General Motors Company

Analysis of Profits and Revenues Data Since the Bankruptcy Confirmation of a Simple and Universal Linear Law

Why cant GM be more like Microsoft?, wondered Bill Gates a few years ago.
And General Motors responded in kind with the following press release: Cars would be crashing twice a day, drivers would have to learn to drive all over with each new car model, and buy a new car whenever the lines on the road are repainted, and so on with many more quips. Well, SURPRISE!, SURPRISE!!, General Motors in 2012 is now behaving more like Microsoft, at least on the profits-revenue diagram. Read on. See also http://www.snopes.com/humor/jokes/autos.asp

Higgins: Pickering, why cant a woman be more like a man? Pickering: Hmm Higgins: Yes why cant a woman be more like a man?
http://www.stlyrics.com/lyrics/myfairlady/ahymntohim.htm http://www.youtube.com/watch?v=Doz5w2W-jAY

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Summary
A simple universal law, y = hx + c, can be shown to relate the revenues x and profits y for all companies big and small. The annual profits and revenues data for the new General Motors is discussed here to highlight the significance of this simple law that is, unfortunately, not yet recognized in the business world. It should be noted that only three (x, y) pairs are available for the post-bankruptcy GM: for the partial year of operations in 2009 and the two full years of operation in 2010 and 2011. Yet, these three data points lie up nicely on a straight line in the profits-revenues diagram. GM is now operating in what may be called the Type I mode. The straight line connecting the data points has a positive slope h and negative intercept c. Both profits and profit margins will increase with increasing revenues when a company is operating in this Type I mode. The simple analysis presented here will be used as the basis, in a follow-up article, to discuss why GM, once the worlds largest company, was forced into bankruptcy in June 2009. Prior to the bankruptcy, the profits-revenues data revealed what may be called the Type III mode (h < 0, c > 0). In this Type III mode, both profits and profit margins decrease with increasing revenues. This is a highly undesirable situation and research by the present author indicates that all companies that operate in this mode, for a prolonged period, are forced to take drastic measures: such as a bankruptcy (as with GM), or a merger (as in the case of Air Tran, which merged with Southwest Airlines, in 2011) or a buy-back, the new scenario that is now evolving with Best Buy (the founder and CEO has offered to buy back the company and make it private). The purpose of re-opening the discussion of the General Motors financial situation is thus to call for a wider appreciation by the business, finance, and economics community, of this simple analysis, via the use of profits-revenues diagrams.

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1. Annual Profits-Revenues data for the new GM

It has not yet been generally been recognized that a very simple and universal law, which can be expressed as y = hx + c, relates the revenues x and profits y for all companies, big and small. This law is actually a consequence of the classical breakeven analysis for the profitability of a company making and selling N units of a single product. The law has been tested extensively by the present author and shown to hold for several companies, big and small, e.g., Microsoft, Apple, Google, IBM, and Exxon Mobil. Several articles describing these findings have been posted in the public domain at http://www.scribd.com/VJLaxmanan. A detailed bibliography list is also provided for convenience at the end of this article. The main purpose is here to report the confirmation of the same linear law for General Motors Company, i.e., the new GM. For this new company, profits and revenues data are only available for the partial year 2009 and the two full years of 2010 and 2011, see Table 1. Nonetheless, as we see from the graph in Figure 1, all three data points fall on a nearly perfect straight line!

Table 1: Annual Profits-Revenues data for General Motors

Year Revenues x $, billions Profits, y $, billions Profit Change, Change, margin, x y 100 (y/x) Slope, h= y/x

2009 2010 2011 2009-2011

57.474 -4.428 -7.7 135.592 4.668 3.44 150.276 7.585 5.05 Overall change 2009 to 2011

78.13 14.7 92.83

9.1 2.92 12.01

0.116 0.198 0.129

Data sources: http://www.gm.com/content/dam/gmcom/COMPANY/Investors/Corporate_Governance/PDFs/St ockholderInformationPDFs/Annual-Report.pdf 2010 Annual Report http://www.gm.com/content/dam/gmcom/COMPANY/Investors/Stockholder_Information/PDFs/ 2011_GM_Annual_Report.pdf 2011 Annual Report

As we see from Table 1, profitability was achieved in 2010, the first full year of operations as a new company. For the partial year 2009 (July 10 to Dec 31, 2009), when revenues were lower, the company reported a loss (negative profits). In other words, the higher the revenues x, the higher is the profits, y. The revenues
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increased again in 2011 resulting in even higher profits. Furthermore, the profit margins, the ratio y/x, expressed as a percent in Table 1, also increased with increasing revenues and increasing profits. The graphical representation of this data, see Figure 1, provides clear evidence for a simple linear law, y = hx + c, relating profits and revenues.
15

Annual Profits, y [$, billions]

10 5

x0
0 -5 -10 -15 0 20 40 60 80 100 120 140 160 180 200

Type I line y = 0.116x 11.12 = 0.116 (x - 95.51)

Annual Revenues, x [$, billions]

Figure 1: Evidence for a simple linear law relating profits and revenues for the new, post-bankruptcy, General Motors based on just two full years of operation (2010 and 2011) and the partial year of operation (July 10, 2009 to Dec 31, 2009).

Any two points on a (x, y) graph can always be joined by a straight line. However, here we find three points lining up nicely along what looks like a nearly perfect straight line. There will very little scatter in the data. Why does the third point fall on the extension of the same straight line?

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Contrast this situation with the profits and revenues data for Zynga, analyzed in a recent article (four full years of operation, 2008-2011, and one partial year 2007). The data plotted in Figure 5 of that article reveals a general scatter with no discernible pattern. Zynga, which was founded in 2007, is a struggling company. Losses have been increasing even as revenues increase. A loss in 2009 followed by a profit in 2010 (as with GM) but, unlike the situation with GM, a huge loss was again reported for 2011. Thus, the linearity observed with the General Motors data in Figure 1 is indeed remarkable and is indicative of a fundamental law at work. This is discussed further in Appendix I. The linear law we witness here is actually a consequence of the classical breakeven analysis for the profitability of a company and can be appreciated as follows. Let us consider the data for 2009 and 2010. These two points can be joined by a straight line with the equation y = hx + c = h(x x0) = 0.116x 11.12 = 0.116 (x 95.51). Notice that this straight line does NOT pass through the origin and makes a negative intercept c = - $11.12 billion on the y-axis (profits axis). As revenues increase, profits increase and the profit margin y/x = 0.116 (11.12/x) also increases because of the negative intercept. This straight line also cuts the x-axis, the revenues axis, at a finite positive value x0 = - c/h = $95.51 billion. This is the cut-off revenue, or the breakeven revenue. This is the minimum revenue that must be exceeded for the company to report a profit. Once this minimum revenue is exceeded profits increase following the linear law. On the x-y profits-revenues diagram, a straight line with a positive slope and a negative intercept (h > 0, c < 0) will be referred to as a Type I line. There are at least two other possibilities, as discussed in Appendix I. A straight line joining two or more points can also have a positive slope and positive intercept (h > 0, c > 0), Type II line, or a negative slope and positive intercept (h < 0, c > 0), Type III line. All three types of linear behavior are observed when we analyze the profits and revenues data for various companies, big and small, operating in different sectors of the economy.

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General Motors is now operating in what may be called the Type I mode, with profits and profit margins increasing as revenues increase. This is the most desirable mode of operation for a company in the profits-revenues space (see Appendix I for more details).
15

Annual Profits, y [$, billions]

10

x0
0

-5

-10

Type I line y = 0.129x 11.87 = 0.129 (x - 91.7)

0 20 40 60 80 100 120 140 160 180 200

-15

Annual Revenues, x [$, billions]

Figure 2: An alternative Type I line deduced by considering the overall change in profits and revenues between 2009 and 2011. A slightly higher slope h and a slightly lower cut-off revenue x0 is now deduced. The linear law implies that if the revenues increase by an amount x, the profits will always increase by the same fixed amount y = hx. The slope h of the Type I straight line is akin to marginal tax rate encountered in tax law. When the taxable income increases by a small amount x, the tax owed always increases by the same fixed amount y = hx where h is the marginal tax rate, see discussion of this point in another recent article which again considers the analysis of the patterns revealed in various (x, y) observations of interest to us.

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In 2011, for a single person, with incomes between $34,501 and $83,600, the marginal tax rate was 25% and the slope h = 0.25 in the linear law relating taxes and income. The tax code is actually a series of straight lines with increasing values of the slope h (and corresponding values of the intercept c), applicable for different income ranges. Likewise, the linear profits-revenues law that we see here, and the constants h and c, apply over a limited range of x and y. Notice also that, if we extrapolate using this linear law, the profits predicted for the revenue levels attained in 2011 are $6.379 billion. General Motors actually reported slightly higher profits of $7.585 billion. This is also obvious from the higher slope of the line segment joining the 2010 and the 2011 data points. If we consider the overall increase in profits and revenues between 2009 and 2011, the slope h = 0.129 and the 2010 data point now falls slightly below the new Type I straight line deduced in this way, see Figure 2. This overall slope h could be used to predict the profits for 2012, assuming we can predict revenues as well. (This is a separate problem. A simple revenues prediction model can be developed and has been discussed in the articles on Kia and Apple.)

2. Quarterly Profits-Revenues data for the new GM

The annualized values of the profits and revenues represent the cumulative sum of the profits and revenues reported each quarter. The 2010 and 2011 data points can be decomposed into four quarterly points, thus providing eight, instead of two, points on the profits-revenue diagram. The 2009 data point, which covers the period July 10, 2009 to Dec 31, 2009, can likewise be decomposed into points: for the period July 10, 2009 to Sep 30, 2009 (labeled as Q32009) and for the period Oct 1, 2009 to Dec 31, 2009 (labeled as Q42009) in Table 2. The profits and revenues for Q32009 can be found on the GM website (click on quarterly data under Historical Earnings, see link given here), http://media.gm.com/content/dam/Media/gmcom/investor/2010/Q3-FinancialHighlights.pdf . Additionally, we now also have the data for 1Q2012 and 2Q2012, for a total 12 quarterly data points for analysis.

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Table 2: Quarterly Profits-Revenues for General Motors

Quarter Profit Change, Change, margin, x y 100 (y/x) 37.614 1.487 3.95 37.759 1.004 2.66 1.158 0.494 38.381 0.472 1.23 36.328 1.726 4.75 39.373 2.524 6.41 36.194 2.863 7.91 4.718 1.998 36.601 0.510 1.39 34.060 1.959 5.75 33.174 1.334 4.02 31.476 0.865 2.75 32.182 -3.520 -10.94 25.147 -0.908 -3.61 The slope for line A, h = 0.423, from 1Q2010 and 1Q2011. The slope for line B, h = 0.427, from 1Q2012 and 4Q2010. Revenues x $, billions Profits, y $, billions Slope, h= y/x 0.427

2Q2012 1Q2012 4Q2011 3Q2011 2Q2011 1Q2011 4Q2010 3Q2010 2Q2010 1Q2010 4Q2009 3Q2009

0.423

Data source: Click on Historical Earnings to get data for each quarter. http://www.gm.com/content/gmcom/home/company/investors/earningreleases.content_pages_news_emergency_news_0802_q2_earnings.~content~gmcom~home~co mpany~investors~earning-releases.html

The graphical representation of the quarterly data in Figure 3, without regard to the chronology, again confirms the simple linear law deduced earlier from the annual data. If we consider the five consecutive quarters 1Q2010 to 1Q2011, four out of five points (the exception being 4Q2010) fall on a nice straight line, labeled Line A in Figure 3. It is also of great interest to note that the data seems to follow two PERFECTLY parallel lines, labeled A and B with slightly different values of the intercept c. Yes, these lines are as PERFECTLY PARALLEL as they can be. Line A joins the 1Q2010 and 1Q2011 data points. Revenues increased by x = 4.718 and profits increased by y = 1.998 yielding the slope h = 1.998/4.718 = 0.423. The intercept c = -12.46. Since the slope h > 0 and the intercept c < 0, this again is a Type I line. Profits increased with increasing revenues along Line A, immediately following the bankruptcy.

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The second Line B joins the 4Q2010 and 1Q2012. Revenues increased by x = 1.158 and profits increased by y = 0.494 yielding the slope h = 0.494/1.158 = 0.427. The intercept c = -15.1. Again h > 0 and c < 0 and we see the same Type I behavior. The two slopes differ only in the third decimal point. The rest of the quarterly data fall between these two parallels. Only the 3Q2009 and 4Q2009 (which represent the early, post-bankruptcy, losses) fall outside these parallels but are nonetheless quite close to them.

Quarterly Profits, y [$, billions]

A
4

B
2

3Q2009
-2

4Q2009
-4

-6

10

20

30

40

50

60

Quarterly Revenues, x [$, billions]

Figure 3: The quarterly data for the new GM since emerging from bankruptcy in July 2009. The data, without regard to chronology, seem to fall between two nearly PERFECT parallels, labeled A and B. The horizontal red line is the x-axis with losses being represented by points that fall below this red line (see also Figure 4 in Appendix II). The quarterly fluctuations in profits and revenues thus seem to represent a movement up and down between these two parallels with slight different values of
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the intercept c, i.e. the fixed costs according to the breakeven model discussed in detail with the annual data, see also Appendix I and Figure 4 in Appendix II. It is also of interest to note that losses increased (which is mathematically equivalent to decreasing profits) as revenues increased between 3Q2009 (July 10 to Sep 30, 2009) and 4Q2009. The line segment joining these two data points thus has a negative slope h = - 0.371 and is a Type III segment. However, even with slightly lower revenues in 1Q2010 compared to 4Q2009 ($31.476 billion versus $32.182 billion), but higher compared to 3Q2009 ($31.476 billion versus $25.147 billion) the new GM was able to report a profit. Since then the profits and revenues have essentially been undergoing small fluctuations between these two parallels with revenues, in general, being on the rise. Indeed, this movement between a set of parallels on the quarterly profits-revenues diagram is amazingly similar to the movement between parallels that we see for Microsoft (1993-2012), see recent discussion of their profits-revenues data following the historic first ever quarterly loss for quarter ended June 2012. Why cant GM behave more like Microsoft? Bill Gates seems to have wondered a few years ago. Then, we could all be driving cars that cost us only $25.00 and get us 1000 miles per gallon. Well, it appears that Bill Gates wish may finally be coming true! At least on this quarterly profits-revenues diagram, the new GM is behaving exactly like the new Microsoft (since Bill Gates stepped down from being the Chairman and the CEO, and, never mind the first ever quarterly loss!). Cars still do not get us 1000 miles a gallon and have, thankfully, not started crashing twice a day! Cheers! The discussion of profits-revenues data for the new General Motors (see also earlier analysis which considers only the five consecutive quarters through 1Q2011, which confirms the same findings here) was initiated here to: 1. Show the validity of the simple and universal law y = hx + c relating revenues x and profits y by carefully analyzing the data for the new GM, which is emerging from its bankruptcy. As we see here, the new GM is now operating in
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the highly desirable Type I mode, with both profits and profit margins increasing with increasing revenues. 2. Initiate a discussion of the significance of the detrimental Type III behavior observed with several companies that are struggling and are operating in a crisis mode. In the Type III mode, profits and profit margins both decrease even as revenues increase. In a subsequent article, it will be shown that the old GM was indeed operating in this Type III mode for several years before it was forced into bankruptcy. 3. Call attention to the transition from Type I to Type III (with an intervening Type II phase) which also implies the existence of a maximum point on the profits-revenues graph. Indeed, a similar analysis of the profits-revenues data for several companies reveals such a maximum point. The most notable example of the maximum point, especially for those who are interested in the auto industry, is Ford Motor Company. Another notable example is Air Tran. GM was forced into a bankruptcy and Air Tran was forced to merge with Southwest Airlines. Prolonged operation in the Type III mode cannot be sustained by any company. The appearance of a maximum point on the profitsrevenues graph and/or the transition to Type III mode is thus a cause for alarm and should trigger URGENT action to return the company to either Type II or the Type I mode of operation. The following discussion, almost academic, is presented here for completeness since it provides a broader theoretical framework to understand the fundamental significance of the linear law and the implications of the various transitions discussed thus far. Lurking beneath the simple linear law is another universal law, a nonlinear law, a power-exponential law, of profound significance. The linear law, and the three types of line segments that we observe during various time periods, are actually special local manifestations of this more general nonlinear behavior.

3. Discussion
All successful and good companies (several examples have been cited some notable ones being Microsoft, Google, Apple) seem to follow the simple linear law, y = hx + c, revealed here by analyzing the profits and revenues data for the
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new General Motors for just three years since it emerged from its bankruptcy. This linear law can also be shown to be a consequence of the classical breakeven model for the profitability of a company. Although a simple model, which considers only a company making and selling N units of a single product, it appears that the same general conclusions are more generally applicable for all companies in the real world. Since the constants h and c in the linear law can be either positive or negative, this also implies at least three possibilities, all of which are actually observed in the real world. Microsoft is a good example of a company that shows a transition from the Type I mode to a Type II mode and then back again to a Type I mode. The company has reported a profit for every single year since its founding 26 years ago. It reported its first ever quarterly loss in the most recent quarter ending June 2012 (mainly due to accounting adjustment related to the entire value of aQuantive, an online advertising company acquired by Microsoft in 2007; for the full fiscal year ending June 2012, Microsoft did report a profit). Air Tran, which merged with Southwest Airlines in March 2011, is a good example of a company that has exhibited all three types of behavior (Type I, Type II, and Type III) during its brief sixteen year history, see, in particular, Figure 8 in the Air Tran article. In the familiar analysis of the stock market (stock prices of a single company over time, or that of an index, like Dow, NASDAQ, S&P, over time), we find that the market either moves up, or down, or sideways. The sideways movement of the market usually represents a period of adjustment. Likewise, in the profits-revenues diagram, Type I behavior is akin to the upward movement of the market, Type III behavior to the downward movement and Type II behavior to the sideways movement. The transitions from Type I to Type II (as with Microsoft, Air Tran), or Type I to Type III (as with Groupon or Zynga) also imply a period of adjustment in the operations of a company as its revenues increase (over time). These transitions are usually accompanied by an increase in the fixed costs (the constant a in the breakeven model which is reflected in the changes in the constant c in the linear law and/or the cut-off revenue x0) and/or an increase in the unit variable costs (the constant b in the breakeven model).
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The most general profits-revenues graph is thus a smooth nonlinear curve with a maximum point. The simplest (yes, indeed!) mathematical expression for such a nonlinear curve, which can be derived using statistical arguments, is equation 1 below. y = mxn [ e-ax /(1 + be-ax) ] + c (1)

If we consider the special case of b = 0, this equation reduces to y = mxne-ax with the exponential term e-ax multiplying the power-law term xn. The power law term implies a rising curve with y increasing indefinitely as x increases. The derivative of just the power law function, y = xn, dy/dx = nxn-1 = n(y/x). This is the slope of the power law curve which will either keep on increasing (if n > 1) or keep on decreasing (if n < 1) as x increases. There is no maximum or minimum. The exponential term, on the other hand, implies a falling curve (a > 0) for large values of x. The derivative of just the exponential function y = e-ax, dy/dx = - ae-ax. Hence, the product curve, which must account for these opposing tendencies, reveals a maximum point. For the power-exponential law, dy/dx = (n ax)(y c)/x for the case of nonzero c. A maximum point will be observed when n = ax, or x = n/a. For x < n/a the curve is rising and for x > n/a, the curve is falling. The significance of the factor [ e-ax /(1 + be-ax) ] with the nonzero b, may be understood as follows. This factor, with b = - 1, was first introduced by Max Planck, in his December 1900 paper, which marks the birth of quantum physics. This is relevant to our discussion here since Plancks analysis actually represents an attempt to derive the average value of a property called the energy for a complex system composed of N entities (which were called oscillators), where N is a very large number. Once this is understood, the extension of Plancks analysis to many problems outside physics, such as the profits-revenues problem, can be readily conceived. The total energy UN = NU where U is the average energy. This total energy UN can obviously be distributed between the N entities in many different ways. Planck proposes the following solution to determine the average U. Let UN = NU = P where P is another very large integer and is an elementary unit (of energy, or some other property of interest). Thus, the average U = (P/N) or P/N = U/.
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Since there are many ways in which the property U can be distributed between the N entities. This gives rise to another property known as the entropy S. The total entropy of the N entities SN = NS where S is the average entropy. The more the number of ways, , of distributing a fixed UN = P = NU, the higher the entropy S. Thus, the following equation for the entropy, proposed by Boltzmann, is the starting point of Plancks derivation. SN = k ln + unknown constant = S0 + k ln (2)

Here k is a constant called the Boltzmann constant. The expression for can be deduced using the theory of permutations and combinations and involves factorials of very large numbers. Thus, a logarithmic relation is conceived between the total entropy SN and the number of ways . If there is only one way of distributing the property, = 1, and the natural logarithm ln = ln 1 = 0 and SN = S0. There is no entropy, or disorder, or chaos, or randomness, in the system, SN = S0 = 0, provided the unknown constant S0 = 0. Notice that Planck is careful to include this unknown nonzero constant into the entropy equation. This is similar to the nonzero intercept c that appears when we consider the profits and revenues data, as just discussed. (A rigorous proof for setting S0 = 0 was provided later in physics.) The expression for used by Planck (originally due to Boltzmann, 1877), is as follows. = ln [ (N + P 1)! /(N 1)! P!] [(N + P)N+P / NN PP ..(3) The factorial of n, written as n! = n(n 1)(n 2) 3 2 1. For large values of n the factorial can be approximated as above, using exponents. After some straightforward mathematical manipulations, Plank arrives at the following expression for the average entropy S = SN/N. S = k ln { [1 + (P/N)] ln [1 + (P/N)] (P/N) ln (P/N) } (4)

Introducing P/N = U/ and differentiating to get the derivative dS/dU eventually leads to the Planckian expression for U given below as equation 6. dS/dU = 1/T = (k/) ln [ 1 + (/U) ] and, U = /[ exp(/kT) - 1] = [ e-/kT/(1 - e-/kT) ] (5) (6)
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Following Planck, we simply set the derivative dS/dU = 1/T. Taking reciprocals, this means that T = dU/dS, which is the rate of change of the property U with increasing entropy S. What is the significance of T and/or the rate of increase of U with entropy S? For the moment, we will NOT discuss this much further than to suggest that it is like the temperature of a system (hence T). We already use this term figuratively in many instances outside physics. Even in the financial world we talk about a hot stock tip. Or, we use hot to describe some exciting news of the day. A golfer, who is suddenly make a run for the championship late Saturday and early Sunday, is described as getting hot. His or her putter is called hot. A candidate in a crowded field, campaigning for the Presidency, suddenly becomes hot. And so on. Some elusive property U and the chaos surrounding how U is distributed (in umpteen countable ways) is the embodiment of the meaning of T. This is the essence of Plancks mathematical arguments which led to the birth of quantum physics in the 20th century. We can generalize Plancks ideas by postulating that energy in physics is, mathematically speaking, exactly identical to money in economics or in the financial world. For example, in the profits-revenues problem, instead of a fixed total energy UN we can think of total amount of money as being the property to be distributed between the N entities. The money could represent the revenue stream from many different products. Thus, instead of a single product considered in the classical breakeven analysis for profitability we are able to consider the more complex real world problem where money instead of energy is associated with a large number of N entities. Thus, we can systematically associate new meanings to each of the mathematical symbols in Plancks analysis to arrive at the expression for the average value of any property of interest to us. U = [ e-ax /(1 + be-ax) ] ............(7)

Here we have replaced the group of terms /kT by ax for convenience. In Plancks analysis, the constant b = - 1. This is also called Maxwell-Boltzmann
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statistics. We also encounter other types of statistics, such as the Fermi-Dirac statistics, or the Bose-Einstein statistics, which describe different rules governing the way in which N microscopic particles encountered in physics interact with each other. This yields different values of b, such as b = + 1. More generally, therefore, we treat b as a parameter in the general expression for U where U is now the average value of any property of interest to us. Thus, energy in physics is just like money in economics, or the financial world, and vice versa. This is the simplest explanation, minus all of the mathematical details, about how to arrive at the nonlinear, power-exponential law, given as equation 1. The linear law y = hx + c is clearly a special case of this more general nonlinear law. We witness small line segments, referred to as Type I, Type II, or Type III lines, on the profits-revenues diagram, with the underlying behavior being a nonlinear one described by equation 1 (and the statistical averaging process described by both Boltzmann and Planck when they developed statistical mechanics and quantum physics). The reader is referred to other articles cited in the bibliography for more details, especially the significance of the nonzero intercept c, and its relation to Einstein work function W. (The articles on Google, Kia, Air Tran, and Zynga discuss various aspects of this analogy between energy in physics and money in economics.) Einsteins photoelectric law K = E W = hf W is a simple linear law relating K and f, which can be understood as follows. E = hf is the elementary quantum of energy, introduced by Planck, in 1900, with h being the Planck constant and f the frequency. Then, in 1905, building on Plancks ideas (especially the idea of entropy of radiation), Einstein showed that light can be thought of as being made up of a stream of particles (now called photons) with each particle having the elementary energy quantum E = hf. When the photons strike the surface of a metal, an electron, with the maximum (kinetic) energy K is ejected (and produce a current in an external electrical circuit, if they are properly collected, modern photocells, used in many applications, work
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on this principle). The maximum K < E since some work W must be done to overcome the forces binding the electron to the metal. Einstein called this the work function of the metal and is to be determined experimentally for each metal from the K-f graph. The slope of the graph is the fundamental constant, called the Planck constant h. The intercept c = - W, the work function. Einsteins law, K = E W = hf W = h(f f0) is thus seen to be exactly analogous to the linear law, y = hx + c = h(x x0). Einsteins equation for K is identical to the fundamental equation Profits = Revenues Costs, P = R C, in the financial world (see Appendix I) with energy replacing money. The energy E of the photon is exactly analogous to the revenues R generated by a company. However, not all of this revenue appears as profits. The profits P is just like the maximum kinetic energy K of the electron and the costs C is just like the work function W. Thus, we have an exact one-to-one correspondence between various terms used for energy in physics and money in economics. The cut-off revenue x0 = -c/h is exactly analogous to the cut-off frequency f0 = W/h. Electrons appear only when the cut-off frequency is exceeded. Likewise, profits will appear only when the cut-off revenue is exceeded. Einsteins law also implies that the K-f graph is a series of parallels, if we perform experiments with different metals, each having its own work function W. Examples of such movement along (nearly PERFECT) parallels can be found when we analyze the profits (variable y) and revenues (variable x) data for various companies, e.g., article on Microsoft, Refs. [18,19] and Kia [16]. And, amazingly, we now find an exact similar movement along nearly PERFECT parallels when we consider the quarterly profits and revenues data for the new General Motors. This was presented in Figure 3.The figure captions and the notes attached to Table 2 provide the additional supporting details. This completes a brief discussion of the significance of the nonlinear law, given as equation 1, which is proposed here to describe a wide range of profits and revenues data for various companies. This exercise, simply put, may be considered to be an attempt to generalize the classical breakeven analysis for many products
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instead of a single product. Many of the ideas outlined here still need detailed clarification, such the important idea of T = dU/dS and the incorporation of the expression of U into the expression yielding the nonlinear law, equation 1. Perhaps, this will be the task for a future generation of researchers if these ideas find even preliminary acceptance among economists and financial and business leaders (academics as well as real world practitioners). As noted earlier, this entire discussion is purely academic, optional, and can be overlooked. However, if pursued, it seems to lead to an intellectually satisfying model for the financial world. The important idea, the nugget, however, is the three types of companies implied by the simple linear law which, as shown here, does have a firm empirical basis. In a companion article we will focus our attention on the situation prior to the bankruptcy, when GM was operating in the Type III mode, for a prolonged period, with profits decreasing even as revenues increased.

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Appendix I Linear Profits-Revenues Law and Breakeven Analysis

It has not been appreciated that all companies follow a simple and universal linear law, y = hx + c, which relates revenues x and profits y. The constants h and c in this law can be deduced using the available financial data. Indeed, this linear law can be shown to be the consequence of the classical breakeven model for the profitability of a company. Consider a company making and selling N units of some product. The total cost C associated with the operation is the sum of the fixed costs a and the total variable costs bN where b is the unit variable cost. Thus C = a + bN. If p is the unit price, the total revenues generated R = pN, or equivalently, units N = p/R.

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Hence, the profits P = Revenues Costs = R C = pN a bN = (p b)N a. Eliminating N using we get, P = [(p b)/p] R a which is a linear relation between profits P and revenues R and can be rewritten as y = hx + c, where Slope h = (p b)/p = 1 (b/p) - Depends on unit variable cost b and unit price p Intercept c = - a - Depends on the fixed cost a Although deduced by considering a single product, the linear law can be shown to hold for a number of companies, large and small. Some examples are Microsoft, Apple, Google, IBM, Southwest Airlines, and Exxon Mobil. Depending on the numerical values of h and c (positive or negative), we have three possibilities. 1. Type I company (h > 0, c < 0): Profits and profit margins increase with increasing revenues. (The reverse is also observed, i.e., profits decreasing with decreasing revenues and is called INVERSE Type I behavior.) 2. Type II company (h > 0, c > 0): Profits increase with increasing revenues, but profit margins decrease. (Companies are usually observed to make a transition from Type I behavior to Type II behavior with increasing revenues, as seen, for example, with Microsoft). 3. Type III company (h < 0, c > 0): Both profits and profit margins decrease with increasing revenues. (Sometimes, even the opposite is observed, i.e., profit and profit margins INCREASE with DECREASING revenues). Each of these linear trends applies over a limited range of revenues (and profits). Transitions from one type of linear behavior to another (Type I to Type II, or Type I to Type III, or Type I to Type II to Type III) are observed and the general profitsrevenues law is a smooth curve with a maximum point. We thus observe small linear segments of a more general non-linear law, which can be written as follows. Further details about the implications of this general nonlinear profits-revenues law may be found in a companion article. y = mxn [ e-ax /(1 + be-ax) ] + c (1)
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 The linear law is deduced as a special case for n = 1, a = 0, and b = 0. The power law, y = mxn + c, is deduced as a special case for a = 0 and b = 0. Profits increase with increasing revenues at an accelerating rate (n > 1) or a decelerating rate (n < 1). For n = 1, we get the linear law. The power-exponential law, y = mxne-ax + c, is deduced as a special case for b = 0. The x-y graph now reveals a maximum point at x = n/a. The case of a 0, b 0 and n 1 is the most general and again reveals a maximum point. The profits-revenues data for several real world companies can be shown to reveal such a maximum point. Some examples of companies operating past their maximum point are Ford Motor Company, General Motors (which went into bankruptcy in June 2009), Air Tran (which entered into a merger with Southwest Airlines), Southwest Airlines (even prior to Air Tran merger), Yahoo, Verizon Communications, Kroger, RIM, and Zynga. The implications of the appearance of the maximum point and prolonged operation in Type III mode (profits decreasing with increasing revenues) have been discussed in detail in other articles, see bibliography, and will not be repeated here.

Appendix II Comparison with earlier analysis for 1Q2010-1Q2011

Some additional insights into the evolution of profits and revenues for the new GM can be gained by reviewing the analysis of the profits-revenues data for the five consecutive quarters, 1Q2010 to 1Q2011, presented earlier. Four of the five quarterly data points (the exception being 4Q2010) line up nicely along the straight line. The best-fit line through the four points, see Figure 4, has the equation y = 0.435x 12.929 = 0.435 (x 29.69) with the linear regression coefficient r2 = 0.9798. This best-fit slope is virtually identical to the slopes determined earlier (from the pairs 1Q2010 and 1Q2011 and also from 4Q2010 and 1Q2012 ), see Figure 3. It differs slightly from the best-fit equation deduced in the earlier article, y = 0.505x 15.19, with r2 = 0.9599. This difference in the numerical values of h
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and c can be shown to be entirely due to the rounding off of the revenues and profits in the earlier analysis, see Table 3. The following observations, made with reference to Figure 4, are of interest and reveal the significance of the changes in the nonzero intercept c, which, according to the break even model implies a change in the fixed costs, see Appendix I. Table 3: Profits-Revenues data for 1Q2010-1Q2011 (with rounding off) Quarter 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 Revenues, x $, billions 31.476 33.174 34.060 36.601 36.194 Profits, y $, billions 0.865 1.334 1.959 0.510 2.863 Revenues, x $, billions 31.5 33.2 34.1 36.9 36.2 Profits, y $, billions 0.9 1.3 2.0 0.5 3.2

6.00

Quarterly Profits, y [$, billions]

4.00

1Q2011

A B
1Q2012 4Q2010 (36.601, 0.510)

2.00

Best-fit line y = 0.435x 12.929 = 0.435 (x 15.43) r2 = 0.9798

0.00

-2.00

-4.00

-6.00 0 5 10 15 20 25 30 35 40 45 50

Quarterly Revenues, x [$, billions]

Figure 4: The quarterly profits-revenues data considered earlier in Figure 3 is reanalyzed here. The slope and the intercept of the Type I Line A were determined
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using a linear regression analysis. Line B is a parallel through the 4Q2010 data point. The four of the five data points from the period 1Q2010 to 1Q2011 follow Type I Line A.

1. The highest quarterly profit to date, $2.863 billion, was reported in 1Q2011. Since then, profits have been lower and fall between the parallels A and B. 2. In the earlier analysis (published on May 9, 2011, prior to the availability of the data for 2Q2011 to 2Q2012), the 4Q2010 data point (36.601, 0.510), was obviously an outlier and was excluded from the linear regression. However, this outlier is now seen to lie on the parallel B. The new GM was able to return to the operating Line A in 1Q2011. Since then profits and revenues have been fluctuating between the two parallels. 3. The difference in the values of the intercept c between the parallels A and B, (cA - cB) = -12.929 (-15.426) = 2.497. This is also approximately equal to the difference in the profits between 4Q2010 and 1Q2011, (yA yB) = 2.863 0.510 = 2.353. Since revenues were roughly constant between 4Q2010 to 1Q2011, the change in profits can be attributed to a change in costs. In other words, the changes in the intercept c, or the fluctuation between the parallels and A and B is entirely due to the fluctuations in the costs (both fixed costs and variable costs). When revenues are constant, the fixed cost is changing. When revenues increase or decrease and there is a fluctuation between parallels, both the fixed cost and the variable cost are changing.

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Appendix III: Bibliography

Related Internet articles posted at this website Since the Facebook IPO on May 18, 2012
The first article listed below discusses a little known mathematical property of a straight line. Figures 1 to 3 in this article provide the philosophical basis for considering the significance of a nonzero intercept c as it applies to many problems in the real world. We make observations (x and y values of interest to us) to deduce y/x, usually called rates, ratios, or percentages. 1. http://www.scribd.com/doc/102000311/A-Little-Known-MathematicalProperty-of-a-Straight-Line-Strange-but-true-there-is-one Published August 4, 2012. Financial data (Profits-Revenues) analysis and Generalization of Plancks law beyond physics. 2. http://www.scribd.com/doc/95906902/Simple-Mathematical-Laws-GovernCorporate-Financial-Behavior-A-Brief-Compilation-of-Profits-RevenuesData Current article with all others above cited for completeness, Published June 4, 2012 with several revisions incorporating more examples. 3. http://www.scribd.com/doc/94647467/Three-Types-of-Companies-FromQuantum-Physics-to-Economics Basic discussion of three types of companies, Published May 24, 2012. Examples of Google, Facebook, ExxonMobil, Best Buy, Ford, Universal Insurance Holdings 4. http://www.scribd.com/doc/96228131/The-Perfect-Apple-How-it-can-bedestroyed Detailed discussion of Apple Inc. data. Published June 7, 2012. 5. http://www.scribd.com/doc/95140101/Ford-Motor-Company-Data-RevealsMount-Profit Ford Motor Company graph illustrating pronounced maximum point, Published May 29, 2012.

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6. http://www.scribd.com/doc/95329905/Planck-s-Blackbody-Radiation-LawRederived-for-more-General-Case Generalization of Plancks law, Published May 30, 2012. 7. http://www.scribd.com/doc/94325593/The-Future-of-Facebook-I Facebook and Google data are compared here. Published May 21, 2012. 8. http://www.scribd.com/doc/94103265/The-FaceBook-Future Published May 19, 2012 (the day after IPO launch on Friday May 18, 2012). 9. http://www.scribd.com/doc/95728457/What-is-Entropy Discussion of the meaning of entropy (using example given by Boltzmann in 1877, later also used by Planck to develop quantum physics in 1900). The example here shows the concepts of entropy S and energy U (and the derivative T = dU/dS) can be extended beyond physics with energy = money, or any property of interest. Published June 3, 2012. 10.The Future of Southwest Airlines, Completed June 14, 2012 (to be published). http://www.scribd.com/doc/102835946/The-Future-for-SouthwestAirlines-The-Unknown-Story-of-Rising-Costs-and-the-Maximum-Point-onProfits-Revenues-Curve Published August 14, 2012. 11.The Air Tran Story: An Important Link to the Future of Southwest Airlines, Completed June 27, 2012 (to be published). http://www.scribd.com/doc/102832984/The-Air-Tran-Story-The-Merger-andMaximum-Point-on-Profits-Revenues-Graph Published August 14, 2012.

12.Annies Inc. A Single-Product Company Analyzed using a New Methodology, http://www.scribd.com/doc/98652561/Annie-s-Inc-A-SingleProduct-Company-Analyzed-Using-a-New-Methodology Published June 29, 2012 13.Google Inc. A Lovable One-Trick Pony Another Single-product Company Analyzed using the New Methodology. http://www.scribd.com/doc/98825141/Google-A-Lovable-One-Trick-PonyAnother-Single-Product-Company-Analyzed-Using-the-New-Methodology, Published July 1, 2012. 14.GT Advanced Technologies, Inc. Analysis of Recent Financial Data, Completed on July 4, 2012. (To be published).
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15.Disappearing Brands: Research in Motion Limited. An Interesting type of Maximum Point on the Profits-Revenues Graph http://www.scribd.com/doc/99181402/Research-in-Motion-RIM-Limited-WillDisappear-in-2013 Published July 5, 2012. 16.Kia Motor Company: A Disappearing Brand http://www.scribd.com/doc/99333764/Kia-Motor-Company-A-DisppearingBrand, Published July 6, 2012. 17.The Perfect Apple-II: Taking A Second Bite: A Simple Methodology for Revenues Predictions (Completed July 8, 2012, To be Published) http://www.scribd.com/doc/101503988/The-Perfect-Apple-II, Published July 30, 2012. 18.http://www.scribd.com/doc/101062823/A-Fresh-Look-at-Microsoft-After-itsHistoric-Quarterly-Loss Microsoft after the quarterly loss, Published July 25, 2012. 19.http://www.scribd.com/doc/101518117/A-Second-Look-at-Microsoft-After-theHistoric-Quarterly-Loss , Published July 30, 2012. 20.http://www.scribd.com/doc/103265909/A-Brief-Analysis-of-Groupon-s-ProfitsRevenues-Data Published August 19, 2012. 21.http://www.scribd.com/doc/103027366/Groupon-Analysis-of-ProfitsRevenues-Data-and-its-Business-Model Published August 16, 2012. More detailed analysis including discussion of the idea of a work function. 22.http://www.scribd.com/doc/103369016/Analysis-of-Zynga-s-Profits-RevenuesData-Maximum-point-on-the-profits-revenues-curve Published August 20, 2012. 23.http://www.scribd.com/doc/103600274/The-New-GM-A-Brief-Analysis-of-theProfits-Revenues-Data-through-1Q2011, Published August 22, 2012, Discussion of the new GM data from 1Q2010 to 1Q2011. ****************************************************************** The Unemployment Problem: Evidence for a Universal value of h in the unemployment law. 24.http://www.scribd.com/doc/100984613/Further-Empirical-Evidence-for-theUniversal-Constant-h-and-the-Economic-Work-Function-Analysis-ofPage 25 of 28

Historical-Unemployment-data-for-Japan-1953-2011 Single universal value of h for US, Canada and Japan in the unemployment law y = hx + c, Published July 24, 2012. 25.http://www.scribd.com/doc/100939758/An-Economy-Under-StressPreliminary-Analysis-of-Historical-Unemployment-Data-for-Japan, Published July 24, 2012. 26.http://www.scribd.com/doc/100910302/Further-Evidence-for-a-UniversalConstant-h-and-the-Economic-Work-Function-Analysis-of-US-1941-2011-andCanadian-1976-2011-Unemployment-Data Published July 24, 2012. 27.http://www.scribd.com/doc/100720086/A-Second-Look-at-Australian-2012Unemployment-Data, Published July 22, 2012. 28.http://www.scribd.com/doc/100500017/A-First-Look-at-AustralianUnemployment-Statistics-A-New-Methodology-for-Analyzing-UnemploymentData , Published July 19, 2012. 29.http://www.scribd.com/doc/99857981/The-Highest-US-Unemployment-RatesObama-years-compared-with-historic-highs-in-Unemployment-levels , Published July 12, 2012. 30.http://www.scribd.com/doc/99647215/The-US-Unemployment-Rate-Whathappened-in-the-Obama-years , Published July 10, 2012. **************************************************************** Traffic-fatality and Teen pregnancy problem 31.http://www.scribd.com/doc/101982715/Does-Speed-Kill-Forgotten-USHighway-Deaths-in-1950s-and-1960s Published August 4, 2012. 32.http://www.scribd.com/doc/101983375/Effect-of-Speed-Limits-on-FatalitiesTexas-Proofing-of-Vehciles Published August 4, 2012. 33.http://www.scribd.com/doc/101828233/The-US-Teenage-Pregnancy-Rates-1 Published August 2, 2012. 34.http://www.scribd.com/doc/102384514/A-Second-Look-at-the-US-TeenagePregnancy-Rates-Evidence-for-a-Predominant-Natural-Law Published August 8, 2012.

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About the author V. Laxmanan, Sc. D.

Email: vlaxmanan@hotmail.com The author obtained his Bachelors degree (B. E.) in Mechanical Engineering from the University of Poona and his Masters degree (M. E.), also in Mechanical Engineering, from the Indian Institute of Science, Bangalore, followed by a Masters (S. M.) and Doctoral (Sc. D.) degrees in Materials Engineering from the Massachusetts Institute of Technology, Cambridge, MA, USA. He then spent his entire professional career at leading US research institutions (MIT, Allied Chemical Corporate R & D, now part of Honeywell, NASA, Case Western Reserve University (CWRU), and General Motors Research and Development Center in Warren, MI). He holds four patents in materials processing, has co-authored two books and published several scientific papers in leading peer-reviewed international journals. His expertise includes developing simple mathematical models to explain the behavior of complex systems. While at NASA and CWRU, he was responsible for developing material processing experiments to be performed aboard the space shuttle and developed a simple mathematical model to explain the growth Christmas-tree, or snowflake, like structures (called dendrites) widely observed in many types of liquid-to-solid phase transformations (e.g., freezing of all commercial metals and alloys, freezing of water, and, yes, production of snowflakes!). This led to a simple model to explain the growth of dendritic structures in both the ground-based experiments and in the space shuttle experiments. More recently, he has been interested in the analysis of the large volumes of data from financial and economic systems and has developed what may be called the Quantum Business Model (QBM). This extends (to financial and economic systems) the mathematical arguments used by Max Planck to develop quantum physics using the analogy Energy = Money, i.e., energy in physics is like money in economics. Einstein applied Plancks ideas to describe the photoelectric effect (by treating light as being composed of particles called photons, each with the fixed quantum of energy conceived by Planck). The mathematical law deduced by
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Planck, referred to here as the generalized power-exponential law, might actually have many applications far beyond blackbody radiation studies where it was first conceived. Einsteins photoelectric law is a simple linear law, as we see here, and was deduced from Plancks non-linear law for describing blackbody radiation. It appears that financial and economic systems can be modeled using a similar approach. Finance, business, economics and management sciences now essentially seem to operate like astronomy and physics before the advent of Kepler and Newton.

Cover page of AirTran 2000 Annual Report

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