GM ads and the underlying truth

Chairman Ed Whitacre fired the CEO and, in the exhaustive search for a replacement, stumbled upon the perfect candidate: himself. Seeking to break GM's bailout-tainted image, the new boss then set out to find a new public spokesman for the company, went as far as the bathroom and said, Well, who's that handsome man in the mirror?

Television viewers are getting a good look at the bespectacled visage of the auto maker's CEO/pitchman this week. In a new television commercial, Mr. Whitacre (in navy suit and red tie, natch - some things never change) strides into a car factory as the bearer of happy news.

"A lot of Canadians didn't agree with giving GM a second chance. Quite frankly, I can respect that," he says. "We want to make this a company all Canadians can be proud of again. That's why I'm here to announce we have repaid our government loans, in full, with interest - five years ahead of the original schedule." (The American version of the ad is nearly identical.)

From there, it descends into standard auto-advertising fare - forklifts gliding around the factory floor, a pretty young woman on the assembly line, a pickup slicing its way through a shallow river in a test run.

His Edness keeps on talking through the whole thing, and at the end of 60 seconds, the viewer is supposed to be left with nothing but good impressions. Hey, these GM guys aren't so bad! Hey, the bailouts worked and they repaid the money! With interest, even.

But certainly not: Hey, they still owe more than $50-billion!

Actually, "owe" isn't the right word. A corporation doesn't owe its shareholders anything, strictly speaking, except responsible management of the money left over, if any, once workers, suppliers and creditors have been paid. When the governments of the United States, Canada and Ontario decided to pump more than $60-billion into GM last year to keep it from sinking, they agreed to convert the vast majority of the cash into shares, so as to not saddle the business with too much debt. A sliver of the money - about $8.4-billion (U.S.) - remained as loans, and that's what has been repaid. Big shareholders, the taxpayers remain.

Alas, the ad agency was struggling with the original script.

"I'm Ed Whitacre from General Motors. A lot of Canadians didn't agree with giving GM a second chance. Quite frankly, I can respect that. We want to make this a company all Canadians can be proud of again. That's why I'm here to announce we have paid back to governments, with interest, about 14 per cent of the money they gave us last year. We don't know when they'll get other 86 per cent. There's a chance they'll never get it all back. Either way, it's going to take a long time. While you ponder that, take a look at this shiny GMC driving through water. Isn't it nice?"

Had he said those words, quite frankly, I could have respected that. It would have made GM a company I can be proud of again. It would also have been better than trying to fool the stupid into believing GM had just accomplished the impossible - the complete payback of $60-billion in less than a year.

But never mind. Let's move on. How about that other $50-odd-billion in government money still locked up inside GM? Ottawa and Queen's Park account for about $8-billion of that, and together they own 11.7 per cent of GM. What are the odds of ever seeing the money?

It's still early in the GM turnaround, but not so early that we can't make an educated guess on the question.

So far the company has bounced back faster than the skeptics had believed possible. Having shed loser brands like Saturn and Hummer and ditched many of the perks in its labour agreements, GM lost about $200-million-a-week (on an operating basis) in the six months after it emerged from bankruptcy court - which sounds like a lot, except that it was losing about $600-million-a-week before. A small profit is probably not far off. (Chrysler, its bailout companion, posted a small operating profit in the first three months of the year.)

But here is the dirty little (not so) secret about the car-making business: as far as investors are concerned, it's toxic. Like the airline business, it's highly unionized, rigid, requires massive capital spending and suffers from too much competition. It's very hard to make a consistent profit, which is why even the best auto companies - think Volkswagen or Toyota, despite the latter's recent troubles - get very low valuations in the stock market. Volkswagen's equity, for example, is valued at 28 per cent of annual sales, and it's usually profitable. Ford trades at 36 per cent because it's on a roll and is making money again.

GM is going to go public soon. Assuming it gets the same valuation as Ford, how many cars would it have to sell for our governments' shares to be worth $8-billion, enough to get our money back?

Answer: $190-billion worth. Last year, GM's sales were $105-billion.

Anyone want to buy a Chevy Tahoe? Please? I'm here to announce our government thinks that would be a terrific idea.