Plenty of pundits predict the world's largest automaker will jump down, turnaround, pick a bale of bucks and survive. We can debate this delusional supposition all day. You say new CUV's are a comin'; I say it takes two CUV’s to make the same profit as one old school SUV. You say union givebacks; I say dream on. But let’s face facts: GM is toast. Uber-investor Kirk Kerkorian knows it. GM CEO Rabid Rick Wagoner knows it (along with his in-house bankruptcy expert Jay Alix). The sooner GM throws in the towel the better.
Whether or not GM sells 51% of its GMAC finance unit, The General's NA operatives are set to burn through the company's remaining cash before it even gets close to posting a profit. Why wait? If GM files for Chapter 11 now, it can use its financial hoard to retain the people and plants it needs to become leaner, keener and more competitive. If it hangs on and files with an empty bank balance, The General faces the final curtain: dissolution and/or total annihilation under Chapter 7.
You can argue about who’s to blame for GM’s sky high labor costs and restrictive work rules (including the infamous jobs bank), but there's no question that GM needs to cut its labor costs across the board and re-structure its working practices. In bankruptcy, the United Auto Workers (UAW) couldn't frog march GM into a contract which would force the automaker to spend more than it can afford, or agree to terms that make it uncompetitive. If the union digs in its heels, the bankruptcy court can throw out the union contracts. In theory, GM could even up stakes and move its domestic operations into right-to-work states.
Each active GM worker currently carries 2.6 retired workers on their proverbial shoulders. Generous Motors' health care costs alone account for $1,525 per vehicle. Chapter 11 would allow GM to end what George F. Will called “the latest welfare state.” While the idea of cutting retired workers’ pensions and health care benefits is abhorrent to anyone who appreciates the value of keeping a promise to someone who's given you the best years of their life, common sense says it’s better to have some pie than none. Make no mistake: there is no “gentle” cure for this situation; Chapter 11 is the only way GM can shuck the beneficiary burden that’s dragging it into oblivion.
Under Chapter 11, GM can also cull its bloated dealer network. GM NA can’t sustain the enormous disparity between their decreased (and decreasing) market share and the huge number of dealers (and related internal bureaucracy) that the remaining business must support. Under US franchise law, GM can’t close up Buick, Hummer, Pontiac, Saab and Saturn stores and walk away. (Lest we forget GM is still paying costs related to Oldsmobile's demise.) Under Chapter 11, the dealer deadwood can be trimmed without razing the entire forest.
The ability to kill diseased brands is arguably the single greatest potential advantage of a GM bankruptcy. The need to feed The General’s eight US automotive brands with new[ish] products and mondo marketing dollars has been dragging GM’s design, engineering, production, sales and marketing creativity into the dumpster for decades. If a post Chapter 11 GM had three brands– Cadillac, Chevrolet and GMC– selling a limited range of products, the company would unleash all the talent locked up inside its bloated bureaucratic structure. It could finally take on its transplanted competitors with unfettered American grit, imagination and know-how.
To that end, a GM Chapter 11 would recapitalize the company’s balance sheet. Think about it: GM’s real problem isn’t debt. It’s negative working capital and crippling legacy obligations. Eliminating these problems under bankruptcy protection would allow GM to emerge as a lower cost producer (albeit with a smaller dealer footprint and sales). With lower costs and a tighter focus, GM could be what it’s supposed to be: a producer of high value vehicles for the general public– rather than an automaker that relies on steadily diminishing (if high profit) truck sales for its survival.
Rick Wagoner’s primary argument against bankruptcy: no one wants to buy a car from a bankrupt company. GM’s sales would tank beyond recovery. And yet millions of passengers have continued boarding Delta's jets since the airline filed for bankruptcy on September 14, 2005. Surely quality, price, service and warranty (which would not be affected) would remain customers’ primary concerns. That said, the enormous disruption to GM’s vast supply chain would cause massive headaches. So… best to get on with it.
Not to get all Wall Street here, but the Chinese military strategist Sun Tzu said “There is no instance of a country having benefited from prolonged warfare.” GM has been fighting the inevitable for too long. It’s time for GM to file for bankruptcy, regroup, gain a competitive advantage, and start again.
149 Comments on “General Motors Death Watch 101: Bankruptcy. Just Tzu It....”
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Well Rf I really think you are wrong on this subject… 101 deathwatch just makes for interesting reading now (crying wolf) but, I know like everyone else that if GM keeps up this trend of taking a loss every quarter, eventually you will run outa cash. I feel that GM is really trying hard to turn this around and they are on the right track as their losses this quarter were what 90 million or so but that was after one time expenses were paid out… I think GM will do all possible to avoid bankruptcy for the obvious reason (LOOK HERE GM would you buy a major expense like a car from a bankrupt company? I wouldn’t) but again interesting read!
GM has 18 Billion in liquid cash.
If GM lost the same amount (100 M) every quarter as they did the last quarter, GM would go bankrupt in the year 2052.
I have to agree whole-heartedly with your assessment here, Robert. Unfortunately I live in Michigan (though neither my wife nor I are directly related to an automotive income). Even so, with Michigan “tanked” right now (we have a recession while the rest of the nation carries on), I know it will get dramatically worse before it gets better.
We’ve been through it before. The early 1980’s. We had a saying then. “Would the last person out of Michigan please turn out the lights?” I left in 1982, to go to college as an adult after serving in the military. I left Michigan for the Air Force in a oil crisis enduced recession (1976), came back onto civvy street in Michigan in an oil crisis II recession plus jimmah cahtah induced stagflation (1980), and left college in the middle of another recession (1985).
Michigan can survive without GM, Ford and DCX if we have to. But it doesn’t have to be that way. The UAW has to actually change with the times as much as the auto companies, IF they are to survive (which I don’t think they will).
Case in point: Delphi workers upset over the bankruptcy and the potential loss of jobs, income, bennies picketing the Detroit International Auto Show in January 2006 while the executives of Toyota were coming through, with thoughts of adding plants in Michigan. What a surprise, instead, Ontario got the plant, and Toyota bought into Subaru for the benefit of their already built Indiana plant this year.
Why? It’s obvious. The Toyota executives have eyes to see with and brains to discern with. Michigan workers under the UAW are too militant and obviously are dragging down the big 3. What company in their right mind would build a plant in Michigan?!
The answer lies in the 300,000 jobs which have left Michigan – and the tens of thousands which went to other states.
Mr. Farago,
Great article. Probably the best GMDW since #1. GM does face many tough decisions including if and when to go chapter 11.
Of course, I have one gripe: Your line about Kirk Kerkorian “knowing” that GM is “toast”. If he really was sure about that, why would he still be holding on to ownership of about 6% of GM?
Keep up the good work.
Wow, 1984, how quickly you forget the massive losses GM has incurred up until this last quarter when “losses reduced”.
Which is just one way of saying “well, the patient is dying, but slower.”
I knew GM was finished over a year ago when I realized it was losing thousands per vehicle built, then speeded up the losses in it’s “Employee Sale for Everyone.”
Now, Ford has just got themselves a secured $18 billion line of credit using their plants and equipment as collateral.
Handwriting is on the wall for both GM and Ford, unless they can pull off miracles.
OK 1984, let me ask you this. Would YOU put your savings account entirely into GM or Ford stock? Neither would I. In fact, no touchee with barge-pole-eee.
Rationally thinking, GM should file for bankruptcy now since it’s inevitable.
Then again, The UAW would rationally say lets give in what we can now so we can salvage something worth saving.
Customers, as long as they would still get warranty and service, rationally shouldn’t care about bankruptcy…
Apparently, people aren’t thinking rationally. I heard last week about an inquiry that indicates this problem. Various random people were given 100 Euro’s, of which they had to give x (they themselves were to choose x) to another person. If the other person accepted this x, knowing that the other one had 100-x, both could keep the money. If the other person rejected x, both were aware they would then BOTH end up with 0.
Rationally, the 2nd person would accept any offer from the 1st one, since he or she did nothing to earn money and would still get money, and would otherwise get nothing. Even if the offer was 0, he or she would be indifferent.
However, significantly many times, the 2nd person would reject what in their opinion was an “unfair” offer, so that both would have 0.
Without in anyway justifying the flaws of GM’s management, I guess a lot of the irrational 2nd persons are with the UAW…
Robert,
I second the motion. This is a great article. We’ve seen that GM can create great stuff when it is brand focused (Z06, Silverado/Sierra) and so-so when not (the half-dozen products riding on the Epsilion platform).
One of the reasons Toyota does well is that it only has to develop and sell a few brands.
I agree, bankruptcy would not be a bad choice. Many companies have filed for Chapter 11 and come out the other side for the better. Although, I am wondering how a company that operates in so many nations can easily do that (can GM just go bankrupt in NA?).
Any suggestions?
i think the unions are the biggest problems. they HAVE to build cars that they wont sell…Buick minivan?! i suggest they drop the union by any means necessary. THEN they can build cars based on demand. i wouldn’t drop brands but combined them at the dealer level. rather then having a Buick dealer, a GMC dealer, a saab dealer and a hummer dealer…make a GM dealer. sell a buick or two. maybe a saab. an H2 and H3. If each brand didnt have its own full range of vehicles there would be no need for individual dealers.
Looking at the just-unembargoed interior pictures of the Buick Enclave, looks like the bean counters have been at it again. Interior plastics appear identical to its Lamba platform-mates. Leather padded dash and brushed aluminum instrument faces? Hah, leave that as an opportunity for the aftermarket.
Thanks to high fixed costs, the bean counters have not just Ford, but all the 2.5 by the nads. And looking at the recent news, so do the oil companies, subtly cutting supply to increase profits. All it takes is a few bad quarters + Hugo Chavez (or your demagogue of choice) and that $18 billion is toast.
Good to see Sun Tzu make it into an American-based automotive article. His “Art of Warfare” is required reading for many future engineers and managers at Asian Universities. His lessons on competition are as valuable as Dr. Deming’s contributions to manufacturing.
Great read as always! GM needs some major help restructuring and since a government bailout seems to be out of the question, Chapter 11 is the next best “help” they can buy.
while GM might have 18 billion in cash, I’m lead to believe Toyota has 100 billion+. Anyway the suggestion of Chevrolet/Cadillac/GMC brands i thought should have these current vehicles in the line up.
Chevrolet
Opel Corsa
Cobalt/HHR
Saturn Sky
Opel Vectra
Lucerne (possibly- for the, how we put this, the Old School)
Holden Commodore
Corvette
Cadilac CTS, STS, DHS. If you want a sports car there a corvette and the crossovers, suvs etc all go under the GMC brand.
This is the first decent GM deathwatch column in ages. Write about what is possible in the real world and bankruptcy just may be the solution for most of GM’s woes. However, using the airlines as an example about how bankruptcy does not affect buying decisions is absurd. A buying decision in the hundreds of dollars for a service that is concluded within minutes to hours does not compare to a decision in the tens of thousands that one must live with for a decade and use multiple times per day. Comparable to riding in a seat on a bankrupt airline is riding in a seat from a bankrupt Hertz or Enterprise rent-a-car. Bankruptcy reorganization may save GM. It may also end their North American car production and sales for all time. Be realistic.
IANAL but I am lucky enough to work for a company that has gone through 2 bankruptcies in the last 5 years. First time the shareholders were given a reduced number of shares, second time they got nothing. I wonder how GM would work that part of it.
I believe that it would be better for GM to go this route sooner than later, but the problem is there are a lot of large groups who will feel they are getting screwed by GM and will fight them tooth and nail to hold on to what they have now. GM will have to convince a court that it’s the only way for them, and I don’t think they are sick enough yet to pull it off. I think GM will have to be in a position where they can show that they have no other options, they are going to have to close their doors and soon if the court doesn’t OK bankruptcy. Don’t think they are there yet, to many billions still available to them.
Glenn A,
The 18 B is what they have now… not before the losses.
I’m sorry… did I state something that was not true? If GM makes even half the improvement they did from Q2 to Q3 for Q4 they would be in the red by a huge margin.
rjsasko:
Point taken, but not proven. I would like to see some hard data on whether or not a traditional GM buyer would abandon a bankrupt GM (after all, they’re pretty much down to the hard core by now).
Obviously, they’d lose some share, maybe even a lot. But the most important determining factor would be… PR. When Chrysler hit the buffers, Lee Iaccoca’s ability to reassure buyers was literally priceless.
There is no way on God’s green earth Rabid Rick would match Lee’s hand-holding abilities. But of course, when GM files, he’ll be gone in double-quick time, floating gently into the history books on his golden, bankruptcy proof parachute.
The sideline quarterbacks are always winners for a reason. You are not being sensible in any way. Why would Joe Sixpack buy a car- His second largest lifetime purchase- when he has ANY doubt about the makers’ ability to warranty and service his car. BK would be suicide. Analogies to the airlines are comparing apples….etc. And how do you figure that the dealer network is a negative? Even if the point in Marmarth, Montana is only selling 2 units a month, the related cost per unit is the same, yes? Remember- Chrysler was in default, not BK.
tulsa_97sr5: In the new year, new accounting rules will put GM into negative equity (where they can't take out any more unsecured loans). It's the financial and psychological Rubicon that they can cross into Chapter 11. BTW: Harley-Davidson has a larger market cap than GM.
olddavid: Warranty payments would not be affected by a GM bankruptcy. The availability of parts– replacement and production– would be the single largest concern for GM in Chapter 11. But nothing is impossible.
Robert:
I agree with you. Mostly. Delaying the obvious need for the nuclear solution reminds me of the story of the little boy who brought his injured puppy into the vet. The vet examines the dog, and tells the little boy, “Your puppy is sick. We can make him better, but to do it, we’re going to have to cut off his tail.” The little boy thought for a bit, then asked, “can you cut it off a little bit at a time, so it won’t hurt so much?”
There’s no way to avoid pain here, and the sooner it’s over, the better for GM, the workers, the shareholders, and the country. What I’m worried about more than anything is that what’s good for GM (in the long-term) may be bad for American (in the here and now). With all that’s going on in the world, I can’t see much good coming from the huge hit to the economy that a GM bankruptcy would bring.
Nevertheless, my only reservation about your strategy is your choice of surviving brands. Obviously Chevy survives. Caddy seems to be the healthiest of their brands right now – if they can get past the era of Bling. After that…I dunno. I see no reason at all to keep GMC around. It’s only raison d’être is to allow the non-Chevy dealer network to have a way to sell trucks. So what should survive?
Frankly, I think you could have a few brands, but with a drastically reduced number of nameplates/models. If Chevy, for instance, needs to be a “full-line” brand, then it should have only an econobox, a sedan, a minvan, an SUV, a CUV and a couple of pickups. And of course, the Corvette. That’s it. No 3 or 4 different SUVs. No array of virtually-identical products. Just a very few well-made vehicles with gotta-have-em looks. Caddy is even easier. A sedan, a coupe, and an SUV. Maybe a CUV. That’s it.
Spin off Hummer. It might survive. Sell off Saab, if you can. Kill Buick and Pontiac. Make Saturn your “green” brand, so you can focus Chevy on “family values” and Caddy on “luxury.” I don’t know enough about GM’s overseas ops to know if those brands are worth saving, but I suspect they are.
So to recap:
SURVIVORS
Chevy - the foundation of the company. Family values.
Cadillac - luxury and quality
Saturn - e-85, diesel, hybrid, hydrogen, solar – you name it.
LOSERS
Hummer - sink or swim on it’s own
Saab - find a sucker for this Saab story
Buick - RIP
GMC - why bother?
Let the bloodletting begin.
I’m going to go with RF on this one.
To those who say no one would purchase a vehicle from a GM undergoing chapter 11, I say there are already many people who treat GM that way.
I know that if my next vehicle is a domestic, it won’t likely be because it was the best vehicle, but because they were able to give me the best deal, because they were desperate. That’s been their business model for pretty much the last 3 years.
Why would that change if they were under chapter 11?
Some thoughts, Why did Kerkorian only sell 10% of GM at one time? If he sold it all, he would get $3.00 a share by the time the last million shares went through the sell brokers. He has to filter his way out slowly, it does not mean he has any confidence in gm just the vagaries of selling huge blocks of one companies shares. As to gm’s $1500 a car legacy costs, if gm did everything else right and say toyota did everything mediocre (especially since they can now afford to coast), on a $20,000 car that is still about 7 1/2% of profits, more than gm every makes. It’s just too much to spot the competitors with the low legacy costs. As to the argument, what about when toyota has high legacy costs? Gm (and ford) can’t last that long. And remember toyota has no union, whenever the costs start to spiral on them they can change the work and benefit rules unilaterally. With no union all of the foreign transplants (except chrysler) can keep their advantages forever.
In my opinion, a GM bankruptcy would bring the inevitable comparisons to the Rover fiasco in the UK/Europe. Lot’s of people got screwed by this. What the hell do you do with a nearly new Rover when it’s supposed to have warranty-covered work? Apparently in the UK, the dealer and/or financing organization may be responsible for covering warranty work. But come on. GM’s image would be [that much further] damaged by this.
I’m also in agreement with the others who state that you can’t compare airline bankruptcy to GM’s. I had tickets on Delta when they declared bankruptcy, and was slightly worried. On leg was on Delta, with Delta-issued tickets, the other was a code-share flight on KLM or Air France. I was slightly worried about losing at least one leg if Delta just stopped flying. But as stated, we were talking about one-half of a $700 ticket that would be ancient history once my flight (3 weeks later) was over. Not if the company would be around to fix my drivetrain in 5 years. Now, knowing that Delta seems to be working, I probably wouldn’t hesitate to buy another ticket, assuming it was the cheapest, on Delta.
And therein lies the crutch. If GM starts selling Logan-esque cars, maybe they’ll be able to pull it out. Beyond this, the hard-core GMites would probably stick by the company, especially for trucks & ‘Vettes. But those new Chrysler, Fords, and even Toyotas, Hondas, et.al, would be looking pretty damn good to many many people. Why take the chance, when you have the choice.
Very good article indeed, as others have mentioned.
One point brought up in the Comments is that GM are down to their hardcore supporters now.
I wonder.
The father of one of my workmates dropped by recently, and parked his Silverado outside. He mentioned that the Toyota Tundras are delayed coming to Canada until Spring.
This perked my ears up. On further questioning, he said he wanted to get one of these new Toyotas. He’s had Chevy pickups for decades, and had no particular problems with them at all, and none with his present 4 year old vehicle. Yet he wants a change.
He couldn’t care less about the automotive world, has no beefs with GM, has no idea they’re in trouble, and he’s going to get a different brand just because he wants to.
Things like this are going to spell the end of GM, as I’ve never met a soul lusting after a GM pickup since about 1962. When Mr. Average changes his buying habits. GM is really toast, if it’s not already.
salokj
Because they don’t have a choice. They just think they do. Or… perhaps not.
“GM could be what it’s supposed to be: a producer of high value cars for the general public– rather than a provider of a steadily diminishing number of high profit trucks.”
So if reliance on trucks is GMs major problem, and cars are the answer, how does retaining GMC help? Chevrolet dealers sold 3xs as many trucks as their GMC counterparts, despite the loss of about 2000 Chevy points while GM added a significant number of GMC dealers over the last 25 years. Obviously Chevy should retain the truck retailing in any new GM.
And really folks, the best DW ever? They are all pretty much the same and this one is no exception. Just more of the blah, blah, blah that RF has spouted since job one.
*Yawn* This Deathwatch series has gotten so very tiring. Anybody can get up on the Cyber-soapbox and pontificate. When you have some real news, let me know.
ucanthandlethetruth
Thanks for the heads-up. I wasn't clear. I've amended the text to read “GM could be what it’s supposed to be: a producer of high value vehicles for the general public– rather than an automaker that relies on steadily diminishing (if high profit) truck sales for its survival."
I recall some years ago sitting around a pool in Naples, Florida chatting with a retired GM couple.
They were absolutely incensed that they would have to start paying co-pays on their scrips and medical care. It could cost them (gasp…) $100 a month more!
GM (along with Ford) is the last great welfare organization outside of Europe. Remember, it’s always easier not to give in the first place, than to give and take away.
Also, GM will need a midlux division too, so make that Cadillac, Chevy, Buick and GMC as the new GM divisions
doom and gloom. geeze. i prefer car reviews.
RF:
Because they don’t have a choice. They just think they do. Or… perhaps not.
Most people do. Right, the “If you some-how show interest in our vehicles we’ll finance you” does kind of mean that some people don’t have a choice, but if you’re in the market for a normal, pedestrian car to get you from point A to point B and you can either hope the manufacturer may be in business if (when) you have problems or you can buy something from a manufacturer that will probably not declare bankruptcy in the next 5 years.
Of course, I’m not in middle America, and I don’t want to assume what people with strong brand alliances will/won’t do.
jazbo123
Three is the magic number. Three vehicles for three brands. Anything more is an invitation to repeat the mistakes of the past.
Three is the magic number. Three vehicles for three brands. Anything more is an invitation to repeat the mistakes of the past.
RF, Upon further reflection, I might “go ahead and agree with you here”. After all, another brand means more marketing and dealer networks.
RF,
So Toyota can thrive with 16 vehicles under the Toyota badge, but GM can only survive with three each Chevrolets, Caddys and GMCs?
RF, I agree with most of your argument, but bankruptcy? Gulp. Maybe you’re right, but I wish it didn’t come to that. Seems akin to opening Pandora’s box.
That said, your throwing the skunk out on the table might encourage key stakeholders to look at the situation more rationally.
Replying to 1984:
GM has 18 Billion in liquid cash.
If GM lost the same amount (100 M) every quarter as they did the last quarter, GM would go bankrupt in the year 2052.
-100M for 1 quarter isn’t really a good indicator. For a company at this size, GM will most likely earn/lose much more than 100M per quarter. Just look at Ford, -5B for the 3rd quarter and another -5B for the 4th.
Replying to ucanthandlethetruth:
So Toyota can thrive with 16 vehicles under the Toyota badge, but GM can only survive with three each Chevrolets, Caddys and GMCs?
Look at where they started. There is a thing called momentum. Toyota never add a new model when losing money (as if they ever did). GM can have 43413124 models as they want, only if they make money. Since they don’t, they had better trim the lineup down.
Reducing the brands to Cadillac, Chevrolet, and GMC is still too many. Too much redundancy between Chevy and GMC trucks. There isn’t anything in the GMC line that doesn’t also wear a bowtie, so I say they should kill off the GMC plate too.
Let us put it simply, GM has worse brand equity than pretty much any of the automakers out there. What educated consumer would ever buy a Chevrolet car over a Hyundai?
GM should understand that they are starting over in America. Their brands are a liability not a strength. They should approach the market as if they are Yugo trying to make decent cars for once. I would argue that the Saturn name is not too damaged, but maybe draining good product from Chevrolet.
Bankruptcy would be just the beginning. US franchise laws screw them left and right as do the unions. It would actually be a huge deal if GM and Ford could push to have those franchise laws eliminated and they could start selling direct.
Personally I don’t really think a GM bankruptcy is going to affect many average Joes’ opinions about GM, for one reason: ignorance of the situation. I’ve been reading these Death Watch articles since the first one, and there is a huge abundance of information, news, and data that I’ve never heard the slightest peep about from the mass media. A friend of mine was looking over my shoulder the other day when I was reading an article about Ford’s new secured credit line and his response to the news was something along the lines of, “Who gives a shit?” And this is a guy who is generally considered among his peers as being a car guy….he had no idea whatsoever that Ford is in a pickle. Similarly, when one of my friends goes car shopping I try to explain to them why they might want to avoid GM vehicles for the time being, using information I’ve gathered from Mr. Farago’s reports, and the general consensus is, “What the hell are you talking about?”
Fact of the matter is, your typical car buyer isn’t the type of person to delve into the matter and do research. Most people don’t know anything about GM’s situation and don’t care to. There was a small article from Reuter’s on the Yahoo! main page a few days back about Cap’n Kirk selling some of his shares of GM….didn’t say anything about why he would do that, though. I doubt anybody gave it much thought after mindlessly skimming through the boring and more-or-less irrelevant article.
I think that if GM reaches the promises land of bankruptcy, people won’t know enough about what’s going on to care and, if GM does indeed pull itself out of Chapter 11 to become a successful, quality carmaker, most people will forget about what happened anyway. It’s all about playing the mass media.
I recall reading in the WSJ (or was it NYT?) about Fiat’s recent turnaround. Their CEO noted that direct labor costs (in unionized Europe) were only about 6-7 percent of the cost of the car. If such a figure holds true for the US, then union scale wages hardly seem to be the problem for GM. Does anyone know? Incidentally, the existence of high wage scales for all the unionized auto labor is the reason why non-union auto plants pay well. This is a well established effect – union contracts have the effect of increasing wages and benefits for non-union workers in the same industry.
The big problems of course are pension and health care costs, which were incurred over decades when making such deals was hardly unreasonable at the time.
How about this for a radical solution: nationalize health care for the auto industry (or at least nationalize catastrophic coverage), let them dump their pensions on the Pension Benefit Guaranty Corporation, give the domestic makers a little breathing room, and see if they can survive. If auto manufacturing is really that important to the overall health of the US economy (and it is, IMHO), why not help them with their biggest burdens?
If GM lost the same amount (100 M) every quarter as they did the last quarter, GM would go bankrupt in the year 2052.
1984: there is a big difference between accounting profits and cash flow. A company can report a $100 M loss even though it actually depleted itself of $3 billion in cash, for a variety of accounting reasons. What matters for bankruptcy is the burn rate of cash — even a profitiable company could find itself having to declare bankruptcy — and GM has been burning the cash at an alarming rate.
Also, they won’t wait til cash is literally zero to declare bankruptcy. GM would likely become non-functioning and face enormous financing issues even with a few billion still on hand.
akatsuki:
What educated consumer would ever buy a Chevrolet car over a Hyundai?
I know quite a few, using that example. Hyundai is still on its uphill battle for most of America’s top-of-mind awareness for decent cars. Chevy cars, while mostly bland, are at least a recognizable brand. I’d put money on 80% of America choosing them over “that Korean cheapo carmaker” (the mental associations with Kia and, ironically, Daewoo that GM doesn’t have). On one hand, Alabama skews domestic…on the other hand, they build the Sonata and Santa Fe here, so there’s some hometown pride in it, too.
Re Saturn: No matter how good the Aura is, I don’t even know what Saturn is anymore. Without cars built in Spring Hill, Tennessee, with plastic body panels, what else is going for them? I can easily see the prevailing thought becoming “And they want close to $30k for a sedan now?”
Kevin,
A company can report a $100 M loss even though it actually depleted itself of $3 billion in cash, for a variety of accounting reasons.
That is an illegal practice. You and I can make all the accusations you want but it does not make it true or false.
bfg9k wrote: “How about this for a radical solution: nationalize health care for the auto industry (or at least nationalize catastrophic coverage), let them dump their pensions on the Pension Benefit Guaranty Corporation, give the domestic makers a little breathing room, and see if they can survive. If auto manufacturing is really that important to the overall health of the US economy (and it is, IMHO), why not help them with their biggest burdens?”
Why should it be socialism / bailout for GM, Ford and 1/2 German DCX now, when 30-60 years ago, these three companies were burying their competition without a thought?
The “big 3″ cried foul and demanded a free market place at the same time that they buried competition such as Hudson, Packard, Studebaker, Crosley, Checker, Kaiser, Frazer, Willys, Tucker, Davis and others (all post-WWII) and absorbed AMC and Jeep?
So, why the hell should these same companies, now that the shoe is on the other foot, be given MASSIVE tax-payer funded handouts for doing a crap job of making cars and keeping customers over the past 30 years?
Unfortunately with the clowns in Washington DC (past, current and future), your assessment is probably going to be reality. Wow, will we end up paying. And paying. And paying. And paying.
1984: Uhm, no it’s not. It’s actually fairly common practice for a variety of reasons.
in reply to akatsuki’s comment;
“It would actually be a huge deal if GM and Ford could push to have those franchise laws eliminated and they could start selling direct.”
The franchise system does not prevent manufacturers from selling to the public.
Yet with all the new entries in the US over the last 20 years not one has decided to take it direct. I think that’s because even if they could afford the cost (and risk) to build new buildings and run the stores themselves, they know that they just can’t do it as well as the dealer who knows his market, probably lives there and is active in and supportive of his community. And who has his own two-balls at risk in his stores.
For example, Ford tried to start “Ford Collections” in a few cities around the country in the 90’s (including my town, Rochester, NY). They bought most of the Ford stores (including several that were well-run and very profitable), closed a few and tried to serve the market with the rest. The result was a large, rapid loss of market share (much more than the rest of the country) and the loss of millions of dollars. After a few years, they sold what stores they could back to local dealers and closed the rest. Ford in my market has never recovered.
Manufacturers should do what they do best; build vehicles, and dealers do what they do best; sell them. And since the dealers themselves make the investment and pay for their own marketing, the cost to deal with dealers (even if there are more than is needed) is minimal.
The market always chooses, and those dealers that serve their customers well will survive, while those that don’t will not.
How about this for a radical solution: nationalize health care for the auto industry (or at least nationalize catastrophic coverage), let them dump their pensions on the Pension Benefit Guaranty Corporation, give the domestic makers a little breathing room, and see if they can survive. If auto manufacturing is really that important to the overall health of the US economy (and it is, IMHO), why not help them with their biggest burdens?
So, bfg9k, your proposal is to make all Americans pay for the domestic automakers mistakes rather than just the Americans who buy their cars? Instead of a GM buyer paying that extra $1500 vehicle, we all chip in and pay it for him/her?
I don’t see how auto manufacturing could be that important to our economy that we should pay to keep it afloat. Let these companies go under, take the hit to our economy, and move on. Why should these companies be exempt from market forces?
It will take years worth of 1B+ quarter losses to drive GM bankrupsy. Conspiracy theories aside; at the current rate of improvement statistically it’s unlikely. I think everyone underestimates the massive size of this corporation and the fact that they have survived much worse economic turmoil during its 100+ year history.
I know it’s popular and fun to hate on the “big bad corporation” but at the same time it’s completely futile.
virgule,
Does it really matter anyway? You and I will never know one way or another.
When you board a Delta flight, you trust the bankrupt company to stay alive for at least the duration of the flight. You also know that the competition offers exactly the same service at the same price. And you know the FAA is enforcing the safety rules, so bankruptcy does not mean your airplane has been repaired with duct tape, hot glue and cardboard plated vinyl. It also costs you less than a month of income.
When you buy a car, you trust the conpany that built it to stay alive for as long as you own it, to build and distribut parts and have a dealer network that can service it. And even longer than that since there is a (slight) chance the car has some value when you want to ditch it. Admitedly, resale value is not a strong point of GM vehicles, and that’s wording it kindly.
While the entire GM operation has been run by bean counters for a while, chap11 will bring the judge mandated Super-Bean-Counters. This will be the end of any chance of creativity or improvement forever. They will look at every penny spent. And if a corner can be cut, you can be sure it will. Twice. And then it will be looked at again, and cut again. Vinyl plated paper, made to look like cardboard looking brushed nickel satin finish interior.
And unlike the airline industry, competitors have different (dare I say better?) products. GM’s lineup does not sell well as it is, does not compare well to its competition, chap11 will scare the last bunch of faithfull to non-bankrupt companies.
1984
You’re not crunching the numbers properly.
First, GM needs a $10b pad just for cash flow to stay in business. So you need to simply scrub that off your calculations.
Second, all the obligations that GM has incurred in their downsizing program are out there… somewhere… waiting to take their toll on GM’s bottom line.
For example, the company is about to make another $1b payment into a health care VEBA, as part of the UAW “giveback.” The Delphi situation will require at least a few hundred million per year to “resolve” (not including all the income lost from the contracts that Delphi insists that it will dump.) Plant closures, buyouts, loan payments, bad loan write-offs– the list is as long and scary.
Again, the biggest issue is cash burn. GM NA ain’t making any money. If they score $8.5b from the GMAC sale, they’ll muddle on for a bit longer (a year?) before the cash crunch comes. But if you think they’ve got another five years left to fart around– I mean, turnaround, uh, no.
As for the argument that GM is simply too big too fail, well, empires rise and fall. History is littered with examples of enormous enterprises with glorious pasts that sank quickly and decisively when the conditions that once suported them changed. Which is exactly how it should be.