GM thrives as bailout proves good for Canada

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Sun Media, Friday, August 20, 2010

It turns out, as Finance Minister Jim Flaherty says, that the GM bailout “was the right policy decision.”

But it was far from clear at the time, in the spring of 2009, when Canada put up $10 billion of a $50 billion bailout package, with the rest coming from Washington.

Thus, General Motors became Government Motors. While they were at it, they found another $4 billion to bailout Chrysler.

Only Ford, among the Big Three North American car makers, didn’t ask for government money.

At the time, the bailout was considered, as one senior official on the file put it then, as “the best of several bad choices.” But the alternative was unthinkable.

If Washington bailed out GM and Chrysler in the U.S., while Ottawa and Ontario refused to do so in Canada, the companies would have closed their remaining four plants here and left the country. And with them might have gone the auto parts companies that are crucial to the automotive supply chain.

Inside Ottawa it was always understood that since Canada historically had a 20% share of North American production, it would be in for 20% of the bailout.

Only a year and a half later, GM has returned to profitability, workers are being recalled, its Ontario plants are functioning near peak capacity, the company is regaining market share for its remaining brands, and it has just announced an initial public offering which will enable governments in both countries to get their money back, perhaps even at a profit.

The July sales numbers, for Canada alone, are eloquent. Ford is in first place with sales of 27,200 units, up 1.6% from the year-earlier period; GM is in second place with sales of 22,900 vehicles, up 22% over last July; while Chrysler sold 22,250 units, up 40%. Toyota, hobbled by the reputational hit of massive recalls, saw its sales decline 22% to 13,800 units, while Honda’s sales dropped 10% to 10,200 vehicles.

It’s not only because of sales that GM made $1.3 billion in the second quarter, and some $2.2 billion over the last two quarters.

It isn’t just that once again GM is building cars people want to drive (even the staid Chevy Impala is pretty flashy, and handles the road beautifully). They are also building them at lower cost — economies of scale and union concessions have taken significant costs out the system.

“Not only are they building more cars, they are building more of them here,” says Flaherty, whose riding of Whitby-Oshawa is ground zero of GM in Canada.

Canada’s share of North American auto production has recovered to 18% from 16% in the sharp downturn of 2008.

The size and timing of IPOs is often an issue, and GM’s is no exception — they don’t want to issue more shares than the market wants, at a price they can’t defend.

But this much is known, following a conversation between Flaherty and outgoing GM CEO Ed Whitacre — the company will list on the TSX as well as in New York.

And while the 10 investment banks doing the IPO will be led by Wall Street firms, one of the participants will be RBC Capital Markets.

That’s no coincidence. As Flaherty said months ago: “We want to make sure Canadian banks get our share of this business.”

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