General Motors Death Watch 101: Bankruptcy. Just Tzu It.

Robert Farago
by Robert Farago

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.

Robert Farago
Robert Farago

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  • Finger Finger on Dec 01, 2006

    On the topic of new Japanese plants... And the foreign car lovers will probably also not tell you (or maybe they just don’t know or don’t want you to know) that GM and Ford pour more money into existing American facilities than foreign automakers spend on new plants, usually with little or no tax breaks. GM has already spent over $500 million upgrading two transmission plants this year, and has spent nearly a billion dollars over the last decade, for example, for facility upgrades in Texas. And what do GM and Ford get for making their existing plants more efficient? It isn’t tax breaks. Instead, they get accusations of not being “competitive” enough! Maybe here I should also mention that the average domestic parts content for Kia is 3%, while the average domestic parts content of Ford and GM is 78% and 74% respectively. This means that buying a U.S.-assembled (or even foreign-assembled, for that matter) GM or Ford supports more American jobs than a U.S.-assembled car or truck with a foreign nameplate. Fortunately for our benefit, the U.S. remains the overall global leader in research and development, and a big reason for that is that American automakers – according to the Level Field Institute – invest $16 billion in R&D (Research & Development) annually, which outpaces any other industry one could name. Admittedly, the Level Field Institute counts German-owned DaimlerChrysler as an American automaker, so Ford and GM’s combined R&D contribution to America is closer to around $12 billion. But who’s counting, right? Certainly not the American auto-bashing media

  • Johnson Johnson on Dec 01, 2006

    All companies make necessary upgrades to their plants in terms of tooling. The media doesn't tell us a lot of things, but doesn't mean it isn't true. Toyota for example spent several hundred million upgrading it's Kentucky plant for the new Camry, and is spending a substantial amount to upgrade it's current Ontario plant in preparation for the Corolla. This is nothing spectacular. These are needed and expected expenditures. But on top of that, they are building new plants. Toyota spent over a Billion dollars to make the Texas plant, and the suppliers next to the plant likely spent a similar amount. Overall, billions were spent on that whole Texas complex. Toyota is also spending about 1 Billion to build the Woodbridge plant in Ontario. As for R & D, Toyota *alone* is spending about 8 Billion this year, more than any other single automaker, including GM, Ford, and Chrysler.

  • VoGhost Key phrase: "The EV market has grown." Yup, EV sales are up yet again, contrary to what nearly every article on the topic has been claiming. It's almost as if the press gets 30% of ad revenues from oil companies and legacy ICE OEMs.
  • Leonard Ostrander Daniel J, you are making the assertion. It's up to you to produce the evidence.
  • VoGhost I remember all those years when the brilliant TTAC commenters told me over and over how easy it was for legacy automakers to switch to making EVs, and that Tesla was due to be crushed by them in just a few months.
  • D "smaller vehicles" - sorry, that's way too much common sense! Americans won't go along because clever marketing convinced us our egos need big@ss trucks, which give auto manufacturers the profit margin they want, and everybody feels vulnerable now unless they too have a huge vehicle. Lower speed limits could help, but no politician wants to push that losing policy. We'll just go on building more lanes and driving faster and faster behind our vehicle's tinted privacy glass. Visions of Slim Pickens riding a big black jacked up truck out of a B-52.
  • NotMyCircusNotMyMonkeys dudes off the rails on drugs and full of hate and retribution. so is musky.