Interview: Ray Young, CFO of the new General Motors

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General Motors Company was (re)born today. The new, streamlined company will sell four product lines, with the following year-to-date market share: Buick (one percent), Cadillac (one percent) , Chevrolet (12.3 percent) and GMC (2.4 percent).

In total, this represents a 16.4 percent market share. This is significantly less than the old GM, whose Hummer, Pontiac, Saab, and Saturn brands represented a further 3.9 percent of market share. However, these brands have been discarded, and the new GM wants to cut dealers from 6,000 to 3,600 and slash its U.S. employee base from 91,000 to 64,000.

And, of course, we Americans own 61 percent of it.

Times are tough. New auto purchases are down 37 percent this year, and the seasonally adjusted annual rate now stands at 9.91 million vehicles. This is still too small a market for American carmakers to break even, making it unclear if the U.S. get its $50 billion back from the new GM.

I asked the new GM's Chief Financial Officer (CFO) Ray Young this and other questions this afternoon. He believes that the reorganization will lower GM's break-even point by about 40 percent and will reduce its fixed costs by 26 percent. He is excited about several new GM product introductions, believes that the company will pay back its $6.7 billion loan in less than six years, and hopes for an IPO in 2010. For more details, read on.

How do you feel about the rebirth of GM? I feel great for America and Canada. To go into bankruptcy and get out of it in 40 days has exceeded our expectations. It happened because of great planning ahead of time and we are pleased about that.

Now we can focus on cars and trucks and on our customers. The last six months has been spent on contingency planning, which is not value added. Based on how I've spent my career, I am happy to get back to focusing on our products.

How will the new GM be different for vehicle consumers? The first thing consumers will see is that we are communicating with them both through advertising and through seeing senior management. We will be spending time with dealers and customers and getting feedback.

And we have a new website called Tell Fritz. It will be a way for our CEO to interact directly with the public, which is very different than our previously insular style.

Another thing that will be different is that senior management will spend time on the product. We will spend more time actually running the business instead of on contingency planning.

What will the revenues and profits for the new GM be in 2009 and 2010? We have not published these numbers, and we plan to finalize them and review them once the new GM board is in place. The new board will consist of the five current members plus Fritz Henderson (CEO), Ed Whiteacre (Chair), and the UAW's Steve Girsky. There will also be four other new members from the U.S. and one from Canada.

At what level of revenues can GM break even? GM can break even on an earnings before interest and depreciation (EBIT) basis, assuming 10 million units are sold in the U.S. market -- which is a cyclical low. We think this is an accomplishment that we have lowered our break-even point to the cyclical low.

We will achieve this by executing our plan to idle excess manufacturing capacity; reduce the salaried and hourly workforce; and focus our brands which will let us make more efficient use of our marketing and engineering resources.

Our break-even before bankruptcy was a U.S. industry of between 16 and 17 million vehicles and by 2010 we will have brought it down to 10 million. And in 2010 our fixed costs will drop to $23 billion from $31 billion in 2008. This will get us to break-even on an EBIT basis with market share of between 18 percent and 19 percent.

When do you think the new GM will be able to pay back the $50 billion provided by the government? There are different elements to the $50 billion. The $6.7 billion loan is due in six years and we hope to pay that back sooner.

The other elements -- common and preferred shares -- we hope to pay back through an initial public offering (IPO) in 2010. The earliest we could do that would be the second quarter of 2010 because that is the soonest that we could prepare the financial statements.

But being able to do that will depend on three factors. First, the equity markets will need to become much more eager to buy IPO shares than they are now. Second, the industry will need to have risen off what we think is its current cyclical bottom.

And finally, we will need to become cash flow positive by focusing on operating cash flow. To do that we must get our cost structure down by idling facilities and pursuing the other cost cutting measures I mentioned earlier.

Second, we will need to drive the revenue line. We are planning to introduce great new products including a Chevy Camaro, Chevy Equinox, GMC Terrain, Cadillac SRX, Cadillac CTS, and Buick Lacrosse. We will have to make these cars with exceptional quality.

Finally, we must regain the confidence of the American consumer. Bob Lutz will bring the creativity to that task both in the product and in marketing communications.

Peter Cohan is president ofPeter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.

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