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GM: A premature celebration?

March 5, 2012 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

GM reported a record $7.6 billion profit for 2011. Politicians hailed this is as proof positive that the bailout worked. Is it truly a cause for celebration?

Personally I think it's too early to tell. Why? One year is not a trend. Yes the profits are impressive, but can GM sustain them going forward? While I'm an optimist by nature I have to confess to having serious doubts that GM will continue the practices it's currently employing.

A significant part of GM's success (and the other car manufacturers as well) in 2011 has more to do with the cycle of the economy in which we found ourselves than any great strategic moves. The reality is that by 2011 most consumers had:

• Adjusted to their new, albeit diminished, income levels
• Paid down a significant portion of their personal debts
• Dramatically limited their spending for more than 2 years

The result is that these behaviors created a wellspring of pent up demand. Human beings are acquisitive by nature. We enjoy spending money on things we want. When we're deprived of that joy for a year or two it becomes a craving that must be satisfied. That's what we saw in the automotive industry in 2011 - the release of a significant amount of pent-up demand.

When demand is high, companies realize that they don't have to offer the hefty discounts they once did, consequently they experience dramatic growth in both their top and bottom lines. Does that mean that they'll continue to hold their prices when demand slows? Will their advertising during slower periods focus on the value their vehicles provide? Or will they focus consumers' minds on price by making it the focal point of their advertising?

If history is any indicator, and in this case I believe it will be, the car companies will revert to price competition. In doing so, they'll once again see declining profits if not outright losses.

My goal is not to denigrate the automotive industry; I hope they prove me wrong. Nor am I prone to dispensing doom and gloom. Rather my goal is to show you how easy it is to become enamored with a result without fully understanding the context in which it was created. The resultant 'see how great I am' attitude can produce devastating results when there's no basis for it. Which I believe is the case in GM's recent success.

The morale of this story is simple. Before celebrating a success, take time to evaluate how much of that success was a function of the state of the economy. More often than not you'll find that your results are more a function of the economic cycle than brilliant strategy.

About Dale Furtwengler

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