GM's Stutter-Step Recovery

Ever ride with a double-pumper—one of those drivers who lurch forward with one foot on the gas and the other on the brakes?

That's the kind of pace General Motors is on as it struggles to reformulate its product line and reverse billions in losses over the past few years. The huge $38.7 billion loss GM reported for 2007 isn't nearly as bad as it sounds—virtually the entire deficit was due to a third-quarter accounting reserve GM had to set up for tax credits it may not be able to claim. There were other problems unrelated to the company's car-building operations, namely a $1.1 billion loss attributed to its minority stake in GMAC, the financing company, which, like other lenders, is reeling from mortgage-related problems. Without those two items, GM would have been profitable.

But its earnings report still reveals widespread weaknesses—despite a drumbeat of good news for the automaker. In its core market, North America, GM lost $1 billion, worse than analysts were expecting—even though GM has been earning raves for new models like the GMC Acadia crossover and the redesigned Chevrolet Malibu, and it's finally rolling out some hybrids. GM's revenue per vehicle was about $1,100 higher in 2007 than in 2006, indicating that its strategy of offering fewer discounts—and building cars people will pay a bit extra for—is working. But that wasn't enough to offset the rising costs of raw materials and falling demand, as the effects of an economic downturn hit consumers.

GM's operations in the rest of the world were profitable, but until GM nails its home market, it can't claim success. The outlook for the rest of 2008 is mixed. GM should continue to get traction from fresh products that resonate with consumers, like the new Cadillac CTS sedan and a spiffy little Eurodarter called the Saturn Astra. But there's little the big automaker—or competitors—can do if buyers hit the sidelines, except hunker down. GM appears to be doing just that, offering a fresh round of buyouts to all 74,000 of its American unionized workers. GM may continue to have spurts of acceleration, but for now, the brake lights are glowing.