Will the rescue of GM work?
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Associate Editor
David Stevenson Jun 05, 2009
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General Motors, the iconic American car giant, has gone bankrupt. The plan is to get under the bonnet, tweak the engine, and get her running again. But would you buy it? David Stevenson reports.
What was the problem with GM?
Just about everything. Years of excess production capacity, old-fashioned models and a legacy of providing over-generous healthcare and pension benefits have finally taken their toll.
In recent years, GM also switched from volume manufacturing to making more profitable pick-up trucks and gas-guzzling sports utility vehicles (SUVs). But soaring petrol prices hit SUV revenues, then the recession crushed car sales worldwide. GM has now burnt through its cash reserves and nurses huge borrowings – the firm has $82bn in assets but $173bn in debts.
The only option open to GM's management, a US government-assisted Chapter 11 bankruptcy, is "a humiliating fall from grace for a symbol of America's industrial might and the world's biggest car maker for much of the 20th century", says the FT.
What will happen in Chapter 11?
In GM's case the aim is to split the car maker into two firms: a 'new' GM, which will emerge within 90 days, slimmed down to survive in a US market which demands ten million cars a year, rather than the current 16 million. Healthcare contributions will also be cut to save up to $2,000 per car.
Brands such as Saab and Pontiac will be parked in a so-called 'old' GM with a view to selling them, while Hummer is being sold to the Chinese.
The US government will provide $30bn additional aid on top of the $20bn already lent, for which it will get a 60% stake, while various other parties, including the Canadian government and United Auto Workers Union, will take much smaller stakes.
Will the plan work?
"The reality of a GM bankruptcy is a bitter pill to swallow – it's a bit like the Titanic sinking," says Stephen Pope at Cantor Fitzgerald. Worse, "this is a step they should have taken more than a year ago, which could have put them in much better shape before the economy went down".
But at least asset sales should help the firm clear more than $79bn in debt, while unneeded facilities will be closed and its dealer network reduced by 40%, says The Wall Street Journal. The result is around 30% of its 90,000 American workforce will be slashed by the end of 2010 as 14 US factories are shut.
But even the slim-line GM may not get long to prove itself. "What's emerged over the past few days is little more than breathing space for maybe a couple of years," says Howard Wheeldon at BGC Partners. The new firm will focus more on making smaller, fuel-efficient vehicles.
That should help GM "get customer confidence back", says Alastair Beveridge at Zolfo Cooper. But "will it be able to return to the glory days? I'm not sure."
Is this good news for customers?
"Four generations of Americans have grown up riding in GM vehicles, and there are at least 30 million on US roads today," says Rick Newman on US News. "Few corporate downfalls could touch as many American consumers as GM's bankruptcy filing."
The government has pledged to backstop all the firm's warranties, but the new GM will wait nervously to see whether customers continue buying its cars or jump ship to rival brands. There is a worrying recent precedent that won't have been lost on consumers: following Chrysler's late-April bankruptcy, sales rose but 'brand damage' caused three-year resale values of its vehicles to plummet.
Set against that, new prices for GM cars could come down sharply as dealer fire-sales reduce the current huge oversupply of vehicles. "GM will be more eager than ever to move inventory through the dealer chain, which implies significant discounting and compelling incentives," says Jack Nerad of Kbb.com.
What about the remaining US car industry?
GM typifies US car making. The industry has struggled since the 1970s and been overtaken by Japanese rivals making cheaper, smaller, more fuel-efficient cars. None of the Big Three – GM, Chrysler and Ford – has ever confronted the unions or cut production, so a chunk of each car's price pays for retired workers' benefits.
As such, marginal productivity improvements haven't fed directly into lower prices. "This industry will be forced to make... painful decisions to survive," says Jon-Christopher Bua on Sky News. Most of these choices "will mean real hardship for working families, who will lose jobs, retirement benefits and any hope of a secure future. If the government makes money on its 'investments', there'll be many who will try to take credit.
But if these plans fail and only push the US further into debt, who'll take the political heat for these tough choices?" As John F. Kennedy said, "success has many fathers, while failure is just a Ford Edsel".
What does this mean for Vauxhall?
Vauxhall was part of General Motors Europe, but last week was transferred to Opel in Germany, itself only 35% owned by GM. So the fate of 5,500 Vauxhall workers rests with the new owners of Opel/Vauxhall, the Russian-backed Canadian car parts firm Magna.
Britain's business secretary, Lord Mandelson, is seeking a 'cast-iron guarantee' that Magna will retain production at Vauxhall, says Karl West in the Daily Mail.
But "a major concern is that Magna has also suffered from the industry slump", having posted a "huge" $200m first-quarter loss while suspending dividends until further notice. And the global car industry will see more plant closures and bankruptcies, says Tim Urquhart of IHS Global Insight, as it shrinks from six to eight large manufacturers.
On recent form, neither GM nor Vauxhall will be among them.
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