Keep the foothold in GM

NationalPost.com – Opinion/FinancialPost.com/FPComment/Counterpoint – GM’s rebirth and successful public offering are a sign of health, and of lessons to learn, for Canada’s auto sector.  Financial Post Staff
November 21, 2010.   By Ken Lewenza

Thursday’s initial public offering of shares in the new General Motors Co. was a roaring success in financial terms. The issue was oversubscribed, allowing the company to boost both the number of shares offered, and their price. And then the share price climbed another 4% in its first day of trading.

We learned long ago, however, that what’s good for General Motors is not necessarily good for the whole country. So what does the IPO, and the resulting sell-off of a portion of government shares in the company, mean for taxpayers, for workers, and for Canada’s economy? This is where we need to dig below the financial hype and focus on what ultimately matters: GM’s real production, and the tens of thousands of Canadian jobs that directly and indirectly depend on this company.

The successful IPO will contribute to the continuing repair of GM’s public reputation — not just with financiers, but with consumers. It is clear that GM’s products (including Canadian-made successes like the Equinox, the Impala and the Camaro) are hitting a chord with journalists and car-buyers alike. The IPO further enhances public confidence that GM is here for the long term, and that can only help sales down the road.

Much commentary has focused on how quickly the governments that rescued GM will get their “money back.” In Canada’s case, the company has repaid $1.3-billion in loans to the federal and Ontario governments, who will also reap over $1-billion from the IPO. That’s about one-quarter of their stake in last year’s rescue.

However, the financial return to governments is already much better than that. First of all, the IPO has demonstrated that the governments’ remaining shares have legitimate value.  Following standard fair-value accounting procedures, both governments should book investment gains resulting from the IPO on their total shareholdings, not just on the shares they actually sold. Every investor knows you don’t have to sell something in order to recognize its value.

On that basis, Canadian governments have won back about 80% of what they put into the company, counting the repaid loans, the shares sold last week, and the market value of their remaining shares. If GM shares appreciate another $10-$12 (which is almost certain, if North American vehicle sales continue to gradually recover), the governments will have recouped their investment.  If shares go even higher, then governments make a profit.

But this does not even constitute the government’s total fiscal net benefit. Remember, the goal of the rescue was to preserve 50,000 or more auto and related jobs (according to Finance Minister Jim Flaherty’s own budgetary estimates). Those jobs were in jeopardy, at the gravest moment of the financial crisis. The fact that 50,000 Canadians continued to work and pay taxes, instead of collecting EI benefits, boosts the net fiscal position of the two governments by at least $2-billion per year. So in economic and social terms, more than just financial terms, the rescue was both necessary and successful.

Now that GM is getting back on its feet, governments should be in no rush to sell, for two reasons. First, flooding the market too quickly with government shares would drive down their resale value. But more importantly, there’s a sound economic case for preserving a government equity share in the long run.

GM’s presence in Canada was reinforced through last year’s rescue effort, thanks to Ottawa’s success in negotiating a “Canadian manufacturing footprint.” Canadians put up a share of the rescue money proportional to GM’s manufacturing activity here. But in return, GM committed to maintaining that proportional share of production moving forward.  So long as Canadian plants remain productive and profitable (which they clearly are), this solidifies Canada’s auto industry to an extent that hasn’t prevailed since the Auto Pact.

Home governments hold long-term equity stakes in many other automakers, such as Lower Saxony’s share of Volkswagen, or France’s holdings in Renault. Japanese and Korean producers are similarly buttressed by long-term injections from national development banks and other public capital. These public stakes do not prevent those companies from being global in scope, and innovative and flexible in their operations. But they do keep these companies “grounded,” protecting a home base that continues to serve as the core of their operations.

In Canada’s case, this is especially important since there are no automakers headquartered here: We are 100% dependent on decisions made in foreign head offices. Maintaining a small but pivotal public ownership share in GM and Chrysler (whose Canadian operations are also vital) would help leverage and protect Canada’s foothold.

Of course, free marketeers will howl about creeping socialism. They are the same naysayers who denounced the rescue effort in the first place, arguing that government should let GM and Chrysler collapse. In reality, government intervention not only saved both companies from extinction, it also laid the groundwork for a more stable (albeit smaller) Canadian automotive footprint moving forward. Let’s learn from that lesson, and make sure we keep a fair share of this vital industry for decades to come.

Financial Post

— Ken Lewenza is national president of the Canadian Auto Workers union.

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