Can GM Rise from the Ashes?

The real question is whether the financial re-engineering — for that is what a successful bankruptcy proceeding ultimately amounts to — will be sufficient for a reborn GM and Chrysler to be successful.

Three factors provide ample reason to be doubtful.

First, and most importantly, the Big Three's engineering and business DNA was solidly rooted in building big cars that were comfortable (and consumed a lot of gasoline).

Aside from references to customer preferences, the main reason given for that approach was that the major U.S. car manufacturers found it hard to be profitable if they built mostly smaller cars (which have correspondingly smaller profit margins).

That sounds logical enough. Certainly shedding a lot of legacy costs post-bankruptcy (such as the vast healthcare liabilities for the retired workforce) suggests that future costs will be lower. This, by implication, means that the reconstituted GM should be able to make do with smaller profit margins.

The problem with that mechanistic assumption is that it neglects the aforementioned engineering and business DNA. The balance sheet will be cleaned up after the bankruptcy, but the engineers and business strategists will likely still be the same. And they learned their ropes by believing that bigger was better.

But wait, won't at least Fiat's transfer of small car technology help Chrysler fill that gap rapidly? Perhaps. But the problem for it, and GM, is this: There is too much production capacity in the U.S. and global car markets.

Why would customers wait for GM's and Chrysler's new product offerings that are at least some time off, while they can buy cars today from the competition that are at least as good, if not better?

Bankruptcies, even successful ones, are highly disruptive events. Supplier relationships change, production networks get reconfigured and, most importantly, the entire surviving personnel group undergoes a personally traumatic period. Scores of long-time colleagues are lost, and even the remaining employees are wrapped in considerable financial uncertainty long after the exit from the bankruptcy proceedings.

The competition won't sleep. They may encounter losses due to the deep recession, but — to date — they can be relied upon to cut costs and become even more productive than before.

The competitors realize that the great consolidation race is on — and that the companies with the smartest and most efficient manufacturing configurations and networks will be the ones that succeed.

They also realize that Indian and Chinese manufacturers will enter the global market in a much bigger fashion than ever before — which will further increase consolidation pressures in the Western world.

The continuing consolidation story, due to an overcapacity of close to 50% of global production, may well spell the demise of Chrysler (and of Opel in Germany).

However, GM is another matter. It certainly has more staying power than Chrysler. And yet, if one looks at what distinguishes the company's product portfolio and brand image from that of its major non-U.S. competitors, one realizes that the company basically represents a bet on oil prices staying low — which, in light of underlying global demand trends, is a highly uncertain prospect.

And the much-vaunted Chevy Volt, contrary to the hyped-up pronouncements of the old management, won't be the game changer that turns around the company's fortunes. Simply put, it's way too expensive.

This presents the Obama Administration with interesting dilemmas. For starters, GM doesn't look well-positioned with regard to its own emphasis on fuel-efficient cars. But it's ultimately a case of doomed if they do — and doomed if they don't.

Amidst the deep recession, it really couldn't let GM die — or shrink much more severely. That would have been too traumatic in terms of political symbolism.

And yet, as the surprisingly early exit of the Obama Administration's car czar, Steve Rattner, demonstrates, this politically smart operator is already bailing out of the GM web (though the pending investigation against a firm Rattner founded also likely played a role in his decision).

He must know what everybody on Wall Street has realized all long. If there had been a business case to resuscitate GM, the otherwise much maligned private equity guys would have found it. The fact that they didn't speaks volumes — and does not auger well for GM's future.

Neither does the fact that Bob Lutz remains on GM's top management team. The proverbial car buff, who is now in charge of communications and marketing, loves muscular cars and believes that driving gas guzzlers is an American birthright. He seems like an awfully risky bet for GM's future.

In the end, GM in all likelihood lost its path to the future by eternally lobbying Capitol Hill to oppose all moves towards fuel efficiency over the past two decades.

What was long-heralded as a political victory has turned into a Pyrrhic one. It lost the company any connection to the leading edge of the industry.