GM Likely To File Bankruptcy Next Week

Multiple outlets are reporting GM may file for bankruptcy next week (CNN for example). Speculation is that the "bad" assets will be cut out and the "good" assets packaged into a new company which would emerge. Automotive News (subscription required) reports GM's bankruptcy plan calls for another $30 billion in Federal loans, bringing the total close to $45 billion.

This begs the question (sort of tongue-in-cheek), why couldn't they just go bankrupt with the debt they already had? Isn't this just trading one mountain of debt for another, with added strings and loss of control?

A lot of people (bondholders, shareholders, dealers, employees and the American public taxpayers to name a few) are getting a raw deal. Is it necessary? No one knows but it IS going to get uglier before it gets better, if it ever does.

It's also interesting that the Chrysler filing was likely a test case (see my earlier post), it's not yet out of bankruptcy, and GM is getting ready to file already. The urgency of the government deadlines is rushing decisions which should be made at a more prudent pace.

What Happened to Detroit?

After decades of mismanagement and mediocrity, we’ve all seen many of the overarching issues laid-bare in the past several weeks. In a nutshell here are the Detroit 3's problems:

1. Poor Management, Perpetual Reorganization, No Solid Long-Term Strategy

Actually their long term strategy essentially amounted to lobbying to keep the status quo in terms of fuel economy and regulatory standards. Cheap gas spurred big profits in SUVs and other vehicles that were not necessary in the numbers in which they were produced, and also put the manufacturers at the mercy of fluctuations in fuel prices.

All the while they went from one failed plan to another with no consistency in long term outlook. Every couple of years each manufacturer would roll out a new initiative but the outcome was usually more of the same: Shrinking market share and decreasing profitability, while spreading their marketing too thin on far too many brands.

2. Producing Vehicles the Market Doesn't Want

The domestic manufacturers produce 8 of the 11 worst cars of 2008 according to Consumer Reports. That becomes even more of a problem when demand is constantly shifting and their plants are geared to only producing a few models, with little flexibility.

Because of continued production of less desirable vehicles they’ve hurt the value of their brands. Sure, by many objective measures the domestic manufacturers have made great strides in productivity, cost, and quality.

But they missed the boat on building exciting, interesting, and desirable vehicles. The reason for this simply is that the executives do not understand cars. They may understand some of the numbers, but until the cars are what people want to buy, they’ll never make the numbers.

3. Excessive overhead (labor cost, healthcare, etc)

Not much of the fault is with the labor unions. They negotiated what they could. Sure it was shortsighted and the results helped dull America’s competitive edge and drove jobs to Mexico and overseas. But the real fault lies with management that would be so inept as to ALLOW the unions to push them into the agreements that they did.

The reason they're in crisis now is because they have been losing so much money, and then the credit crunch sharply reduced sales (many buyer's can't qualify for loans) AND reduced the credit available to the companies, especially since their existing debts (bonds) have continued to be downgraded. It's a vicious cycle resulting from the 3 points above.

By the time they realized this it was all too late. We’re now at a stage where it looks unlikely that GM and Chrysler will be able to stave off bankruptcy without government support (and even then it’s not looking too bright). The reason is because their businesses are not strong enough to survive in good conditions, much less to weather the storm.

Too Big To Fail?

Not to be too much of a cynic but see what I meant last week? There's no business case for a GM/Chrysler merger but.... maybe taxpayers will foot the bill.

GM/Chrysler Takeover/Buyout/Merger

A day later and it still doesn't seem like a good idea for GM. This article goes into a little more detail about the cash GM would get from Chrysler's coffers, which would be advantageous in the tight credit environment that currently exists. Let's be real. That $11 billion isn't going to save a company that is burning $1 billion per month, especially after it absorbs another company that's also bleeding. What's that going to buy? Another 6 to 12 months?

It seems like the real end game would be to create a company that has so much impact on the American economy, whether real or perceived, that it would not be allowed to fail. By merging the two they would have further bargaining leverage with governments, suppliers, and dealers, as well as the ability to drastically reduce industry capacity. That would (perhaps) help hasten a recovery by bringing supply more in line with demand.

However, I still think it's a bad idea and that adding two companies in crisis isn't going to result in anything but a big stinking pile of you-know-what.

General Motors: Vision for the Future

Rick Wagoner's speech at the Consumer Electronics Show covered much of what I've been thinking about the future of the automobile. I was very impressed with the breadth and depth of GM's vision as I read the transcript.

Three points that stand out are driverless vehicles, vehicle-to-vehicle (and network) communication, and electric drive. I've touched on these things in other posts. Certainly not the only one, so it seems there is some conceptual convergence within the automotive industry.

In the speech there was also discussion of hydrogen and other advance propulsion methods. But ultimately, it all comes down to voltage and current. No matter where the energy comes from, whether it's oil, coal, biofuel, or nuclear, the future is electric.

There's a long road from vision to reality. It's anybody's guess how events will eventually unfold but it is abundantly clear that General Motors does not lack vision. I hope and believe it will come to pass.