known as GMAC LLC.

GM won't be able to pay off its debt until it launches an initial public stock offering - the timetable for which is still unclear. GM Chief Financial Officer Chris Liddell said the IPO could come later this year, but it's just as likely to be pushed off into next year.

"The IPO will happen when the market's ready and when the company is ready," said Liddell. "It could happen by the end of this year, that's a possibility. It could happen next year, that's a possibility as well."

GM's first-quarter profit "is a good, useful step on the road to the IPO," he said. "I'd like to think the first quarter demonstrates we're making good progress. Now that we've achieved profitability, the next step is to achieve sustainable profitability."

Sluggish sales in Europe will be one of the major roadblocks to that effort.

GM in the first quarter earned $1.2 billion before interest in North America compared to a $500 million loss in Europe, according to Liddell.

GM plans to cut 8,000 jobs at its European unit, Opel, and reduce its capacity by 20%. Continued restructuring costs at Opel will almost certainly lead to losses beyond the $506 million pretax first-quarter deficit.

Still, even if GM does turn its business around, the taxpayer is likely to remain on the hook for a substantial sum of money. The U.S. Treasury has $43 million tied up in the carmaker, which means GM would need to have a total value of about $80 billion after dilution for the government to break even, BusinessWeek reported. The old GM's market capitalization peaked at about $53 billion in April 2000, according to Global Financial Data.

Fortunately, the loss on the government's investment is now expected to be less than $8 billion, which is significantly less than the $30 billion projected in 2009.

Union Uncertainty

In addition to paying back the government and building on its first-quarter progress, GM will also have to negotiate with a familiar foe in the UAW. The UAW came to own a 17.5% stake in GM and a 55% stake in Chrylser Group LLC through a trust fund as the two carmakers declared bankruptcy last year.

The UAW is already pushing for the reinstatement of benefits to hourly workers as Detroit's Big Three return to profitability, according to the New York Times. The UAW negotiated its last contract with Ford Motor Co. (NYSE: F), GM and Chrysler in 2007, but was forced to make concessions in 2008 during the financial meltdown.

Hourly workers relinquished pay and benefits worth $7,000 to $30,000 each a year, according to union estimates. And it's likely the union will demand that as many of its benefits as possible are restored in 2011, when its contract with the automakers expires.

"When there's equality of sacrifice there's got to be equality of gain," incoming UAW President Bob King said last week during a speech to executives. "We just want to make sure when things turn around we share in the upside."

King is already fuming at Ford for returning merit-based pay increases, tuition reimbursement, and matching contributions to retirement accounts to salaried workers.

"We had an understanding about equality of sacrifice," said King. "None of that, in my view of what the contract is, should have happened without our membership getting the same thing."

The UAW has already filed grievances on the matter.

A Ford spokeswoman, Marcey Evans, told The Times Ford was honoring its contract, noting that the company gave profit sharing checks averaging $450 to all of its union workers.

The cuts that affected salaried workers were made with "a commitment that the company would reinstate them as business conditions allowed," she said. Any increases in pay or benefits for hourly workers would have to be negotiated.

Ford was the only U.S. automaker that did not retreat into a government-assisted bankruptcy. The company earned $2.7 billion in 2009, and $2.09 billion in the first quarter of this year.

As far as GM and Chrylser are concerned, the UAW may find it difficult to squeeze additional benefits out of two companies that received a total of $62 billion from U.S. taxpayers - especially since many critics blame the union's demands leading up to the financial crisis for the U.S. companies' inability to compete with foreign rivals.

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