The good, the bad and the ugly: General Motors of Canada Ltd.

This is a Darwinian moment. Even such celebrated companies as Japan’s Toyota Motor Corp. have seen their sales plummet. But GM is still more vulnerable for a host of reasons.

General Motors of Canada Ltd. (NYSE: GM) Subsidiary of America’s largest auto manufacturer
Established: 1908
Employees: 12,000
Altman’s Z-Score: -0.15
Probability of bailout: high

How did it go bad?

The wheels have fallen off the global auto industry, and General Motors Corp., long its largest manufacturer, looks increasingly like a write-off. Its Canadian subsidiary has already announced major cutbacks, including the closure of a truck plant in Oshawa, Ont., and a transmission plant in Windsor, Ont. In December, it secured $3 billion in bailout loans from the federal and Ontario governments — funds it later declined to draw on — and is now negotiating for a larger sum.

Many of GM’s problems are identical to those faced by competitors. Here’s a big one: the industry builds too many vehicles. American auto sales ran at an average of 16 million units over the past five years; GM Canada alone can build more than one million, nearly all of which are intended for the U.S. market. Some observers, such as veteran Ontario-based auto analyst Dennis DesRosiers, believe this level of demand was unduly inflated by generous incentives and massively available credit for most of the past decade. But that came to an end last September, when U.S. auto sales abruptly plummeted amid the worsening recession. Americans bought just 13.1 million units last year, the worst showing in decades. That’s left all manufacturers scrambling to slash production.

One reason is that car buyers now have trouble obtaining credit. That’s a drag, because roughly two-thirds of new-vehicle purchases have historically been debt-financed. Last year’s spike in oil prices made matters worse. American gasoline peaked at about US$4 a gallon last summer, driving a sudden preference for fuel-efficient vehicles in a country that had long favoured gas-guzzling engines. It also caused most Americans to drive fewer miles, and even encouraged some to ride public transit.

This is a Darwinian moment. Even such celebrated companies as Japan’s Toyota Motor Corp. have seen their sales plummet. But GM is still more vulnerable for a host of reasons — many of them shared by the other major American manufacturers, Ford Motor Co. and Chrysler LLC.

GM lost traction long ago. Following decades of declining market share, it surrendered its position as the world’s leading seller of vehicles — a position it had held since 1931 — to Toyota last year. DesRosiers broadly attributes the sad decline to an “inferior” business model — which encompasses everything from vehicle design and engineering, to workforce compensation and to the structure of the supplier base and dealer body. Though GM has made progress in some areas, DesRosiers says it can take about 15 years of hard work to turn around failing aspects of an automaker’s business model. GM has lagged behind.

GM’s albatross is its so-called legacy costs. It’s been manufacturing in North America for about a century, far longer than its overseas competitors. And it’s been generous to its unionized workforce. The result is disproportionately large obligations to retirees, notably in the form of pensions and health-care benefits.

Maintaining a large stable of indistinct brands is expensive and counterproductive, yet GM has indulged in that for decades. It did terminate its Oldsmobile nameplate in 2004, yet it kept Chevrolet, Pontiac, Buick, GMC, Cadillac, Hummer, Saturn and Saab — and that’s just in North America.

Financially, GM is weaker than most: it hasn’t earned a profit since 2004, and reported a bumper-splitting US$30.9 billion loss for 2008. And it’s not exactly fuel efficient: according to DBRS Ltd., a debt-rating agency, it burned through “alarming levels” of cash last year. The company has loads of debt; fortunately, though, most of its obligations come due after 2009.

GM is also plagued by problems that fall under that ill-defined category, corporate culture. Its management has long been criticized for avoiding tough decisions. Accountability has also been lacking: amid continual deterioration, few heads rolled. Rob Kleinbaum, a longtime consultant for GM and previously a nine-year employee, published a scathing indictment of its culture in January. “Despite substantial effort to create ‘one company,’” he warned, “very few GM employees see themselves as truly belonging to the global enterprise; almost all identify themselves with their function and then the local business unit; viewing others as ignorant meddlers and sometimes outright adversaries ? of all GM’s cultural problems, this might be the most crippling.”

The news is not all bad. According to DesRosiers, GM recognized problems in its product portfolio years ago, and worked hard to improve. The result has been models like the Chevrolet Malibu, Cadillac CTS and the truck platform GM unveiled in 2006, which are part of “impressive” offerings unveiled by the Detroit Three in the past few years. (GM’s quality and customer satisfaction has improved greatly, according to DBRS.) “The problem is that they’re just a quarter of the way through that, a third at most,” says DesRosiers. “They still have two-thirds of their products that don’t measure up, relative to the competition.”

How ugly is it?

Left to its own devices, GM executives would likely feel disinclined to shutter their Canadian operations, which includes some of the most efficient auto plants anywhere. Yet events may progress well beyond their control. GM and its accounting firm, Deloitte & Touche LLP, agree there is “substantial doubt” about GM’s ability to remain a going concern. Bankruptcy may not be far off — and GM Canada’s fate remains precarious.

GM’s latest restructuring plan arrives too late to save it. It includes a much-needed culling of the herd, sacrificing brands like Saturn and Hummer so the strongest (Chevrolet, Cadillac, Buick and GMC) can survive. GM will shrink its bloated dealership network considerably. There’s also a sudden, out-of-character attempt to build fuel-efficient vehicles. But the odds of GM accomplishing any of this on its own are slim to none.

GM’s immediate survival now largely depends on its ability to coax government to prop it up. At the end of last year, it managed to secure US$13.4 billion in three-year term loans from Washington, enough to keep it afloat for a few months. The company returned to the trough this year, calling for up to US$30 billion to see it through. It’s also in talks with other governments around the world. Its latest proposal calls for between $6 billion and $7 billion from Canada and Ontario. The quid pro quo? GM says it would keep between 17% and 20% of its production here — an outcome politicians want.

That may not be the end of it. GM’s management has been consistently wrong about the company’s cash needs, so it could return for more handouts. Canada’s minister of industry, Tony Clement, told automakers in February that if they receive a federal bailout, they should not come looking for more. DesRosiers doesn’t know how much the Detroit Three and their suppliers will need, but he thinks governments haven’t heard the last from them. They’ll need “a lot more than the $100 billion they’re currently asking for,” he predicts.

DesRosiers believes GM can survive, but says the biggest uncertainty is how long demand stays low. J. D. Power & Associates predicts Americans will buy just 10.4 million vehicles in 2009. GM is counting on a spectacular market rebound: its projections suggest Americans will buy between 15.3 million and 18.3 million by 2014. Jeff Rubin, chief economist at CIBC World Markets, offers a far bleaker assessment: he thinks sales will stabilize at eight to nine million cars annually. “Tomorrow’s auto vehicle market in the U.S. is likely to shrink to something half its former size,” he predicted in a recent report. “Long-term changes in the way Americans drive will mean that the good times for the auto industry are never coming back.”

What if?

It’s now widely assumed that at least one Detroit automaker will not survive this downturn. What if GM Canada is a casualty? It would be bad news for Ontario. In recent times, GM employed 20,000; its seven assembly and component plants were all found in the province, including its flagship facility in Oshawa. By the time its implosion reverberated through its dealer network, suppliers, competitors and spinoffs, DesRosiers thinks half a million jobs might evaporate. Not all of the damage would be confined to Ontario, however. “A community of 3,000 in northern Alberta that happens to have a GM dealer would also get hit,” says DesRosiers. “It may employ only 35 people, but it also sponsors the curling team, the hockey team, the baseball team, the local hospital, and so on. What does that community do?”

A study commissioned by the Ontario Manufacturing Council last year (and prepared by the Centre for Spatial Economics) studied how a collapse of the Detroit Three might affect Canada’s economy. One scenario contemplated what would happen if one company collapsed in 2009, resulting in a sudden 50% drop in vehicle production. In that event, the study claimed 157,400 jobs would evaporate, most of them in Ontario. “The job losses continue to mount after the first year because the weaker economy depresses investment, discourages immigration and puts the brakes on new housing,” it predicted. The economy would partially recover after 2014, but its employment and output would be permanently lower.

Yet if the prospect of GM’s failure seems painful, its survival might prove tremendously unfair. Some observers, including Volkswagen AG chairman MartinWinterkorn, worry that survivors of the global auto downturn might well turn out to be those that get the most government support, rather than those that entered it in the best health. Even as the Detroit Three have rusted away, so-called new domestics, including Toyota and Honda, have created new jobs across North America. And some have mused that a court-supervised restructuring might be the only way to address GM’s long-term problems such that it might have a future worth looking forward to.