What GM Still Needs to Prove

The carmaker’s comeback has been quick, but there are still many laps to go.

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Not bad. Barely a year after its shameful bankruptcy filing, General Motors has become a profitable, competitive automaker with cars that shoppers want to buy. It wouldn't have happened without an extraordinary $50 billion bailout by the U.S. government, but GM's accomplishments over the past 12 months are still exemplary.

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After five years of disastrous losses, GM has earned more than $2 billion in profits so far this year, with the future for once looking better, not worse. The company plans a huge public offering this fall that will bring it back into the ranks of public companies and help it reduce the government's ownership stake. Many of its cars are proving popular, with fewer discounts to help them sell. And after two abrupt CEO departures in the last 18 months, the current chief, 68-year-old Ed Whitacre, has announced his orderly retirement later this year, with a successor lined up. Kind of like an ordinary company would do.

Still, GM has many laps to go in its journey back to health, and Whitacre will leave while GM's comeback is still a work in progress. Here are some other steps GM needs to take:

Better profitability. GM has made great strides, thanks in part to a bankruptcy filing that helped it slash labor costs. GM may even end up with slightly lower labor costs than the non-unionized "transplant" factories, mostly in southern states, operated by foreign automakers like Toyota, Honda, and Nissan. But GM still has other cost disadvantages and must pay higher incentives to sell its cars. The typical GM car sells for 15.7 percent less than its list price, according to Edmunds.com, compared with an industry average of 13.7 percent off-list. And GM typically ponies up $3,691 in incentives to sell a car, according to Edmunds, which is 38 percent higher than the industry average. What that means is that GM has to discount its merchandise far more than average to sell it, a reflection of lagging problems with brand image and perceived quality. That takes a long time to fix, and only if you prove yourself consistently to customers and critics, without lapses.

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Better reliability. The quality of GM's cars has undoubtedly improved, with authoritative sources like Kelley Blue Book and J.D. Power raising their marks for various GM models. GM's strongest suits have been curb appeal (the shapely new Buick Regal, for example), performance (Chevy Camaro) and practicality (Chevy Traverse, GMC Acadia). But reliability is still subpar. On Consumer Reports's reliability list, for example, GM is still second to last, ahead of only Chrysler. "They definitely have a lot of product interest," says David Champion, CR's director of automobile testing, "but they haven't shown us much in terms of long-term reliability." That could improve if new models like the Regal and Chevy Equinox prove themselves over time, and older dogs like the Chevrolet Avea and Impala are retired. But quality at most other manufacturers is improving too, and a longstanding GM weakness has been its ability to keep up with the competition.

Less myopia. GM cracked an institutional taboo—and a cultural barrier—when the government finally forced it to hire Whitacre, an outsider, to run the company. Whitacre had run AT&T and had no auto industry experience when he came to GM, and he promptly hired a CFO from Microsoft to help turn the company around. Whitacre's replacement, Daniel Akerson, is a GM board member, but he's also a former telecom exec whose current job is with the Carlyle Group, the private-equity firm.

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By most accounts, these outsiders have been good for GM just as they have been for Ford, where Boeing executive Alan Mulally took over in 2006. But below the top levels, GM is still largely staffed with GM lifers, which raises questions about how much has really changed. "They finally got rid of the guys who have been there for 40 years, but replaced them with guys who have been there for 30 years," says Fortune contributor Alex Taylor, author of a new book on GM, Sixty to Zero."The bureaucracy remains the same. It's not as responsive as it needs to be." Akerson, with private equity background and experience amping up the performance of companies, could target that bureaucracy for further streamlining.

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A smaller portfolio. GM has gotten rid of four underperforming divisions—Saturn, Saab, Pontiac, and Hummer—but it still has four left: Chevrolet, Buick, GMC, and Cadillac. Some analysts think that's still too many, requiring too many dealerships and diluting the company's marketing efforts. Toyota only has three brands, including its Lexus luxury division and entry-level Scion, and most other carmakers have just two brands, or one. If GM downsized further, one move that might make sense would be splitting Buick up so that it gave Chevrolet more luster at the high end and Cadillac a couple new offerings at the low end. GMC, which mainly produces trucks and SUVs that have near-identical Chevrolet siblings, could be rolled into the more mainstream brand. GM could end up with just two divisions, Chevrolet and Cadillac, and still look like a complete full-line automaker.

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Clear strategic focus. GM has spent roughly $1 billion, and staked its reputation, on the Chevy Volt plug-in electric, set to debut late this year with much fanfare. At the old GM, hype often outstripped reality, and projects that represented the entire future of mankind one year were completely forgotten the next. If the Volt turns out to be another case of corporate ADD, GM will look foolish and have a lot of explaining to do to everybody with a stake in the company, since it can no longer paper over flops. GM also needs to prove that it can be profitable in Europe, where it's still struggling, and win customers when Toyota is running strong instead of falling on its face, Chrysler is resurgent, and GM itself is the competitive target instead of the industry basket case. The company is halfway there. But in an endurance contest, the later laps are the toughest ones.