GM Bankruptcy: The End, and Beginning, of an Era…

c/o Michael Ramirez, IBD editorial
c/o Michael Ramirez, IBD editorial

General Motors this week will enter bankruptcy, a stunning turn of events for a corporation that in many ways defined the peak of American manufacturing over the last century.

In its bankruptcy petition, G.M. said it had $82.3 billion in assets and $172.8 billion in debts. Its largest creditors were the Wilmington Trust Company, representing a group of bondholders holding $22.8 billion in debts, and affiliates of the United Auto Workers union, representing nearly $20.6 billion in employee obligations.

So GM, the auto behemoth,  enters  Chapter 11.  Chrysler today will (again) be sold to Europeans, this time Fiat, and will no longer really be an American company (again).  Ford is doing relatively well…but that is not so great in the scheme of things.

This may finally be the end of the Big Three.

In truth, this has been coming for decades.  Many insiders knew that without huge reform, the massive car maker was headed for bankruptcy sooner or later.  Its leadership system is as close to a red tape government bureaocracy as you can get.  It has always stood in quicksand when it comes to change.  Its cars have middling sales, and its Union contract is an absolute disaster.

GM has half-heartedly tried to reform for several decades now.  It slowly cut its union workforce. It expanded globally.  It divested from money losers like Delphi, the parts company (who is also in bankruptcy).  It sold off side or spun off side business like Hughes Aerospace, Elctronic Data Systems, and its own financial unit GMAC.  But at the end of the day, its core auto business in North America was stagnant.  It wasn’t even about cars…GM, remarkably, builds fine cars.  It is about more:  perception is reality.

What is worse about the bankruptcy is that this should have happened long before.   We spent $20 Billion of US taxpayer money since last fall, through TARP, to accomplish what, exactly?  The answer is, nothing.   Those, like me, calling for a structured bankruptcy then were villified.  Sen. Corker of Tennessee was the most hated man in Michigan…the only problem is, that we were both right.  Now, before this bankruptcy process is over, the federal government’s investment will be north of $50 billion…for a company whose stock value, today, is worth around $450 million dollars…or about 1% of what the government is investing.

That is in the past.  What comes next is the $64 billion question.

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The Union, to its credit, has agreed to changes in their contract, in exchange for approximately 17.5% of the reconstituted company.   But for all practical purposes, this is the death-knell of the UAW as a major labor force in this country.  There power has been waning for decades, this is just the final straw.  GM is going to become a much smaller company…which means many less union autoworkers.  That is just a reality.

A whopping 60% will be owned by yours truly, the American taxpayer. An additional 12% will be owned by the Canadian government.   Bond holders, for a large part, have agreed as well, realizing that they will never get a fair shake with this administration.  And in the process, 2,100 GM car dealers will disappear…or one-third of the total 6,000 dealerships now existing, which will cost in upwards of 40,000 jobs alone

However, Mr. Obama’s view, frankly, continues to be naive.  He said the government was forced to do this, and had no other choice.  “That was the only way we were going to be able to structure the deal,” the president told NBC’s Brian Williams in an interview taped on Friday.   “My preference would have been to stay out of it completelty,” Obama said. “But the alternative was to potentially see a liquidation bankruptcy in which (an) enormous institution with a huge impact on our economy, particularly in a lot of Midwestern states, simply gets broken up into pieces, and in the current deep recession that we’re in, could have had horrendous effects in terms of the overall economy.”

Maybe, maybe not.  But this is a quagmire.  Now, the government, meaning you and me, own this mess lock, stock, and barrel.  GM is slowly selling off pieces of itself to survive, including money makers like Opal.  What will be left of the company?  Basically, a North American Division of Cadillac, Buick, GMC trucks and Chevrolet.  This is a company, that even in the boom times of the nineties, had trouble making money.  So is there any point where Obama will now pull the plug, declaring GM a failed entity?  Or is GM likely to become like Amtrak…a never ending black hole of government money?

The government share (Government Motors, anyone?) is the most worrying part.  How much day-to-day control will the Obama Administration infuse into GM?  Mr. Obama says he does not want to run a car company…I am not s0 sure.  Obama has placed 31 year old Brian Deese, a not-quite graduate of Yale Law School who had never set foot in an automotive assembly plant until quite recently, has been placed to steer this process for GM and Chrysler.  He is neither an economist or engineer (and he isn’t evenn a laywer); makes you wonder why he is in charge, huh?  This is perfection for someone who wants to alter the car market in this country.  Will the government push GM to bypass SUVs (one of the few areas where they are making money, I may add) for smaller, Euro style cars who  (no offense) no one buys?

The pressure on the White House to impose the ‘green era’ liberal thinking on the most backward American car company will be immense.  And in liberals minds, it makes sense him; you are already trying to impose gas mileage changes, cap-and-trade…why not take the next step, and make GM into a ‘green’ car company?  And will the government make decisions favorable to GM, and detrimental to the actual only private carmaker in America now, Ford?

Obama will have a difficult time fighting against liberal extremist group who will put much pressure on the Obama administration to make drastic, even extremist, changes to General Motors.  Obama, speaking from the White House, stated “What I have no interest in doing is running GM.”

The combination of extreme lobbying from Washington, with the inherent issues GM has, may make this the most difficult corporate restructuring in US (maybe world?) history.  The problem with restructuring is that you need a strong leader that is willing to do unpopular things…GM has no such leader, and Barack Obama certainly is not that man.  So who will lead them from the wilderness?  There are practical realities here.  What if GM needs to layoff another 50,000 UAW workers to survive…is Obama going to go along with that?  How about GM needing to ship more manufacturing to foreign countries…how do you think this administration will feel funding a company that is outsourcing?  These are real issues.

If Obama is willing to sacrifice political capital for the well being and survival of GM, GM has a chance.  If he is not willing to do that, GM is almost certainly doomed to future failure.

2 thoughts on “GM Bankruptcy: The End, and Beginning, of an Era…

  • June 19, 2009 at 2:58 pm
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    The GMC truck division should not continue as a part of GM. GM and the US government have one chance to get the reinvention of the new GM right and avoid continued government and taxpayer support.

    Domestic and import full-size truck and SUV sales are declining with fuel economy concerns, so manufacturing two of the same brand is not a profitable long-term business model. Chevrolet and GMC trucks and SUVs are essentially the same vehicles. Chevrolet models cost less, have equal or better quality and fuel economy, and outsell GMC models more than three to one. Toyota and other imports don’t manufacture two of the same full-size vehicles under different brand names; it does not make sense, economically, for GM to continue producing both GMC and Chevrolet.

    Advocates who hope to keep GMC as the auto industry changes to more fuel-efficient models want to continue a business strategy that will ultimately be as unprofitable as the now defunct brands of Hummer, Pontiac, Oldsmobile, Saturn, and Saab.

    Follow the import business model, eliminate GMC now, and save the costs associated with the extra GMC manufacturing processes and distribution channels, which will not be part of a long-term solution. The new GM will be more profitable going forward without GMC if Chevrolet produces and sells all of GM’s full-size trucks and SUVs.

    GM won’t need government and taxpayer support again if GMC is eliminated now.

  • June 19, 2009 at 3:04 pm
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    Fat chance. The truck division is right now the ONLY division that is profitable. Even if it is decreasing, without it, GM would be dead. Both GMC and Chevy trucks are profitable right now. Actually, you want to make a pure business decision? Get rid of all the cars, keep Cadillac, and just have a luxury and truck company.

    If GMC wasn’t there, GM would be gone by the end of the year. It is a sad statement, but totally verifiable and true.

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