By on February 26, 2009

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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92 Comments on “Editorial: The New GM...”


  • avatar
    John Horner

    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.

  • avatar

    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 !!!!

  • avatar

    better idea…replace Wagoner and implement Return to Greatness.

  • avatar
    menno

    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…

  • avatar
    TVC15

    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.

  • avatar
    psarhjinian

    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.

  • avatar
    toxicroach

    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.

  • avatar
    Lumbergh21

    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.

  • avatar
    jaje

    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.

  • avatar
    TheFredMan

    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.

  • avatar
    Jared

    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.

  • avatar
    cardeveloper

    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.

  • avatar
    mikey610

    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……

  • avatar
    McDoughnut

    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.

  • avatar
    Bunter1

    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

  • avatar
    crackers

    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.

  • avatar
    geeber

    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.

  • avatar
    Pch101

    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.

  • avatar
    mikey610

    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.

  • avatar
    Stein X Leikanger

    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.

  • avatar
    no_slushbox

    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.

  • avatar
    toxicroach

    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.

  • avatar
    DR. XO

    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.

  • avatar
    McDoughnut

    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.

  • avatar
    PickupMan

    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.

  • avatar
    SpeedJebus

    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..

  • avatar
    windswords

    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.

  • avatar
    fallout11

    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?!?

  • avatar
    ZoomZoom

    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.

  • avatar
    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.

    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.

  • avatar
    ihatetrees

    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…

  • avatar
    bluecon

    Why go bankrupt when the government has unlimited funds to fund you?

  • avatar
    bunkie

    “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.

  • avatar
    mikey610

    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.

  • avatar
    windswords

    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.

  • avatar
    Sammy B

    Great rundown. I feel like forwarding this to my congressmen!

  • avatar
    CarnotCycle

    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.

  • avatar
    Jared

    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.

  • avatar
    McDoughnut

    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.

  • avatar
    Diewaldo

    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.

  • avatar
    Stein X Leikanger

    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.

  • avatar
    akear

    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.

  • avatar
    mtypex

    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.)

  • avatar
    Pch101

    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.

  • avatar
    RetardedSparks

    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….

  • avatar
    Mr. Sparky

    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.

  • avatar
    gus

    Let’s vote for the all-time auto industry buffoon award. Is it:

    a. Rick Wagoner;

    b. Ron Gettelfinger; or

    c. David Cole?

  • avatar
    Jared

    The answer is:

    d. Jürgen E. Schrempp

  • avatar
    njdave

    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.

  • avatar
    Ingvar

    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…

  • avatar
    ctoan

    McDoughnut

    I’m not quite familiar with what Cerberus’s original plan was, but I will say that the computer industry has almost nothing in common with the car industry.

    Technology development is driven entirely by suppliers (Intel, AMD, etc), and computers, at least within the PC market, are differentiated almost solely by price and marketing. The computers themselves are assembled off-the-shelf, with a few strange proprietary bits to make things interesting for the do-it-yourself crowd.

    Car companies, on the other hand, bear the entire burden of designing the product, which probably (ideally) has nothing in common with its competitors, then tell their suppliers to make the parts they need, then assemble it. The tooling is unique and complex, and therefore expensive, and it’s all heavily automated, none of which lends itself to outsourcing.

  • avatar
    highrpm

    So you’re the typical car buyer that’s not associated with the auto industry. Let’s say that you are interested in a new GM vehicle, maybe a Malibu. And let’s say that you believe GM vehicles are built pretty well now so the reliability thing is not in your equation.

    So you’re going to shell out a chunk of money, or take on a debt, for this car, and all you will every hear from anyone is “why did you buy a car from a bankrupt company” instead of the “nice car!” comments that you were hoping for. At worst, you would have bought a new Camry and not gotten attention either way. Nobody wants to shell out bucks and have it look like a bad decision though.

    What I am seeing now with my Chrysler vehicle’s 7/70 warranty is that the dealers are not excited about working on it and usually try to squirm their way out of repairs. This situation can only get worse when Chrysler goes into C11.

    In summary, I think that a lot of folks will not buy a car from a company in C11. An anecdote – I was selling a Daewoo last summer that I bought at auction. It was a nice car and priced low for its age and miles. The #1 concern was where can folks get parts and service for the car?

  • avatar
    cdnsfan27

    Would I buy a vehicle from a bankrupt company? If the government guaranteed my warranty, sure. We rented a Dodge Caravan for Christmas vacation and really liked it. We would love to buy a loaded T&C but the uncertainty over Chrysler’s future is keeping us out of the market. When we know what is going to happen then we will decide. In the meantime we keep flogging the old 4Runner.

  • avatar
    Pch101

    Car companies, on the other hand, bear the entire burden of designing the product, which probably (ideally) has nothing in common with its competitors, then tell their suppliers to make the parts they need, then assemble it.

    It would appear that the Cerberus plan was to build minivans and trucks in-house, that it would sell both under its own nameplates and to other manufacturers such as Nissan and VW, while outsourcing car production to the likes of Nissan, Fiat and Tata, which would be entrusted with all of the production, and some or all of the design. The second part of the plan might have resembled the earlier Chrysler relationship with Mitsubishi, although it would appear that more efforts would be made this time to use enough styling differences so as to avoid obvious badge engineering and cloning.

    That’s not an entirely bad plan, if you can trust your wholesale customers to buy your vehicles, and, more importantly, if you can depend upon your production partners to produce a good product on time and on budget. But there is a lengthy time component inherent to such a plan, and PE tends to be impatient and demanding, probably too much so for this to work in the car industry.

  • avatar
    RetardedSparks

    The government may guarantee your warranty, but they won’t guarantee your resale value.

  • avatar
    ZoomZoom

    gus :

    Let’s vote for the all-time auto industry buffoon award. Is it:

    a. Rick Wagoner;
    b. Ron Gettelfinger; or
    c. David Cole?

    Jared :

    The answer is:

    d. Jürgen E. Schrempp

    Wrong. It’s a two-part answer:

    e. the voters, who are getting exactly what they want; or what they voted for, anyhow.

    AND

    f. the taxpayers (no, not those people; I’m talking about the ones who will actually PAY for all of this), who just may be the real chumps in all of this.

  • avatar
    Flake

    PE firms get their returns in many different ways. Cerberus didn’t buy Chrysler to take its returns from profit. Much like a good house flipper, they bought a piece of garbage hoping to fix it up and sell it for a profit.

    We might all be missing a very important difference between GM and Chrysler that actually errs in Chrysler’s favor. While GM has basically zero access to cash, Cerberus has the wherewithal to give Chrysler the cash it needs, it’s just not. After all, if all YOU had to do was put together some BS report for the government in exchange for billions and billions of dollars in free money, why would you spend a nickel of your own? We’ll really only find out whether Cerberus wildly underestimated the challenges of the auto industry (which I highly, highly doubt given the number of incredibly intelligent and savvy investors that it employs) or whether its just exercising solid decision-making once the Government shuts off the money spout. While GM will go directly into C11, Cerberus has the choice of continuing to fund its multi-billion dollar investment if it chooses to do so.

    Maybe the business plans submitted to Congress (for both companies) just kinda tell the Government what it wants to hear. Again, if YOU were going for billions in no strings attached money, wouldn’t you play to your audience regardless of your actual intentions? Now I definitely don’t presume to have any idea what the Company’s real plans are, but there just might be something going on behind the scenes that Cerberus won’t (and doesn’t have to) disclose. Then again, I just speculate, maybe not.

  • avatar
    ZoomZoom

    cdnsfan27 :

    “Would I buy a vehicle from a bankrupt company? If the government guaranteed my warranty, sure. ”

    Now this is one way we’ve gone wrong; by making the taxpayer (the real ones) responsible for a car maker’s warranty commitments and responsibilities, we’ve removed accountability from the equation. By extension, we’ve further eroded any remaining capitalistic market controls down to a point of uselessness. I suppose I should start to get myself mentally prepared to walk or ride my bike everywhere I need to go.

    That’s because it’s only a matter of time before safety, reliability, and just plain old responsibility falls to the wayside even more than it already has!

  • avatar
    Pch101

    Much like a good house flipper, they bought a piece of garbage hoping to fix it up and sell it for a profit.

    And they may have promised to do that in 3-5 years, when 10-15 years would have been required. That would be a problem for the investors.

    Cerberus has the wherewithal to give Chrysler the cash it needs

    Most of the cash in Cerberus is there in connection with other deals that have nothing to do with Chrysler. The investors in Air Canada, the Albertson’s supermarket chain or Bank Leumi have no obligation to keep Chrysler afloat.

    I doubt that the leadership of the company has that much excess cash sitting around…which is part of the reason not to help them. The management’s motivation to avoid failure is minimal, so why help them at all? If we’re going to throw money away, I would have rather given it to Ford, which might actually put it to some good use.

  • avatar
    GS650G

    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.

    Best Buy is going to have the same problem Circuit City had, competition from the internet.

    As to Gm surviving, ask someone screwed by faulty engineering, ignored by GM, and slammed by poor resale if they care enough about GM to see them survive

  • avatar
    Stein X Leikanger

    From DetNews – abandoned Packard plant. Four minute film. Made me sad.
    http://apps.detnews.com/apps/multimedia/player/index.php?id=3180

  • avatar

    Having toured the Chicago auto show last week, Idunno…theres a TON of obselete CRAP trying to be peddled by virtually every manufacturer(too many of those?), many with WAY too many dealers for the new reality(maybe 10M cars a year, never 15 again) and it plain just aint gonna happen.

    The sooner we all quit huffin the crack pipe, the better.

  • avatar
    Ken Elias

    A few comments. First, the Cerberus deal for Chrysler is not reflective of a good deal. Clearly Cerberus has turned out to be less smart than they think, and acquired the weakest of the Detroit 3 in terms of product, quality, and pipeline. This was apparent before they even bought the company.

    Second, Cerberus could never afford the capital investment required to “re-launch” Chrysler after the acquisition. It would kill the deal returns. I believe they were mostly after the finance company, not the auto company, in order to make profits. Also, Cerberus bought the company, not assets, and hence assumed significant legacy liabilities.

    A better deal is to buy assets with no liability tail at a price where any resurrection pays off hugely in a public valuation – basically an exit strategy that does not hinge on current returns, but merely from a valuation contingent on future earnings expectations. This is a short term plan, maybe three to five years max. So a New GM has no legacy tail, no OPEB, and a “fresh” balance sheet, simply looks like a company that will have value assuming the public “forgets” about the old GM.

    This model of selling assets to a new company retaining some of the look of the old company has been done before but on a smaller scale. Piper Aircraft did a transformation through bankruptcy in the 1990s where the new company picked up assets (factories, aircraft type certificates, and other key assets) and eliminated liabilities from the old company.

  • avatar
    TxTransplant

    Pch101,

    Now here are some things we can agree upon.

    Management at Cerberus obviously said the things they needed to in order to create buy-in from their investor pool.

    They obviously over reached when they assumed the debt that was part and parcel of the Chrysler deal, don’t have the cash position required to turn the company around and, besides that fact, there is no motivation for them to do so.

    While I don’t agree with bailing any business out, if we are going to make that investment it might as well be with a compnay that has a realistic chance to succeed and the motivation to do so.

  • avatar
    63CorvairSpyder

    @Stein X L:

    Thanks for posting the link to the Packard video…Yes It is sad, very sad. And sadder yet, there are hundreds(maybe thousands) of these abandoned plants throughout the midwest, northeast and surely other parts of the country as well. Check out Buffalo NY, PA steel towns, southern textile plants etc.

    I know I’ll never see it in my lifetime, but will the USA ever return to its once great industrial complex or is it forever gone?

  • avatar
    tesla deathwatcher

    An interesting and thoughtful proposed solution. Myself, I don’t think it would work. What GM and Chrysler need is not capital. They have all the capital assets they need (and then some — overcapacity is a real problem).

    What they need is to reduce operating expenses below revenues. While revenues will decline as expenses are cut, there may be a point at which they cross. If so, there can be a viable business there.

    Private equity firms cannot help in these kind of cases. Bankruptcy might. Start with chapter 11. If that does not work, go to chapter 7. That might still save a lot of jobs.

    What GM and Chrysler really need, though, is a visionary leader for each. That will not come through bankruptcy. Or from Congress. Those kind of people are scarce.

    With Wagoner and Nardelli still in at the top of these companies, nothing is going to help them. Tim Geithner? Larry Summers? Steve Rattner? Ron Bloom? As a federal automaker task force? Don’t make me laugh.

  • avatar
    peoplewatching04

    People might even like the idea of an emergent “New GM.” I think we Americans like the underdog, and GM no longer has the prestige of being the biggest or best while it lacks anything resembling ‘underdog’ status. Of course imports will always have their place, but a totally new image is what the company needs. If Nissan filed C11, people would probably be hesitant. But people want to support American car companies, they just need to know that GM has learned its lesson and actually changed this time around.

  • avatar
    akear

    Well, folks every American is now paying around $120 a year to keep GM going. You might as well buy a national motors car.

    Way-goners and Putz’s rebadged Opels and holdens played a role in this fiasco.

    In the future we can look forward to rotting and abandoned Saturn dealerships.

  • avatar
    Captain Tungsten

    Too bad Wilbur Ross isn’t on the government task force.

  • avatar
    50merc

    Stein, my thanks too for posting the link to the video about the Packard plant. It appears to have been stripped of machinery and fixtures, but it still has quite a story to tell. I wish someone would do a documentary that included scenes and commentary about the layout and internal processes of the great plants like Packard’s, Ford’s River Rouge complex or Highland Park factory, etc. Heck, there’s a defunct thirty-year-old GM assembly plant in Oklahoma City I’d pay ten bucks to walk through accompanied by someone who knows how it worked. You’d think Detroit’s tourism bureau would realize the appeal those historic plants have to students of automotive history.

  • avatar
    John Horner

    “If GM goes Chapter 11, people will stop buying their cars. End of story.”

    Right now every sentient being knows that GM is on the edge. The vast majority of Americans polled do not want the government to bail GM out. The marketing impact of the C11 bogey-man is happening already, so the company might as well get on with a serious restructuring. BTW, what they have been doing for the past two decades isn’t serious, it has been incremental bleeding to death.

  • avatar
    Buckshot

    I´m surprised that almost noone demands Rick Wagoner and Robert Nardellis heads on a plate.
    After all they have the ultimate responsibility for GM and Chryslers subpar performance.
    Are they “The Untouchables”?

  • avatar

    C11 would no doubt result in the following.

    I recently bought a $500 audio receiver for $300, in liquidation at Circuit City.

    This depressed the price of said receivers at Best Buy too.

    Once Circuit City is gone, then we may expect full retail again from Best Buy, now that the competition has shuttered.

    The same thing happened when Home Depot showed up. Great competition with two other hardware stores. Low prices and great selection. Once the other two were gone, prices jacked right up and selection went out the window.

    C11 is needed so that the system can re-structure. Dealers need to go, union AND upper management contracts need to be voided and renegotiated.

    Only then can the prices and sales volumes return to “healthy” amounts. No one made money on my 1/2 price gadget.

  • avatar
    geeber

    Best Buy was not the only competition for Circuit City. Sears, Costco, Sam’s Club, Wal-Mart and Target all sell consumer electronics. So I doubt that any price increase posted by Best Buy in the wake of Circuit City’s disappearance will last long.

    By the same token, even if GM and Chrysler go away completely (highly unlikely), we will have Ford, Honda, Toyota, Nissan, Mazda, Subaru, Hyundai-Kia, VW-Audi, BMW and Mercedes-Benz still selling cars in the “mass market.” No one company will have monopoly power – or even the dominance that GM had during its heyday in the 1950s and 1960s.

    Stein: Thank you for posting the video on the abandoned Packard plant. Interestingly, it was a former GM man – George Christopher – who made several mistakes in the immediate postwar years that led to Packard’s downfall.

  • avatar
    windswords

    Buckshot:

    “I´m surprised that almost noone demands Rick Wagoner and Robert Nardellis heads on a plate.”

    I can’t blame Nardelli, yet. He has only been at Chrysler for a short time and unlike Wagoner he has someone watching over his shoulder and maybe pulling his strings. Wagoner, there’s no excuse, the buck really stops at this man.

    ZoomZoom:

    “Jared:

    The answer is:

    d. Jürgen E. Schrempp

    Wrong. It’s a two-part answer:”

    I like Jared’s answer better! :-)

  • avatar
    Flake

    Most of the cash in Cerberus is there in connection with other deals that have nothing to do with Chrysler. The investors in Air Canada, the Albertson’s supermarket chain or Bank Leumi have no obligation to keep Chrysler afloat.

    You’re right. Cerberus has cash because its other investments are doing well and investors keep investing in CERBERUS. You have to realize that Cerberus is the one investing in these specific portfolio companies, not the “investors”. If one portfolio company takes a nose dive, every investor feels it, regardless of whether or not they liked that idea in the first place. They invest in the PE firm and trust them to make wise decisions, thinking that they will invest their money more wisely than they would otherwise think to do. Otherwise these people or companies would have invested in Bank Leumi or Air Canada specifically.

    I doubt that the leadership of the company has that much excess cash sitting around…which is part of the reason not to help them. The management’s motivation to avoid failure is minimal, so why help them at all? If we’re going to throw money away, I would have rather given it to Ford, which might actually put it to some good use.

    I think you’re probably correct that the company doesn’t have much cash, but we have no way of knowing what they have and don’t have. I also don’t agree with throwing money away on Chrysler. I don’t think the company is viable at all and I hate that the Government keeps forking over money. What I do know is that a crapload of people that are far more intelligent than I am thought that Chrysler would make a good investment. We just don’t know what cards its PE owner has up its sleeve because of the disparity in transparency between private and public companies.

  • avatar
    Pch101

    You have to realize that Cerberus is the one investing in these specific portfolio companies, not the “investors” you speak of.

    That’s incorrect. Deals will typically be structured as individual LLC’s. Most of the ownership will be held by the investor-members. Most of the cash in a given deal would have come from that pool of investors.

    Naturally, investors will look at Cerberus’ overall track record, and evaluate their competence accordingly. However, the deals themselves are segregated into different funds or tranches, and kept separate.

    My point is that we don’t know what cards its PE owner has up its sleeve because of the disparity in transparency between private and public companies.

    The financial statements should exist; the question is whether the public should get to see them, given the private ownership. Personally, I don’t need to see them to know that I still wouldn’t have given the money to Chrysler.

    In any case, this situation shows that private equity is not an ideal source of new funding for GM, either. PE wants too much, too fast, and if GM is going to be turned, it is going to take years, not quarters or months, to do it.

  • avatar
    RNader

    I remember some of the advice that Jerry York gave to Rick Wagoner just a couple of odd years ago. Sell Hummer, fix Saturn reduce brands etc.

  • avatar
    Flake

    Oh the financial statements definitely do exist, but the public won’t be seeing them any time soon without a government order.

    After some research, you’re right that Chrysler is in its own fund (with GMAC). I dumbed down my initial entry and had just assumed that its fund included a group of other investment LLCs, like the majority of these types of funds do.

    I wouldn’t have given money to Chrysler, either. But that’s not the point. I just think that if a group of people put up $4 Billion for this piece of garbage someone COULD have something planned that we’re not seeing. Maybe not, but ya just never know.

    And we really can’t pain all PE firms with the same paintbrush. Every investor has different motives, time-frames, appetite for risk, etc. I guess that’s why there are so many different targeted funds that exist in the PE world. It might not be ideal, but I don’t think we can rule it out as a viable source of capital if a Chapter 11 re-org. comes along.

  • avatar
    Blastman

    C11 is needed so that the system can re-structure. Dealers need to go, union AND upper management contracts need to be voided and renegotiated.

    Agree. C11 shouldn’t be viewed as a bankruptcy — it’s simply a reorganization.

    GM can “ride” the current credit crisis and economy tailspin, saying they were forced into a reorganization by economic forces beyond their control. (Not that I agree with this, but it could be viewed as a media spin opportunity.)

  • avatar
    Andy D

    Nobody gave a rat’s ass when steel and shipbuilding went down the tubes. Scratch career #1. Nobody gave a damn when ATT had some hard times, scratch career #2. I’ve been living the erosion of this country’s industrial base. And the erosion of the midddle class that kept it going. Nobody cared. Why does anybody care what is basicly a new pair of shoes, (they are gone too) or an appliance for most people?
    My elected congress people sold me down the river. They gave their constituents the finger and went with the folk who gave them the money for their election campaigns. Better watch out,poor people don’t buy much

  • avatar
    golden2husky

    Would I buy a vehicle from a bankrupt company? If the government guaranteed my warranty, sure. We rented a Dodge Caravan for Christmas vacation and really liked it. We would love to buy a loaded T&C but the uncertainty over Chrysler’s future is keeping us out of the market. When we know what is going to happen then we will decide. In the meantime we keep flogging the old 4Runner.…

    Funny you said that. My friend owned an ’87 4Runner, the kind that had a removable cap like a Blazer. His was quite reliable, with few repairs. His blown head gasket was a byproduct of the fan clutch failure which allowed the engine to overheat, so I don’t really blame Toyota. He lives in CT, where the road salt took its toll on the bodywork and framerails. At 180K, he gave it away. You just don’t see them anymore, or so I thought. While you don’t see them in the Northeast, I am on vacation right now in Breckenridge CO, and have seen 5 of the same generation in one day. Yep, holes aplenty but the two in the parking lot had serious mileage – one of them had 290,000 miles on it.

  • avatar
    carlos.negros

    If GM goes bankrupt, what about all the pensions? Those workers didn’t pay into Social Security.

    In the event of bankruptcy, the worker and the pensioner contracts will take priority over the business reorganizations, and even over the parts suppliers. What gets sold or kept will be determined by how much GM owes its workers and retirees.

    I think people are too optimistic about the results from a Chapter 11. This is not some retailer like KMart with a bunch of low paid sales personnel with crappy benefits.

    The end result of Chapter 11 could be the unbolting of the assembly lines and robots and seeing them shipped off to China.

  • avatar
    mach1

    The NEW GM will follow down the same path as the old GM unless the Corporate culture gets a radical makeover. Changing a culture is a long process that requires strong leadership from the top and consistency. It usually means that people who were successful in the old culture have to be replaced by people ingrained in the new culture.

    GM has to recognize the new reality that they are but one of several auto makers and they will never again dominate the industry. Their success or failure hinges on their products. One bad experience usually means the customer is gone forever – their are too many alternatives.

    GM needs a culture that rewards and advances people who actually contribute to the developing and producing high quality, innovative and attractive vehicles. If the products are right, the money will follow. If the price is right but the product is ho-hum, their dead.

  • avatar
    Mendicant Monitor

    Carlos.Negroes
    If GM goes bankrupt, what about all the pensions? Those workers didn’t pay into Social Security.

    To my knowledge, the auto workers DO pay into Social Security. As such they would be entitled to SS upon reaching 62. A good number will be retired for 14 years before their SS benefits begin.[Only some governmental employees don’t contribute to SS.]

    However, the hourly workers did not kick in to their company-sponsored defined benefit pension plans.

  • avatar
    JackK

    Everyone says let GM go bankrupt. So if they do what do you think is going to happen to all the retirees. Do you mean they don’t deserve their pensions. Are they to end up on public assistance. See it’s easy to say go bankrupt when you do not have a stake in the outcome. Oh that’s the American way me first screw everyone else.

    http://www.warriorsoflabor.com

  • avatar
    McDoughnut

    Re JackK:

    How are you dealing with the bitterness issues?

    The taxpayers did not do anything to hurt your pensions – rather we have given cash of almost 25 times the value of GM (per Market Cap)in “loans” that GM will most likely never pay back – you’re welcome.

    So why is it our responsibility to prop up your pensions with even more cash? Just because your unions are politically connected? Answer that. You ask if GM retirees deserve their pensions, but you conveniently don’t ask why non – UAW members should pay for them. Even your own union won’t negotiate any guarantees. If they don’t care then why should I? It’s obviously not that important, is it.

    As far as what’s going to happen to your wealthy pensioners – yes, that right, believe it or not GM retirees are some of the wealthiest blue collar workers ever – if they end up on public assistance it’s not my fault you blew all your savings (I know, that’s was not your fault either…).

  • avatar
    agenthex

    I just think that if a group of people put up $4 Billion for this piece of garbage someone COULD have something planned that we’re not seeing. Maybe not, but ya just never know.

    A lot of stupid bets were made back then. This is really nothing compared with assuming that the real estate bubble would be unlike any before it.

    Anyway, their plan for chrysler is probably one of the better ones for the failing company, and now that it’s been exposed to work poorly, I doubt anyone would touch any of it with a pole.

    Seriously, who would want it (or GM) unless you put money on the hood like their cars.

  • avatar
    carlos.negros

    So the 50 year old worker, who has faithfully worked for GM for 30 years, will have no medical benefits until he turns 65 and gets Medicare.

    The first time he or a family member gets sick, there goes all his money and his home.

    That seems fair. I’m sure that he is just another “loser” who deserves what he gets.

    But at least he will have his “liberty” to become the next JP Morgan or Bill Gates. Ain’t America great?

  • avatar
    Geotpf

    Riddle me this, Batman: Why is a GM worker any better than a Circuit City worker?

    That is, if we bail out GM, shouldn’t we then have to bail out every failed company throughout the country?

  • avatar
    T2

    Forget saving jobs inside the domestic auto sector that are under the control of two dysfunctional managements. I would rather express hope that the Obama administration is eyeing those foreign manufactured platforms that sell more than 30k units here.

    North America should not be reducing foreign unemployment lines at the expense of its own. Those imported vehicles should be built here. I’m thinking specifically of the Toyota Prius since Toyota is on record to bring 100k of them here for 2010.

    Regarding the domestic industry, longtime mismanagement of production capacity has led to an overcapacity that needs to be adressed with some serious trimming that can’t avoid anything other than be detrimental to the labor force. More than that Product Planning has also been mismanaged. Although more than ten years have elapsed, GM and Chrysler have yet to come up with a Prius fighter. Regretfully GM and Chysler need to be let fall as happens in other industries when managers take their eyes off the ball.

    For instance, anyone remember Digital Equipment Corporation ? Well, during the late seventies DEC gained significant market share in the computer business by the manufacture of lower cost minicomputers. This was facilitated in some ways by the larger companies such as IBM who were ignoring the market for smaller machines. Sound familiar ?

    Ten years later DEC was making the same mistake and ignoring the microcomputer market even though their CEO had demonstrated an early prototype back in April ’76. Bear in mind that DEC had significant revenue inflow from a huge customer field service division that supported their floor standing machines. With this mindset they were careful to avoid doing anything that would potentially cannabalise their own market and therefore downplayed their emphasis on the microcomputer business. There’s a close similarity in this to GM’s own attitude to the EV1 here.

    Despite DEC’s reticence, Steve Jobs proceeded with Apple into that business category. Then IBM, determined not to be burned a second time, changed their strategy. There was no time to design their own microprocessor architecture so they abandonned their NIMBY design culture and followed on with an outsourced processor chipset from Intel. That’s right, computer giant IBM couldn’t come up with their own competitive chips in the immediate time frame !! However IBM knew what was important and that was to be a player in this new game as we all know.

    Compare the IBM situation to that of GM in the auto sector regarding the introduction of full hybrids. The outcome is much different. When GM arrives late to the party, this time there is no equivalent “Intel” around to offer the enabling technology.

    The upshot of this error by DEC management, failing to commit to the right product, resulted in the loss of jobs for tens of thousands of career computer techs who were let go as PC desktops and servers replaced minicomputer systems. But NO bail out for them.

    Why should a similar error by GM and Chrysler not result in the same fate as befell DEC ? As DEC was failing it was taken over by Compaq. Compaq overvalued DECs worth and was unable to profitably consumate the union resulting in yet another trade. This time Compaq was itself taken over by Hewlett Packard and DEC disappeared from the radar.

    For GM to survive it must come from within. I see the best result coming with a new GM to emerge through an unassisted C11 restructuring with a newly elected BOD, if that’s at all possible.

    Obama is introducing the politics of change then he has to demonstrate that the BODs and their CEO’s who have shown poor vision will go to the wall.

    Unlike GM, Ford management, in the hiring of Mr Mulally, show that they at least, recognize the value of some new blood in order to affect changes in strategy. For both that reason and to preserve at least one American design house in north America, Ford should be assisted in my opinion with govt loans. You could say that Ford’s woes have been precipitated by the flooding of the market by the two other domestics as they drove their businesses into the ground.

    Finally we need smaller companies for a stable society. Being “too big to fail” must be prevented to avoid the type of societal upheaval that results when corporate governance goes astray.
    T2

  • avatar
    tonycd

    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.

    I agree with Mr. Sparky’s comments above. I’d further point out that the only reason the transplants’ auto workers make the good salaries they do is because of the pressure applied by the existence of the UAW. Toyota has already made noises about slashing the pay of their U.S. workers, even before the recent catastrophe. Does anyone really believe they wouldn’t just do it straightaway if not for this?

    We need to remember what’s most important about this outcome. This is not a theoretical MBA-class exercise. The best outcome is the one that’s best for the American public. That means maintaining as many good jobs as possible. When we as a public buy Wagoner’s and the corporate plutocracy’s propaganda that the unions created all of GM’s troubles, we make the restoration of American carmaking pointless. Henry Ford (not a terribly unsuccessful businessman) had the right idea — the workers should be paid well enough to afford the company’s products. There can be no economy without customers.

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  • eggsalad: You make it sound like Target (or wherever) can just plunk 20 chargers in the parking lot. No. Target has a...

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