By on October 3, 2008

Consumers will not buy a new vehicle from a bankrupt carmaker. That’s the over-arching fear preventing GM from filing for a court-managed rescue: a total collapse of consumer confidence in the company’s products. History suggests that a GM C11 would indeed trigger carmegeddon. Ask an automotive  historian to name an American automaker that filed for bankruptcy, survived, emerged and thrived and you get a doughnut-hole shaped answer. But I submit that GM will reorganize successfully. C11 will be a new beginning for GM, its suppliers, dealers, workers and, yes, customers– not the end of everything. But let’s start from the corporate perspective…

Even though GM’s burning through billions it needs for a successful bankruptcy exit plan, the American automaker will still have a number of important assets which will aid its recovery. First, GM’s already accomplished a considerable amount of restructuring, having lowered its structural costs to almost meet its target goal of 25 percent (down from 40 percent). There is plenty of fat left to cut (Gulfstream jets anyone?), but much of the trimming has already been accomplished. Equally important, the company’s stultifying “job for life” mentality may not be gone, but it’s definitely packing-up its things.

Second, GM benefits from the fact that the entire organization will not be in bankruptcy, just its corporate parent and the North American operations. GM’s ongoing, somewhat healthy foreign ops will provide more than just a semblance of normalcy. They will offer the prospect– only now just becoming realized– of global products that provide tremendous economies of scale. That’s once GM jettisons the bureaucratic fiefdoms inherent within its bloated brand structure. THEN it can really tap into worldwide expertise to reduce costs through global platform sharing and reinvigorate its small car portfolio in the USA.

Third, GM has tremendous political capital. Losing GM (and its supplier base) entirely would be just too much to bear for an American President and Congress. While a Federal “solution” may not be forthcoming in terms of cash money, some of the issues which management will (in some cases correctly) blame for the bankruptcy will get new attention: health care cost containment, tort reform, labor laws which rebalance management/labor negotiations, and possibly some rethinking of Corporate Average Fuel Economy and CO2 emissions standards. Measures in these areas will help a new GM get its bearings.

Fourth, Chapter 11 protections will give GM access to fresh sources of capital.

C11 will give GM the freedom to do what it should have done decades ago, but can’t afford to do now. The company can cut dealers, shed even more labor, close factories, reduce long-term liabilities, trim brands, slice models, eliminate duplication and so on. Yes, once this root and branch restructuring is accomplished, GM will emerge from Chapter 11 with a smaller market share and lower sales. But it will be significantly leaner, with two brands (Chevrolet and Cadillac), and one of the lowest costs structures in NA. This “new GM” will be able to attract both investment and world-class executive talent.

From a customer’s point-of-view, as I stated in the previous installment, consumers will see GM stores (albeit in fewer locations) stocked with vehicles offered at tremendous pricing. Americans are mostly payment buyers of cars– and lower prices mean lower payments. Existing owners and new buyers will get a separate new car warranty policy issued by a major property and casualty insurer as a backstop to the GM warranty, valid at most national repair shops, thus allaying any fears if GM closes up shop. Kind of like FDIC insurance for depositors.

GM will continue its online and national media efforts touting its vehicles as if all is well. Most of this effort will shift to Chevy and Caddy– every other brand will fade from promotion before they’re officially pronounced as dead. The American public may fear buying from a bankrupt company initially, but enough TV advertising will reassure them that the company is alive and well and doing the deal.

During this reorganization period, Toyota will enter a crisis– at least at its executive levels. They’ll know that the tea leaves point to a rejuvenated General– concentrating its firepower at two brands– with a lower cost basis, without excessive debt and labor burdens. The U.S. is Toyota’s big profit generator; it can get away with charging more for its products against a weak field of domestic competitors. If Ford does the same as GM in the USA, the easy profit days for Toyota will be over. Toyota will become the GM of yore, with too many products, an older and more expensive labor force, and no competitive advantage.

GM just has to make it through its reorganization. As always, the key question is leadership. GM’s Board, who precipitated this disaster as they stood by their man, Rick Wagoner, can’t remain in place.  Otherwise, it will just be another opportunity missed as the empire finally craters for good.

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34 Comments on “General Motors Death Watch 202: Carmegeddon Pt. 2...”


  • avatar
    jwltch

    I think there also some potentially negative economic impacts to C11 that could lead to further damage to GM. Cutting dealerships, for example. In rural areas, this will decrease sales tax revenue tremendously. I’ve seen small towns devastated financially because the local new car dealers closed up shop. This could lead to angst against GM by the residents in those areas. People see their local dealer and favorite salespeople forced out of business by GM’s actions. With that local dealer they know out of the picture, many could look at other auto maker’s offerings since they can’t shop locally any longer. While this is happening, where are the employees of these dealerships going to go? Are they going to be GM customers? Will they encourage family and friends to buy from GM? I think GM in the USA as we know it is history. I’m doubtful that they could emerge from C11 successfully.

  • avatar

    Existing owners and new buyers will get a separate new car warranty policy issued by a major property and casualty insurer as a backstop to the GM warranty, valid at most national repair shops

    Y’know, if all warranties worked that way, I would feel a whole lot better about the prospect of buying cars like Saabs and Volkswagens.

  • avatar
    jkross22

    Ken, Interesting thoughts on the potential future of GM. There are some legacy issues you addressed regarding leadership, but what about the ‘tired swimmer’ corporate culture of mediocrity that contributed substantially to the (lack of) quality of their products.

    How would that change? Move to Texas?

    Just can’t see how GM can be successful with the entitlement attitude and culture that sustained that toxic expectation.

  • avatar
    Samuel L. Bronkowitz

    I think C11 could be a good thing if it is managed correctly… but I see no indication it would be.

    If it’s the same old tired executive club running the show then C11 will just be time to cut costs and raise executive salaries. Nobody…. NOBODY inside the GM leadership hierarchy right now seems capable of the kind of change that is needed.

    I grew up in a “GM” family. That’s all we’d buy. Now even my “die-hard-GM” dad owns a Toyota truck.

    I hope Ken’s take is right, but I’m very pessimistic.

  • avatar

    Willys-Overland survived and thrived for many years after bankruptcy #1 in 1920, moving to 4th place among automakers a few years later. They went bankrupt yet again after the Depression and held on for decades.

    Just one of many examples.

  • avatar

    bankruptcy is NOT the answer. Return to Greatness is.

  • avatar
    Paul Niedermeyer

    Toyota will become the GM of yore, with too many products, an older and more expensive labor force, and no competitive advantage.

    I don’t think it’s quite THAT simple. Ultimately, it’s the product (and it’s reputation) that most defines competitiveness. Toytota still has a lot going for it there.

  • avatar
    Aegea

    Whatever happens, Rick and his buddies will be fine, and the rank-and-file and retirees will be screwed.

  • avatar
    Engineer

    This all sounds pretty good, Ken. But I see no sign that anyone in a leadership position at GM understands any of this. They really seem to be stuck in the echo chamber of TBTF (too big to fail).

    Given all that, I think it is very premature to suggest that Toyota start losing sleep over this…

  • avatar
    Dave

    Good article, great analysis. Just one little problem – GM has got to get a viable plan…… work at implementing it and not be distracted along the way.

    Me? I would love to see GM (and Ford) come back, but I can’t say I’m optimistic.

  • avatar
    John

    An outside-the-box alternative to Chapter 11 is Chapter 11-with a fresh name. It works like this: Congress creates a new financial status for GM and Ford, which confers all the protection of Chapter 11 bankrutpcy but is called something else. Naturally, this new name will have a positive spin to mislead the clueless customers. (probably containing the words “Patriot” and/or “American”) Very simple, really. All the protection without the aftertaste.

    John

  • avatar
    Pch101

    Chapter 11 reorganization plans require approval by the existing creditors. They also require a business plan to rebuild the business in such a way that the creditors can be repaid. That means that there will need to be new investor equity and loans available for the plan to work.

    Therein lies the problem. Right now, there is no market for providing debt to companies in as bad of a shape as GM. Investor equity will also be difficult to raise.

    Meanwhile, consumers and their lenders are increasingly risk adverse. It will be difficult enough for a consumer to get any sort of car loan, let alone for a car company that is in bankruptcy. Even if the buyer is motivated, he may find that his banker is not.

    So, if GM can’t get lenders to provide money for the bankruptcy or for the car sales, and if investors aren’t willing to jump in with new capital, then that Chapter 11 turns into Chapter 7 liquidation as the existing secured creditors scramble to get whatever they can get. There won’t be a GM left after a bankruptcy filing if done anytime soon.

    Even several months ago, this situation could have been very different. But right now, we are one step away from an economic meltdown, and it’s going to take at least a couple of quarters to get off of the tightrope and back to solid ground. Bankruptcy could have been used as a turnaround tool when the economy was in better shape, but now it’s too late.

  • avatar
    Martin B

    Another company that very nearly went bankrupt is Volkswagen. In 1973 they had pretty much reached the end of the line. The Beetle was tired and outdated, the 411 models sold poorly (No wonder; they were probably the world’s ugliest cars), and their traditional rear-engined, air-cooled layout no longer found favour with the public.

    What saved them was the Golf/Rabbit. It was a complete break from everything VW had done before: FWD, water cooled, angular. But it was superbly designed, and it sold and sold.

    I can still remember the culture shock when the Golf came out. It didn’t seem right for a Volkswagen, somehow. After all those famous ads with lots of white space for the Beetle, we’d got used to Volkswagens as cute, rounded, and retro.

    A change as big as that needs powerful and visionary leadership, and great courage, as well as expert knowledge of production, engineering, and the marketplace. This is not an accountant’s skill set.

    The Saturn should have been GM’s Golf. A profoundly new car with plastic panels etc, and a new type of factory organisation based on the successful Toyota Production System. Alas, it never found its Product Champion at corporate HQ, and slowly withered on the vine.

    You can’t cut your way to greatness. I can see GM surviving as a mini-GM, dreaming of past glories. I don’t see the bold leadership and must-have products that will propel GM back to automotive leadership.

  • avatar
    Dan

    Pch101 nails the problem. Ch11 means that shareholders will be wiped out, debt holders will agree to take a serious haircut, and unions will magically agree to reduced benefits. Somehow, the odds of all of this coming together seem pretty low. Instead, it’s entirely possible that GM falls into Ch7, and whatever assets it has end up purchased by other auto manufacturers. That almost makes sense: I’ll bet one of the Japanese car manufacturers could do better with a GM plant than GM itself.

  • avatar
    Redbarchetta

    Great take on this Ken. But I still don’t agree with you that they have a chance of coming out of C11. A great example would be to look at mini-GM, Delphi. They are just a GM spin off so we are looking at the same sort of brainiacks that are running the GM show. Delphi is months away from staring down the barrel of liquidation. Their C11 filing has NOT been a success story. I know they are a parts supplier and not the OEM but my point is the same thinking for them is the same sort of thinking that will be going on during a GM filing. Not much to look forward to.

    And you aren’t answering the question of where are the sales goingot come from to sustain them during the filing. The best sales they can look at are the same kind of sales they are generating right now even if they give bigger discounts. That simply isn’t enough to keep them alive while they fix that huge broken mess. How long do you think the filing is going to last?

  • avatar
    Ingvar

    “What saved them was the Golf/Rabbit. It was a complete break from everything VW had done before: FWD, water cooled, angular. But it was superbly designed, and it sold and sold.”

    Not entirely true. What saved Volkswagen was their buy-outs of Auto-Union in 1964 and NSU in 1969, and the creation of Audi from those. Remember the NSU Ro80? The template for all future Audis. The smaller already made but not marketed NSU K70 was quickly rebranded as a VW K70. The skillful engineers at NSU formed the braintrust at Audi that made Audi and Volkswagen what it is known as today, not much unlike how Chrysler bought out AMC and transfered those technicians to Chrysler. AMC practically did Chrysler in the 90′s, until the Daimler buy-out.

    The Volkswagen K70 did not sell well, as it was so far removed from what Volkswagen traditionaly produced, but the DNA of that car was transfered to Audi and the Audi 100 in 1969 and the 70´s Audi 80/VW Passat. The DNA of Audi engineered cars (Front wheel drive with engine in front of the front wheels) goes straight back through Auto-Union and the 30′s DKW. It amuses me much that todays Bentley Continental is configured in the exact same way. A fun fact is that NSU:s factory at Neckarsulm traditionally produced the larger Audis, and nowadays, they are churning out A6′s, A8′s and R8′s. Traditionally, Audi has engineered the bigger cars, while VW specialised in the smaller ones, like Golf. The Passat has usually been Audi-based, with exceptions between 1988-96 and the current Passat from 2005.

    What really saved Volkswagens ass in the 70′s was that they finally understood that their backway engineering was way past its prime, and let the skilled technicians at Audi do the dirty work of transforming the company from the ground up. A lesson someone at GM should learn.

    The lines of the NSU Ro80 actually reminds me of the current Audi A6 and rather much of the Audi 100 C3 in 1982::

    http://www.spiegel.de/img/0,1020,985861,00.jpg

  • avatar
    bikegoesbaa

    “That almost makes sense: I’ll bet one of the Japanese car manufacturers could do better with a GM plant than GM itself.”

    They already did…

    en.wikipedia.org/wiki/NUMMI

  • avatar

    Congress creates a new financial status for GM and Ford, which confers all the protection of Chapter 11 bankrutpcy but is called something else.

    Boy, this gay friend of mind would love it if Congress were to do something like that for gays. Give gay marriage a classy new title or something like that, like “civil unions.”

    Nevermind. I don’t think bankruptcy will work for GM. America has given up on GM. The only way GM could possibly win back that trust is to prove it’s sustainable in the long term. Which isn’t going to happen either because people like Wagoner won’t let it happen.

    Like it or not, GM’s going to die by the hands of its management.

  • avatar
    obbop

    First new vehicle I purchased in 33 years of car/truck buying was that 2004 Silverado, the one I bought to assist the “home team.” The one I have mentioned before about the absolutely horrible warranty service (dis-service) obtained from several dealers and how corporate GMC spat upon me when I sought recourse at the corporate level.

    No way can I not continue to warn others of what befell me. During my ventures on-line and in the real world I have been told by too many others of either their horror stories or what others with a GMC product told them.

    The word gets around and will likely continue.

    No matter what GMC does I believe that while trying to save a buck here and there they have burnt too many bridges, created too much animosity.

    To this day, whenever the opportunity arises, when folks are discussing anything auto related, I warn others of what MAY befall them if a GMC is purchased.

    Particularly damning is the waterfall through the dashboard, shorting out the blower motor and creating a mini-lake upon the interior floorpan (flood plain) and the dealer braying yet again… can not replicate.

    Sorry GMC… you do not deserve to survive and I will do all I can to assist in your downfall.

  • avatar
    ihatetrees

    I used to think GM could make it through a bankruptcy. But current and near future market conditions look too daunting.

    And while it’d be nice to see a GM comeback, I think you underestimate the UAW’s train wreck potential. Significant changes a bankruptcy judge orders could result in production disruptions that ruin whatever remains of GM.

    I disagree with your take on Toyota’s potential problems. While currently unwilling, if pushed Toyota will cut production and headcount if their profits are threatened.

  • avatar
    Brendan

    There is no way a GM bankruptcy would go this smoothly. There are too many lawyers, too few competent managers, and very few investors willing to take a stake in the company. Building confidence in the new enterprise will be nearly impossible, which means no private money. Marketing is a lot harder than it looks and TV ads haven’t exactly turned things around for GM, (they already spend a ridiculous amount on ad buys.)

    Whatever GM emerges from bankruptcy will be very different from what we know today.

  • avatar
    hltguy

    My two cents: GM will go into bankruptcy and never survive it, if they come out of bankruptcy it will not be long term. The America of tomorrow (in my opinion) is going to be much more difficult for the average americans to buy expensive cars, nor will they want to in the volumes seen before. GM will be a very hated company, they have already lost most of both coasts in sales and middle America will not forgive them for screwing the retirees out of their pensions and health care. The people in the cities and states they leave behind will not buy their products in any quantities (you think Flint, Michigan has much love for GM?). Suppliers will get screwed royally and thus that will be a problem going forward and as you state, who wants to buy a car from a bankrupt company that already had a piss poor reputation. Young people don’t give a rip about GM and that is the next generation of purchasers. Kia, Suzuki, Hyundai et.al will step in and fill the void and cars will arrive from China priced cheaper than a Chevy.
    Let’s face it, GM is toast one way or the other, either in BK or not.
    One of my companies has a Saturn company car, I am probably going to sell it realizing there is some value in it now as opposed to when GM goes into bankruptcy. Just think what the already deplorable resale value of GM products will be when GM goes Chapter 11. Uh what resale value?
    I will also add the American people are fed up of executives making millions while their firms are losing billions and then getting taxpayer money. Wait to GM files and word comes out about Waggoner and the company having corporate jets and the suits making millions. The hatred and disgust toward GM will be widespread.
    Turn out the lights the party is over.

  • avatar
    Martin B

    Ingvar:

    Yes, I remember the NSU Ro80. An acquaintance of my father had one, and I used to study it in our driveway. Fabulously advanced car, years ahead of its time. Pity it needed a new rotary engine every couple of years.

    Thank you for providing more detail of the Volkswagen turnaround than I ever could. The main point I wished to make was that it was product-led.

    They didn’t blame the unions. They didn’t blame the dealer network. They didn’t blame government regulations or unfair competition. They realised they needed to make and market better cars, and that’s what they did.

  • avatar
    toxicroach

    I don’t think the difference between a reborn GM’s labor costs and Toyota’s will make all that much difference.

    And what is the GM like sprawl Toyota is doing? They have Lexus, Toyota, and Scion. I suspect if GM had three brands (or two and a half really) they wouldn’t be in nearly as much trouble branding wise.

    Sure, they will have to run a tighter ship once the Big do whatever they are going to do, whether it be from Hyundai/Kia stepping into replace the big 3 or fresh competition from the new lean 2.

  • avatar
    yankinwaoz

    I’ve seen small towns devastated financially because the local new car dealers closed up shop. This could lead to angst against GM by the residents in those areas.

    This is the same faulty logic that was used to defended AT&T before they were ordered broken up. Do you remember the “Widows and orphans” argument that AT&T put out? Basically, AT&T claimed that breaking them up would devastate the widows and orphans who relied on regular fat AT&T dividends for their income. In their minds, a monopoly that stifled innovation and raked in obscene profits was totally justified because they helped poor widows and orphans.

    Sorry… if your GM dealer can’t compete, and can’t earn a profit, then they need to go. The land and capital used to prop them can be put to better uses.

  • avatar
    ExtraO

    C11 will be a new beginning for GM…

    Dream on.

  • avatar
    Honda_Lover

    Save the widows and orphans!

  • avatar
    John Horner

    “As always, the key question is leadership.”

    In the 1920s, GM’s board tossed out an ineffective leader at a time of great crisis for the company and put a young new guy in charge. Pierre Dupont and JP Morgan (the man, not the bank which today has his name) bought up 51% of the common stock and forced a change of leadership on the company. The old boss was founder Durant and the new boss was Sloan.

    But, who is the Sloan for modern GM? Who has the cash and desire to buy a controlling interest in GM and force needed changes?

    In the early 1990s another board coup tossed out the old team and brought in a new one. But that time the new guy was Jack Smith, and his reign is not looking back on as a period of success.

    http://money.cnn.com/magazines/fortune/fortune_archive/1992/05/04/76362/index.htm

    So my question is, who is going to force upon GM the radical restructuring of management which is necessary, but not sufficient, to fix it? And, who is the fixer?

    To date I see absolutely no signs of either the will to make radical changes at GM nor the people who might have a chance at successfully leading the charge. In a tough spot it is not just history, incentives, opportunities and problems which are import. It is the actual individuals who make the decisions and carry out the plans which makes all the difference. I haven’t heard a word spoken by any of GM’s leadership which makes me think they are the ones to get something transformational and successful done.

    “This is the same faulty logic that was used to defended AT&T before they were ordered broken up.”

    The breakup of AT&T and “deregulation” of US telecom were hardly a resounding success. Much of what survived of the baby bells has been slowly glued back together. Our cell phone system is a Balkanized mess of incompatible systems. If you compare the US phone system of today with the more highly regulated ones in other developed countries you might be surprised to learn that ours is no longer the best in the world. Taken as an entire picture, little was achieved in busting up AT&T except for making piles of money for the Wall Street investment banks which brokered the deals to split it up and then brokered the deals to put the surviving pieces back together. Lots of high priced parties for the fat cats and lots of laid off former employees. Bell Labs, once the premier center of R&D innovation in the US (inventor of transistors, Unix, fax machines, modern quality management {statistical process control}, the “C” programing language, cellular telephony and a host more of breakthrough technologies) is now gone. Hardly an example of things gone well. But hey, the investment bankers made multiple fortunes on the whole thing, so why worry :(.

  • avatar
    psarhjinian

    During this reorganization period, Toyota will enter a crisis– at least at its executive levels

    Toyota comes from a country that has a long tradition of comprehensive, long-term, multiheaded corporate strategies. Oh, and it’s currently run by a corporate strategist, as opposed to an accountant or engineer.

    I think they have a plan for such an eventuality.

  • avatar
    psarhjinian

    The breakup of AT&T and “deregulation” of US telecom were hardly a resounding success. Much of what survived of the baby bells has been slowly glued back together. Our cell phone system is a Balkanized mess of incompatible systems. If you compare the US phone system of today with the more highly regulated ones in other developed countries you might be surprised to learn that ours is no longer the best in the world.

    Off topic maybe, but damn, are you ever correct.

  • avatar
    amca

    Remember on key thing about GM’s finances: they’ve just gotten a $10 billion (or more) reprieve from Washington.

    That shores up the balance sheet long enough that Rick & Maximum Bob might just hang on ’til things improve. Or, at least they’ll be able to convince enough people of that to make it true.

  • avatar
    geeber

    John Horner: In the 1920s, GM’s board tossed out an ineffective leader at a time of great crisis for the company and put a young new guy in charge. Pierre Dupont and JP Morgan (the man, not the bank which today has his name) bought up 51% of the common stock and forced a change of leadership on the company. The old boss was founder Durant and the new boss was Sloan.

    J.P. Morgan (the man) died on March 31, 1913, so if he was buying GM stock in the 1920s, he was doing it from beyond the grave. Perhaps you mean the financial institution that bears his name?

    John Horner: Taken as an entire picture, little was achieved in busting up AT&T except for making piles of money for the Wall Street investment banks which brokered the deals to split it up and then brokered the deals to put the surviving pieces back together.

    Phone rates and long-distance rates have declined in both real dollars and as compared to income (even poor people have cell phones now). We have more options for telephone service than ever before. And please note that consumer advocates played a big part in the effort to break up AT&T.

  • avatar
    GS650G

    If they are still making craptastic cars after C11 price is not going to matter. Their costs can go down , prices can undercut Toyota, but cars are not the same as internet access or wall paint. While we may tolerate lower grade quality in some things people have grown accustomed to nice cars, reliable machines and expect decent resale value.

    Show me where a reconstituted GM would provide any of that without strings being attached

  • avatar
    dew542512

    I only have one major issue with your future looking scenario. GM would have to figure out how to make cars people actually want to buy.

    Right now their product line is oriented to an audience of seniors and red necks. One of these groups is rapidly declining (guess which one) and the other will continue to buy GM no matter what.

    So in order to get more business GM will need to actually figure out who they want to target, figure out what to make and then actually make a quality vehicle. Note the word QUALITY!

    Sorry to burst your bubble but GM is not capable of obtaining these 3 objectives unless they fire their entire senior management group. Not likely that’s going to happen with government loans.

    Rest assured that the supply of auto for red necks will be safe for a few more years.


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