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.