General Motors Death Watch 187: Feel the Burn

Earlier this morning, GM CEO Rick Wagoner announced a cost-cutting package designed to "better align the business to the current market condition." He's cutting bonuses, pushing salarymen out the door, disappearing the dividend, postponing the union's health care payment, putting truck development on ice, yada yada yada. While the media focuses on the scope and scale of Rick's "right-sizing," the money shot arrives in the last six words of the official press release. Apparently, GM has "an ever stronger and competitive product line-up." Nonsense. And until that's true, GM's doomed. Which means GM's doomed.

Those of you who've been following this sad saga of missed opportunity, bungled branding, disconnected development and arrogant administration will know that the markets normally react to GM's slicing and dicing with some enthusiasm. And why wouldn't they? Rick's regular rescue remedy is offered by an accountant, for accountants. But this time it's different. The dividend cut is a tacit admission of failure. And Rick tenuous statement that The General's willing to kinda maybe sorta if they have to oh what the Hell hock their last meaningful asset– GM's foreign ops– is a fire sale too far.

By now it's clear that GM's burning down the house. The automaker is already paying $3b in interest; the last thing they need is billions of additional debt. Especially as GM [still] has no coherent plan for building profitable products for the U.S. new car market. A market which is contracting violently, which has yet to hit bottom. By now, even the money men understand that one.

Wagoner says his new new new new turnaround plan will raise (raise?) some $10b and save another $5b. That should be enough to see GM through, well, until it burns through the money. In fact, this move only makes sense if GM is stocking-up its war chest in anticipation of bankruptcy. No matter how much cash GM stuffs in its coffers, the automaker has too many unkillable dealers, unattractive brands, untenable products and expensive obligations. C11 is the only way out.

The ur-problem is that Rick Wagoner doesn't have the stones for the job. Wagoner simply refuses to do what must be done, and done soon.

Yes there is that. While a GM bankruptcy may be unthinkable for the GM lifer in charge of its fortunes (or lack thereof), there is only a small window of opportunity for a court-protected, dealer-dumping GM restructuring.

In case GM hadn't noticed, the U.S. is in the midst of a major mortgage meltdown. "Solving" the banking problem will require trillions of dollars of federal "assistance." There could well be a political backlash, or, of you prefer "bailout fatigue."

At the same time, it's entirely possible Chrysler will file for Chapter 11 in the next few weeks/months. When the world doesn't stop spinning, the psychological non-impact of a Chrysler C11 could make GM's inevitable bleating at the pre-C11 begging bowl seem less… credible. And let's not forget Ford. Same deal, only on a much larger scale.

If Ford goes C11 first and receives federal loan guarantees, wouldn't GM be more likely to be able to do the same? Maybe. Maybe not. Again, bailout fatigue. And what of the competitive threat posed by a dealer and brand-liberated FoMoCo? Maybe Motown's game of last man standing actually means the first one into bankruptcy wins?

It has been said many times by many people, including Mr. Wagoner, that a GM Chapter 11 would eliminate the American automaker. Bankruptcy's opponents always trot-out the argument that a bankrupt airline (the most common example) is not the same as a bankrupt car company. A plane ticket is not as great an investment as a car. No one would buy a car from a bankrupt carmaker.

This is patently untrue. Everything sells at a price. How about a new Buick LaCrosse for under ten grand? Seven? Six? And a GM C11 would NOT prevent GM (or some third party) from honoring its existing or future vehicle warrantees. And it's important to see this from the other side of the equation. American Airlines is generally considered to be in worse shape than its competitors because it didn't file for Chapter 11.

While bankruptcy would be an enormous shock to GM's system, that's exactly what they need. GM NEEDS Chapter 11 to get their house in order, to perform the root and branch reform upon which their future– if they are to have one– depends. And the longer they deny, dismiss and delay the inevitable, the less chance they have of emerging from the process. Ever.