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