GM and Chrysler both must go bankrupt. Only then, out of the ashes, can a new company emerge, taking control of the best assets of both companies, with a new management team and a clean balance sheet. All financed by private equity and bank debt, not the government, and free from the political machinations that would result. It’s pure business—of making and selling vehicles here in North America and in selected markets around the world. It’s past time for the old empire of GM to make room for a new vision of the future based on market realities.
Before we examine the future, it’s worth repeating: anyway you slice and dice General Motors (and its sister sibling Chrysler), there’s not a chance to resuscitate the company in its present form. Trying to do this out of bankruptcy makes no sense at all, even with various parties making accommodations of trading debt for equity, wage/benefit cuts, or simply making “shared sacrifices.” In the end, the balance sheet still has too much debt, brands and dealers. Not mention the fact that the existing management team (and BoD) has proven itself incompetent after years of failing to address its structural problems in a meaningful way.
Extricating Chrysler and GM from this mess will require the “mother of all private equity” equity deals, the biggest one yet, and likely one of the most profitable when the company goes public. And that’s the New General Motors Corporation in 2012. Here’s how it works.
From the bankruptcy, the judge allows the sale (via Section 363 of the Bankruptcy Code) of assets to raise proceeds for the debtor. The beauty of the asset sale comes from the ability to cherry pick the best assets. GM has a lot of assets that are worth lots of money once they’re free of the associated liabilities. So a new buyer gets to assemble a new GM out of the ashes of the old.
The way I see it, a new company would acquire Chevrolet and Cadillac (and some models from its other brands), associated assembly plants, its huge trove of patents and marques, and some of its foreign operations (like Canada, Mexico, Latin America and Eastern Europe). In North America, the new company would not acquire any franchise agreements; instead it would sign “operating agreements” with dealers for the interim as it figures out the right-sizing of its ultimate distribution network. And best of all, it would have a new management team properly motivated to make decisions that maximize value and profits unburdened by any legacies.
The New GM would not take the union contracts with it. Those were signed with the old companies. Many hourly workers would have the choice to gain employment with the New GM, at parity labor wages and benefits with the transplants. Work rules would also be re-written to mirror those of Honda and Toyota, not echoing Detroit’s featherbedding past. Better to have a good paying job than no job at all.
As for the old GM and Chrysler, the debtors wind down through a process of selling the remaining assets to others and dividing up the proceeds among creditors as directed by the Court. For example, the Chinese JVs should be sold back to their partners (SAIC and Wuling) for cash and the rights to use certain marques within certain geographies (like Buick only in China). The remainder of the foreign assets, like Opel, Vauxhall, and Holden, can be sold to others (like foreign governments?) or simply shut down.
As for suppliers, many will fail. But those critical for the support of the new GM will have their pre-petition claims accelerated and paid. The Court can determine that this will be necessary to enhance and preserve the value of the assets being sold to the New GM; without key suppliers, there would be nothing to sell (i.e., if the new company can’t get parts).
For private equity investors and their lenders, the new GM would be acquired at the bottom, not the top, of the auto market. My guess is that these assets are worth at least $20 billion. That’s cash that goes to satisfy the liabilities of the old GM. Operating cash for the New GM would be provided by commercial lenders and debt offerings—all untainted by the old GM.
So imagine a New GM free from its past and run by private equity investors, not the government. Two strong brands—Chevrolet and Cadillac and a minor brand of Jeep—with the best vehicles and dealers from the old GM. Perhaps it would have a US market share of 15 percent, making it smaller than Toyota but similar to Ford. And when the car market comes back (and it will), the New GM can be a successful and vibrant company. That’s what’s called a real investment.
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Makes sense. Call the new company simply Chevrolet and leave the GM name with the baggage. Chevrolet can have a Cadillac Division as the upscale version, just like Toyota has Lexus. Stop the silliness of trying to make Cadillac a world brand. It isn’t and will not be.
The name General Motors has negative net brand equity … no matter how many little blue emblems they slap on things.
I am 100% against GM going Chapter 11 – restructuring Bankruptcy.
NO ONE would want to buy a car from a company with Bankruptcy in their name.
Circuit City went Chapter 11 – see where they are now? LIQUIDATED !!!!
better idea…replace Wagoner and implement Return to Greatness.
Call it Chevrolet Motors LLC with Cadillac Division and (if Chrysler is included) Jeep Division.
There is a historical precident; when GM’s founder, William C. Durant, lost control of GM, he went out and founded Chevrolet Motor Company, made it a success, and wrangled his way back into control of GM by hook and by crook, then merged Chevrolet into GM.
Most people don’t realize this. Of course, it was some 8 or so decades ago…
I am 100% against GM going Chapter 11 – restructuring Bankruptcy.
NO ONE would want to buy a car from a company with Bankruptcy in their name.
Circuit City went Chapter 11 – see where they are now? LIQUIDATED !!!!
What about Delta airlines? They went Chap 11 and came out OK. Surely they have more in common with GM than an electronics retailer.
Circuit City went Chapter 11 – see where they are now? LIQUIDATED !!!!
A lot of that has to do with who they are. Circuit City was worth nothing as an operating company: it had no raison d’etre, nothing that gave it an advantage over competitors. What it did have were assets worth something for the vultures to pick at. C7 was a natural choice for something worth more piecemeal than whole.
GM is not quite the same: there’s certainly enough room for them to operate as a successful, albeit more sanely structured, company. You could make a case for restarting them as a functioning business.**
I don’t think they should necessarily go into C11 until the economy is more stable as the loss of confidence would be problematic.*** If and when things turn around, though, I think the question of “Why are funding you guys” should be raised.
** which you can’t do for, say, Chrysler
*** and again, we could probably afford to lose Chrysler for the same reason.
Circuit City got liquidated because they had morons for management who picked bad locations, fired anyone with experience, and still charged more than Best Buy on most things.
That really doesn’t give much hope for GM, but it doesn’t necessarily follow that Ch 11 means death.
The big issue for me is the ineffectual leadership at GM. They need not just a new CEO but new leadership all around. I don’t know if that will happen in the event of a bankruptcy or if some of these criminals will retain their jobs, but it certainly won’t happen outside of a bankruptcy.
A bankrupt retailer who makes nothing is a business completely different than a MFGR who makes millions of cars a year. Circuit City analogy = fail.
TVC15….can’t compare an auto bankruptcy to an airline. Potential customers are only buying travel – not the underlying asset (e.g. most people wouldn’t think twice about a cab ride in a Crown Vic if Ford went under). Buying the actual car is another story. And don’t believe for one minute that a government backed warranty will keep customers from running. Anyone that says they would buy a car from a bankrupt automaker is lying.
If GM goes Chapter 11, people will stop buying their cars. End of story.
GM sales are certainly down greatly (40-50%) now, but nothing like what would happen in Chapter 11. GM would still have huge fixed costs, but income would virtually cease.
Within 1 quarter of declaring Chapter 11, GM would be in Chapter 7. There would be nothing left.
What product did Delta airlines mfg? Oh that’s right, they’re an expensive service industry. Circuit City didn’t mfg anything either, but they learned the lesson of hiring total incompetence.
There’s another unforeseen side to one or more OEM’s in bankruptcy, higher prices. Anybody checked out Best Buys best sale prices lately? They are about 10% higher without the direct competition for CC. But, the industry is about 3x over capacity, which means nobody is going to make money until that capacity is dealt with.
Re: The cicuit City analogy:
Circuit City did not have a CAR/David Cole equivalent who could create an awesome argument that if they went under, all ~32k CC employees, plus all the nearby strip mall retail/service businesses from Taco Bell, Pier One, Jumbo Buffet, Borders, Kohls, Dress Barn, the wireless store, the smoke shop, the shady cash-advance place, the hair/nail salon, and all of their suppliers would suddenly go under and then Best Buy would go under and then cats and dogs would start living together and ohmygod we would be thrust into a depression without any strip malls……
Lumbergh21 touches on the problem with GM’s management culture.
If you look at past, unsuccessful bankruptcies a trend emerges – while liabilities are shed, the managers and culture stays on – and proceeds to make the same mistakes all over again.
Yes, Rick Wagoner, Fritz What’s his name and a couple of others will be sent to business Guantanamo but most other mid to upper level managers will stay on.
Fewer managers yes, but not different or new managers.
Simply put, Bankruptcy is not the same as reinventing the company – and that’s the long term problem.
At least one survey (morgan stanley?) asked the “buy from BK maker” question intelligently.
They did not included the numbers of those that aren’t looking at domestics anyway and included the concept of the Gov supporting the warrenty.
IIRC (hey, it’s been a few months) something like 2/3rds said they would consider these cars.
C11 is the only viable option.
Like the idea of going with Chevrolet as the corporate name. GM is poison as a brand.
Bunter
Assuming Ken’s approach is implemented, I would be particularly worried about the competence of any private equity investors to run a car company. Cerberus thought they could make it work and now we see where that got them.
For this to work, there would have be massive blue- and white-collar job cuts. And without thousands of dollars in incentives to simply leave.
Sorry, I can’t see this happening, even though it makes sense.
So imagine a New GM – free from its past and run by private equity investors
You’ve just described Cerberus and Chrysler.
The downside to private equity is that the return expectations are very high. Shareholders have no problem with a publicly traded manufacturer with a modest, steady return. Private equity investors want double digit returns, and they typically want to exit within a five year horizon.
One reason that Cerberus is reaching for the government till while contributing nothing is because neither the investors nor their fearless leader — the Cerberus parent — want to contribute anything beyond their original investment. With high return expectations, the last thing you’d want to do is to toss in more money, that’s not why you got into the game in the first place. You’re seeing the downsides of the private equity model in play here.
That, and there just aren’t that many suitable prospects for running a car company. It’s a specialized business with few good candidates.
If I was in the federal government, I’d be trying to piece together a consortium to buy it. Magna, VW, Fiat, Renault-Nissan might be suitable candidates, but whoever they are, the list will be short and probably dominated or comprised exclusively of foreigners. That’s probably as it should be.
GM sales are certainly down greatly (40-50%) now, but nothing like what would happen in Chapter 11. GM would still have huge fixed costs, but income would virtually cease.
What data do we have that will back that up, besides OEM-funded studies designed to come up with that answer? Do we really believe consumers are that sensitive to semantics (bankruptcy vs. on govt life-support)?
Actually the best time to do Ch. 11 is in a down market, because any volume you lose is less than in an up market. (Yes I understand that lost share may never come back) Sure, some volume would be lost, but IMO it is nowhere near the 80% numbers you see quoted. As has been stated here before, roughly half the population ALREADY doesn’t consider domestic vehicles.
I would love to see an honest study on this without the leading questions.
Elias and Horner are making sense here.
First of all, GM is a car brand only in the heads of management and in the media. Let the name GM die. GM is just a holding company, and a lousy one at that.
I’ve never bought a GM car in my life. I have had Pontiac, Saab, Opel – but didn’t think of them as GM cars. In fact, I cursed GM, while I enjoyed the ride.
GM management has been on a mission to turn GM into a car brand, and they have failed, so let the failure die.
The individual brands in the GM portfolio is the real asset here.
And yes, Chevrolet – with Cadillac as a luxury satellite makes sense. By the time the new company is operative, GM will be dead in peoples’ minds, and the attention will be on the comeback of the phoenix brands.
Re: Flashpoint:
Interesting that you bring up Circuit City. Did you know that Circuit City had more full time employees in the US than Chrysler does. Chrysler has only 36,000, including both UAW and white collar.
What will sell cars is certainty. Right now this political charade where GM and Chrysler beg for money every couple of months is creating nothing but uncertainty.
The best way to sell GMs would be for the government to say “Yes, we are going to put GM through Chapter 11, because there is no other way to make GM viable, but we will backstop the Chapter 11, and a company called GM will continue to exist. Your warranties will be guaranteed by the government.”
That would bring back both the buyers that are boycotting GM because of bailout disgust, and the buyers that are staying away or buying foreign* because of the month-to-month uncertainty about GMs survival.
If you really care about GM maybe you could buy one, instead of just boring us with the Mercedes you own (lease) or are considering buying (leasing).
Also, consider stimulating the economy by buying a new keyboard, “Caps Lock” seems to be broken on yours.
*Made in the US south, with parts from US suppliers, and possibly designed in the US, by a company whose stock is publicly traded in the US.
Is the psychological impact of GM going back and begging for cash from the government every 3 months any less than an official declaration of bankruptcy? Anybody who cares about such things knows GM is bankrupt NOW.
I think this plan is very well thought out.
On the other hand, I would personally never buy a Cadillac or a Chevrolet. But that is what America is supposed to be all about, freedom of choice.
Re Pch101:
I don’t really have that much of a problem with Cerberus….. They’ve run out of time and money, but their original business plan is sound. A lot better then GM or Ford’s thats for sure.
Look at it this way.
When you buy a Dell Laptop does it make a difference that in 2007 the contract laptop factory was in China, in 2008 its Tawain, and 2009 Malaysia? No, the models look and perform the same – with the typical annual technical improvements.
Dell defines the requirements for the brand along with manufacturing, quality, schedule requirements, etc. Marketing, Sales and Service are exclusively handled by Dell.
This is exactly what Cerberus wanted to do. I need 300K small cars that look like (fill in blank) and cost (fill in other blank) who can make this for me? Now, I need 500K Pickups, 600K minivans, and of course 15 PT Cruisers. And so on, and so on……
Contract manufacturing is a fact of life in the automotive industry (Magna Steyr, Valmet for example). Cerberus just wanted to take it to the next level.
Flashpoint:
That’s why you don’t let the GM name live on. Call it Chevrolet and immediately change all advertising to squarely hit two themes:
1. We’re still here with the same neighbors and friends you’ve always dealt with.
2. Your warranty is still good, because we’re staying right where we are.
Joe Public does not understand C11. Lights stay on, business keeps running. The advertising takes care of this education.
Circuit City actually went C-7 because they couldn’t find a company willing to provide operating funds while they worked through C-11 restructuring. Uncle Sugar will take care of that.
Don’t dealerships fight tooth and nail against warranty claims anyway? What difference would this be from not having a warranty at all?
Just my sarcastic 2 cents..
Well you had me till you said “Only then, out of the ashes, can a new company emerge, taking control of the best assets of both companies”. Are we back to “merging” (killing) Chrysler and GM?
Then when you mention the assets of these companies you say Chevy, Caddy, and maybe the “minor brand of Jeep – with the best vehicles and dealers from the old GM.” The old GM. So you want to *maybe* have a minor brand of Jeep but populate it with former GM vehicles? Yea, that’ll work. I can see the Jeep faithful lining up to by a Jeep Hummer by GM. That will not work.
Correct me if I’m wrong but your plan looks like:
1. Merge GM & Chrysler
2. Shut down and sell Chrysler assets (this makes Cerberus look like choir boys)
3. Sell *some* GM assets.
4. Form a new GM based on the profits of parting out Chrysler and *some* of GM.
I have to disagree with you here Mr. Leikanger, anyone over the age of 10 knows that the only difference between a Cadillac and a Chevrolet is the badging and “chrome”. It’s all a GM product, same as a Taco Bell chicken burrito and Pizza Hut personal pizza both roll out of the same kitchen down at the local gas and go, and the “Kenmore” refrigerator in my kitchen is actually a Maytag. The names attached to these products are meaningless for most, who picks a Pontiac over a Chevrolet anyway?
What’s (indeed) in a name?
GM, as a automobile manufacturer’s moniker, would work just as well as Buick or even Captain Crunch. Doubt it? Try to sell any of GM’s “brand” names as IP and see what you get for any of them. Only the Chinese would bid.
As for the real issue, given the cash burn rate and losses and rapidly evaporating market share, GM will either embrace Chapter 11 soon (regardless of the downside, if any), or it will be in Chapter 7 without a vote soon enough. Four years without a profit?!?
When you say that people won’t buy a car from a bankrupt GM, you can remove me (and millions like me) from your calculations.
That’s because I won’t buy a car from GM anyway.
My point is, I’m not part of the scope of potential customers.
I’m curious if anybody has ever taken a poll to determine what percentage of the car buying public is like me…and is not part of the potential customer pool; and whether or not this percentage is large enough to be factored into any “do/don’t do” decisions with regards to Chapter 11.
I don’t really have that much of a problem with Cerberus….. They’ve run out of time and money, but their original business plan is sound.
I see a lot of flaws in it. I’ll avoid discussing most of those here, but one of the critical flaws that is relevant to this article is that the sort of returns that are common to the auto business are well below what private equity investors normally expect.
That huge spread tells me that Cerberus was probably making promises that couldn’t be easily kept. That suggests that the strategy was more of an all-or-nothing bet than a real plan. It depended upon on a lot of outcomes that were possible, but not likely to happen, supported by a lot of flawed assumptions.
A PE buyer would not be good for a revived GM because GM could never produce adequate returns for such an owner, even under a best case scenario. Manufacturing companies just don’t make that kind of money. Like supermarkets, they are good at generating volumes of cash, but not good at creating high margins. Too many input costs, not enough pricing power.
The New GM would not take the union contracts with it….
Since so much of this has become a political question, so will the Union issue. I wouldn’t put it past the current administration/congress to craft a new auto-only bankruptcty law that favors keeping existing union contracts. That makes any New GM that emerges worth a hell of a lot less.
Better to have a good paying job than no job at all.
That’s not true if you’re in the job’s bank and work (off the books) part-time…
Why go bankrupt when the government has unlimited funds to fund you?
“the only difference between a Cadillac and a Chevrolet is the badging and “chrome”. ”
Knowing, in this case, defined as meaning “having an unsupported belief that somehow is always correct”.
After all, why should I buy a new CTS when I can get the Chevy version for thousands less. Oh, wait…
This has to be said: An awful lot of us actually really, really like a number of Detroit products. In them we see things that no one else offers (and it’s not the ‘Mericun-made’ thing). There’s real value in Detroit bound to huge liabilities. Separate out the liabilities, hand the management of the assets over to people who feel the same way and there’s not only hope, there’s a chance to go out an kick some ass in the marketplace. Some form of bankruptcy is the right way to do this.
This is what I hope for. Please don’t make me buy a Lexus or a CamCord (for lack of anything more interesting). I’m not dead yet.
Pch101:
I’m totally with you. I don’t know all the specifics, but Cerberus put very little (if any?) of their own money into the whole Chrysler deal. As such, there was very little downside risk to them, and massive upside. They saw it as a unique opportunity to buy a distressed asset for very little down (kind of like a $0-down mortgage, with the thought that housing always appreciates)
Their kind of investment encouraged exactly what they did – don’t invest any more money and hope the market goes up. Of course it didn’t happen that way, but they are far from exposed.
Flashpoint,
Chrysler had 58,000 employees in 2008. They have reduced head count by a few thousand more. There are still over 40,000 now. Chrysler said in their plan that if a C7 wind down were to occur 40,000 employees would immediately lose their jobs. That seems right because a few thousand would stay on to facillitate the bankruptcy, which would take months to process. But they also have
3,300 dealers with 140,000 employees. And 90% of the direct and dealer employees make a higher wage (and pay more taxes) than the Circuit City employees.
Great rundown. I feel like forwarding this to my congressmen!
Circuit City was a outfit with no assets barring its inventory, which is something you can’t take a loan out on because electronics depreciate while sitting in the warehouse. I don’t even think Circuit City owned the real estate they put their box stores on.
And for the record, Best Buy sucks by any measure other than comparing it with Circuit Shitty. Fry’s rocks, but its privately held, and owns it’s real estate assets I would wager.
What about Delta airlines? They went Chap 11 and came out OK. Surely they have more in common with GM than an electronics retailer.
As a consumer, your relationship with an airline is far different from your relationship with an automaker. When you buy an airline ticket from an airline in Chapter 11, you are betting the amount of your ticket (a few hundred dollars) that the airline will still be operating a month from now. The amount you are betting is relatively small — a few hundred dollars. The time frame of your risk is relatively short — a month or so.
In contrast, you face much greater risk buying a car from an automaker in Chapter 11. First off, you are not risking a few hundred dollars; you are risking tens of thousands of dollars. Secondly, you are risking that amount over a much longer time frame; not a month but instead 5 to 10 years. You are betting that the auto manufacturer will still be in business for the entire time that you own the car. If the auto manufacturer dissolves, the value of your car will drop dramatically and you may have a much harder time keeping it running, due to difficulty finding parts.
The fact that people have bought airline tickets from an airline in Chapter 11 does not imply that the very same people will buy cars from an automaker in Chapter 11. The risks are very different and are apparent to anyone who thinks about them for more than 10 seconds.
Re Pch101 :
I agree, some Private Equity typically looks for a quick, big return, however other PE investors have done pretty good sticking with a slow and steady wins the money race strategy. For example my long lost adopted father, Warren Buffet seems to know how to make a buck or two.
Did Cerberus make some mistakes and some assumptions that have come back to haunt them – true that.
I think that when the dust settles, and Chrysler/Cerberus goes into the business school case study handouts, it will be remembered as good plan, bad implementation.
Makes no sense to me. Without its European subsidaries GM is pretty much worthless in term of engineering and technology.
Or told the other way round. If Opel goes to China or elsewere all of GMs knowledge will be gone too.
fallout11 :
February 26th, 2009 at 1:29 pm
I have to disagree with you here Mr. Leikanger, anyone over the age of 10 knows that the only difference between a Cadillac and a Chevrolet is the badging and “chrome”.
Don’t mind the disagreement, though the addressee should probably be Mr. Elias who in his editorial suggests this solution. I think he’s right, and that the new constellation would have to work harder to ensure that the premium brand (Caddy) becomes more of a unique platform than what is the case today.
Nobody will buy a car from a bankrupt carmaker. GM and the government could try to find another word for bankruptcy and go on from there.
If GM declares bankruptcy it is basically a death sentence.
A nation without an domestic autoindustry cannot call itself a superpower.
Buickman has been breathing the air in Flint too long – it’s too late for ‘Return to Greatness.’ Wagoner has eliminated any chance of it. The plan may have worked a decade ago, though.
A nation without an ‘industrial base’ cannot be a ’superpower.’ Car industry is a component of ‘industrial base.’
I expect Detroit to be reduced to the Chevrolet-Cadillac and Ford operations. No more Chrysler Group, no more Lincoln-Mercury, GM operations outside of Chevrolet and a small Cadillac = gone.
Does it really matter? No, they won’t hire me anyway. I’m keeping my Acura. Have a nice day, especially if you are under those mid-Michigan skies. (It’s bad enough here in Illinois.)
Cerberus make some mistakes and some assumptions that have come back to haunt them
It’s more than that — the assumptions were bad enough that they should not have made them in the first place.
Even under a good-case scenario, it wasn’t realistic to expect an outsourcing model to be profitable within a few years. I haven’t seen their plans, but I can guesstimate that Cerberus didn’t allow for enough time to do this properly. In large part, there would have been pressure to speed up the time frames of the projections, because the yield targets couldn’t be hit without it being done quickly.
The point is that if they had formed a realistic version of their plan that would have allowed time to create the relationships, build the products and cultivate the brands that it would have produced too low of a return for their investors. So rather than shelve it, they lied about it, oversold it, and made promises that they couldn’t keep. That makes it a problem of poor planning and even worse ethics, not just an issue of implementation.
This is just a very naive proposal. If it were so simple for “investors” to just spring up and “cash” to be paid it would have happened a long time ago.
I was in the process of writing a long comment when it dawned on me: as I read this I can’t help but hear the voice of Bobby Jindal in my head….
I appreciate the enthusiasm of this article, but the plan is not possible in the current credit market.
I also do not believe that private equity is the white knight that is described in the article. Our only example to date of a very gifted private equity company running a car company is Cerberus/Chrysler. I see nothing to believe that a similar outcome would not occur with GM.
The only workable solution is a government financed debtor-in-possession C-11. Ideally, the result of which would be a new CEO and BOD. A good CEO (example Ford) paired with a clean balance sheet would put GM back on the road to good health.
Unfortunately, Chrysler is no longer a viable business entity with nothing really to restructure in C-11. A C-7 dirt nap is the only sane course for the once proud marque.
Let’s vote for the all-time auto industry buffoon award. Is it:
a. Rick Wagoner;
b. Ron Gettelfinger; or
c. David Cole?
The answer is:
d. Jürgen E. Schrempp
Those who are saying no one will be buy a car from a bankrupt company are completely overlooking the fact that every possible customer KNOWS that GM and Chrysler are already bankrupt. Chapter 11 at least assures educated customers (those most likely to be able to afford a new car in this economy) that the company has a plan to return to profitability and managed to convince a bankruptcy judge that the plan is viable. That is MUCH more reassuring than constantly going on TV and saying “If we don’t get X billion dollars right now we are going under and bringing the whole midwest economy down with us”. The only reason that the corporations don’t like this idea is that the CEO’s and BOD’s lose their cushy jobs.
What’s the difference from buying a car from a car company in Chapter 11, to buying a car from a car company that’s heading for inevitable doom? None whatsoever…