General Motors: “Extraordinary Turnaround”

On Thursday, General Motors Corp. posted its best quarterly profit in six years in one of the clearest signs yet the ailing automaker (and its beleaguered industry) is on a road to recovery.

The record profits were posted slightly more than 12 months after a steep drop-off in sales caused by the financial crisis of 2008/2009.

GM says that the strong profits will pave the way for the company file for an IPO and begin to rid itself of a more than US$50-billion taxpayer liability — company equity that is majority owned by the U.S. government.

Total second-quarter earnings came in at US$1.3-billion, a huge reversal from the US$12.9-billion it lost in the same period a year ago. Revenue jumped 44% to US$33.2-billion during the quarter.

Last year the government had estimated that it would take perhaps 8 years for the GM to pay taxpayers back. The quick GM rebound however has surprised even the most optimistic of forecasts.

“Given the extraordinary turnaround — frankly, faster and better than what we had imagined — I think the IPO could be very successful if the overall markets co-operate,” Steven Rattner, the Obama administration’s former Car Czar, said in an interview on Bloomberg Television.

Don’t Like the SKS Valuation? Compete, Don’t Complain!

Much has been said about the astronomical SKS valuations and the personal fortunes of the original investors. Speaking for ourselves personally, we are not at all disturbed by how much money was made by whom. On the contrary, we are very excited that an area that was once thought to be the exclusive turf of, as Monika Halan (http://bit.ly/SquidorDevta) puts it so graphically in Mint, `the nexus of political doles and the rural bank branch system rotting under the weight of corruption and dysfunction’ thanks to pioneers like Vikram Akula, Padmaja Reddy and Udaya Kumar, has moved firmly into the domain of `mainstream commerce’.

People forget that we are a country of over 500 million very-very poor people, so very large amounts of equity capital are required in building an ecosystem of financial firms which will serve the poor of India. Now that the ball has been tossed up high in the air we are hoping that other people who also know how to build India sized businesses (Ratan Tata, Kumar Birla, Mukesh Ambani, Sunil
Mittal, Azim Premji and several others) take notice of this ball and hit it with all the power that they can bring to it. Curiously, the fact that so much money was made and was seen to be made is good news because this kind of money even makes the big boys sit up and take notice. Preventing Vinod Khosla or Vikram Akula from making some money is not going to eradicate this poverty, but the
power of their ideas taken to scale will.

Should we then not be concerned at all about how much money was made? For sure! Not because somebody got rich but because it calls into question the oft-stated MFI position that their high interest rates are only just about covering their high operating costs. A paper (http://bit.ly/Nvw6k) by Chaudhary and Rai shows that valuations are very sensitive to interest rates. They show that just a 1% decline in MFI interest rates leads to a Rs. 1.5 billion drop in valuation for an MFI with 500 branches. They also show that
should the large MFIs choose to cut interest rates by as much as 10% (from the over 30% per annum that most of them currently charge, to under 20% per annum), they would still deliver a holding period return on equity of over 25% per annum.  The focus on individuals making money distracts our attention from this very important fact.

And attempts that are intended to bring about `orderly conduct’ (http://bit.ly/MFINCode) could have the consequence of preventing competitive forces from coming in and bringing these rates down there is a real need to make sure that this does not happen and to actively encourage intense competition amongst new and existing players.  Experience, for example with housing finance in India, shows that this was the only reason why the rates fell and services standards improved without any dilution of credit quality. There is also an urgent need to bring in completely new models of financial services for low-income households (we are associated with one such attempt: www.bit.ly/LocalTouch). For example, the rapid scale-up of ATMs in India changed the entirely banking landscape by changing the very nature of the service models

Bindu Ananth (bindu.ananth@ifmr.co.in) is the President of IFMR Trust (and the corresponding author). Nachiket Mor is the non-executive Chairman of the Governing Council of IFMR Trust and the President of ICICI Foundation for Inclusive Growth. Views are strictly personal.

Economic Events on August 13, 2010

At 8:30 AM EDT, the Consumer Price Index report for July will be released.  The consensus is that CPI increased by 0.3% last month, with a 0.1% increase in CPI when food and energy are removed.

Also at 8:30 AM EDT, the Retail Sales report for July will be released.  The consensus is that retail sales increased 0.5% from June, after declines in the last two months.

At 9:55 AM EDT, Consumer Sentiment for the first half of August will be announced.  The consensus is that the index will be at 69, which would be an improvement of 1.2 points from the level reported in the second half of last month, but is well below June’s reading of 76.

At 10:00 AM EDT, the Business Inventories report for June will be released.  The consensus is that inventories increased 0.2% from May, which would be the fifth month of increases in a row as businesses rebuild inventory to handle  increasing demand, but the rate of increase has been on the decline.

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