How to Make Money From GM's Chapter 11

There are winners in every financial disaster. There are always a few folks– heroes or scoundrels depending on how they make their profits– who understand that the Chinese symbol for danger and opportunity are one and the same. GM’s impending bankruptcy (and likely Ford as well) will produce some winners. But not without serious financial and psychological risk to those who seek their fortune from misfortune. For those of you with a robust constitution, here’s one potential game plan for GM’s C11. First, some background for those uninitiated in the ways of the American automobile business…

The new car business has always been a boom or bust industry. There’s no such thing as steady growth; sales go up or down in multi-year cycles. During the last decade, Detroit’s fobbed-off excess production on rental car companies, commercial fleets and retail buyers. The strategy helped maintain cash flow. But it distorted sales levels and became a pattern of value destruction. Worse, the automotive sales cycle is now at new lows, with as many as four million units sliced off a “false” peak of nearly 17 million units just a few years ago.

The car business depends on the availability of credit at every level. GM will have to obtain new financing– either from the government or private debt/equity–- to remain in business in North America. Its dealers will need floorplan and buyers of retail paper. It’s a chicken or egg scenario. No one will lend to GM-brand dealers and customers if there’s any question of whether the parent company can stay in business. Even then, it’s still riskier than lending to Toyota dealers and customers. The only variable will be product pricing; GM’s vehicles will have to be priced accordingly to make up for the extra cost of the financing and bankruptcy risk.

And that’s the opportunity. Buy Chevrolet and Cadillac (and Ford) dealerships now and into 2009 at fire sale prices from distraught dealers. It’s the bottom of the sales cycle and credit is not available. A firestorm of distress that will pass. One just needs the capital to survive the first few months after the filing. New car sales will still be depressed overall, and even worse for GM and Ford due to consumer and lender uncertainty. But that’s temporary– especially if GM follows the previously predicted prescription and launches a series of massive TV advertising and cut-rate pricing (like distress sale levels). Honor the warranty. Keep the flag raised – don’t surrender.

Within eighteen months or so, the recession will end. Banks will again lend and get greedy to find new revenue streams. GM will still be around, producing fewer cars only for its two remaining brands. But those brands will have the best vehicles from across the entire GM lineup.

Chevy will offer the following: Aveo, Cruze, Malibu, Impala, Lucerne (nee Buick), Camaro and Corvette. And maybe a Volt or two. Its Traverse, Tahoe, Avalanche, and Suburban models also remain. But the truck business– that’s where GM will still score (as will Ford) big profits. The housing business drives the pick up truck market and it still belongs to the domestic brands. Housing will come back and so will the truck market. Chrysler will no longer be alive to bother anyone. Chevy will still fight with Ford for light pickups, but at least GMC down the street will be boarded-up and closed.

Likewise, Cadillac will remain as a luxury brand incorporating the best in engineering and design from Detroit. No corners are scrimped, no more Cimmaron mistakes. Rededicated to its roots as the “Standard of the World,” GM’s ability to reshape its mark will continue, especially free from the distraction of the GM dysfunctional brand family.

The surviving GM dealers will have two brands offering complete and distinct vehicles without suffering from internecine warfare. GM, under new executive management and with new owners (maybe even private equity players) will be smaller in North America. But they’ll have products that meet or beat the foreign competition. And with its restructuring, GM can again be profitable at smaller volumes.

It’s a classic “buy low, sell high” strategy. There will be no shortage of Chevrolet and Cadillac stores for sale soon, most for real estate value only or less. Better stores, within markets having significant units in operation already, have a base of customers needing warranty work and service that can keep a store alive. And the used car business, when run right, provides a stream of profits as well.

Assuming GM it makes it through Chapter 11, avoiding Chapter 7 liquidation, the value of remaining Chevrolet and Cadillac stores will soar. Easy money– if you know how to run a car dealership and can stomach the risk. Anyone ready to bankroll me?