The worst is over for GM

So says its CEO. But prosperity is still a long way off.

By Alex Taylor III, Fortune senior editor

NEW YORK (Fortune) -- In its 99-year history, no year at General Motors was worse than 2006. It started off with talk of bankruptcy following a $10.6 billion loss for 2005, got worse as GM was forced by shareholder Kirk Kerkorian into alliance negotiations with Renault-Nissan's Carlos Ghosn, and ended with renewed talk that GM soon must relinquish its position as the world's Number One automaker to Toyota.

But while GM (Charts) is still on the critical list, it is at least sitting up and taking nourishment. It is making money everywhere in the world except North America, has taken a massive bite out of its cost structure, and is getting a positive buzz from its newer cars and trucks. One top GM'er bragged that German and Japanese auto executives at the Detroit auto show last week were sliding underneath some of GM's models to get a closer look.

2007 will present its own challenges, with slower sales expected and the United Auto Workers contract expiring in the fall. But in an interview at the Detroit auto show with Fortune's Alex Taylor III and other journalists, a feisty Chairman and CEO Rick Wagoner expressed a surprising amount of optimism.

What will you do if Toyota (Charts) passes you in worldwide sales this year?

If we are sitting here next year and I've lost, I'm not going to like that. [But] we're not giving this thing up just because somebody got a calculator for Christmas and punched in the numbers. This is going to be a dog fight. We're going to give up sales that don't make money, so we are not going to act like a company that is going to be drunk and disorderly. But it doesn't mean we have to lose the game because of one player.

One year does not a battle make. If we lose, we lose, but we're going to keep fighting them.

What were your biggest accomplishments in '06?

The basic move on structural cost is a big one. We started that process in '05, when we were at 34 percent of revenue. We said we wanted to get to 25 percent by 2010. We are relatively farther along on that [29 percent -- 30 percent] , but we need to do more work on our cost disadvantage here. We made a nice step on health care, but we haven't fixed it by any stretch.

How are you coming in increasing GM's revenue?

The revenue side has a longer tail on it. From a product perspective, if you are enhancing the products that you execute, the more you execute at higher levels, the more momentum you get. There is an image aspect of that too, which, by definition, has a delayed fuse on it.

A little more subtly, but just as important, is the sales and marketing strategy. Initially it costs you sales and costs you revenue, but there is no question that what we did last year [reducing marketing incentives] was the right thing. Over time we expect it to yield us more revenue - I hope I don't get too old waiting for that to happen.

What is the value of higher residuals? It shouldn't take from today to tomorrow to realize it, but it shouldn't take two years to realize it, either. What is the value of less incentives and longer warranties? We obviously believe the longer warranty has value, but it doesn't play from one day to the next.

How long do you expect your turnaround to take?

I think it is pretty long runway on the turnaround. People ask when is the business profitable and our objectives have to be much bigger than that. It is not an issue of can you make a nickel - that doesn't do anything for anybody. We need to get good profit and then it is very important that we generate good cash flow.

We need cash flow to invest in the future and pay the shareholders a fair return, and cash flow to rebuild the balance sheet. We've taken a lot of the cash on the balance sheet to restructure the business and build up a strong liquidity position. Over time and this is a long way out, get the credit rating restrengthened. So there is a lot of work to do.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.