Is It as Simple as New-GM vs. Old-GM?

Picture the 1970s: we’re cruising down the boulevard of dreams in our softly suspended land yacht when suddenly we hit the sand like a beached whale. Gas becomes tight and GM quickly downsizes its fleet with disastrous results. Too bad it was only a false alarm and GM was able to enter the 1980s back to its gas guzzling ways.

Instead of fighting the Japanese midsize and large car advance heading into the 1990s, GM once again did a side fake to SUVs. GM has a history of avoiding the distasteful competition with either total avoidance or lame attempts to meet the competition. CEO Fritz Henderson touted a few of GM’s stellar products, leaving us thinking that they moved little from mediocrity. Just watch those full-size cars float up and down on the highway and image how well they handle.

Two things puzzled me when I listened to both President Obama and Fritz Henderson’s speeches on Monday, June 1, 2009. The first was that neither told us what customers can expect in the products from the new GM. The second was how can GM be easily split when there is a matrix relationship between products and factories?

Henderson said GM’s product development needs to be less scatterbrained; fewer new vehicles introduced with more successes. But Henderson did not tell us what would compel a customer to buy a GM car. Along with that we need to know from GM what separates a great car from a mediocre one. And what defines GM across all its vehicles. Until GM can answer those questions, they are still lost. No amount of government money, great engineers, frugal accountants and conscientious hourly workers can save them.

Let’s assume miraculously, some customers still find GM relevant in the future. After all, even the Republicans still have a small remnant of Karl Rove’s famous base. Does GM still build highway cruisers and SUVs to please its shrinking base or does it create a few high performance cars with great handling? Henderson implies both during his speech. A little halo covers over a lot of mediocrity. You can see that there will be no new GM in the customers’ minds.

Companies can only reinvent themselves when they are willing to give up their core constituency and define themselves to a new audience. It requires letting go of the security blanket and clearly defining yourself in the characteristics of every brand and every product you sell. GM cannot define itself because it still wants to be all things to all people. Reducing the number of brands does not change that.

So if there is no new GM in the products and the customers’ minds, then the only benefit left is cost reduction. The work force is being reduced and wages are dropping significantly, but it is happening at a huge cost. The pension plan still needs to be funded and government is forcing the new GM to fund the retirees healthcare with a $6.5B preferred paying 9%. And workers are not being let go, they are being bought out. GM will be reacquiring certain Delphi parts factories that it jettisoned years ago. It looks to me like a combination of a UAW jobs and retiree social welfare program with an AIG-like (AIG) pass through to save the auto parts industry.

Now we realize that while the workforce and wages will be reduced most legacy costs will still remain. While GM’s unsecured debt will be exchanged for equity, GM still has plenty of other debt and obligations remaining. Just think about the cost of winding down and closing plants, and the environmental liabilities that will remain. That leads to the question of whether the creation of a new GM will hold up in bankruptcy court.

Removing Pontiac from the GM lineup does not mean that GM can simply just close the Pontiac plant, because there is no such thing. GM has always produced multiple brands in the same factories. So moving Pontiac to the old GM is meaningless. Likewise, to close a plant that produces Chevy and Pontiac models would mean the costly moving of gigantic equipment and realigning computer systems. So the question of which GM owns which plants is just the start, then comes which GM owns what equipment inside the plant starts the real quagmire. Does the old GM produce parts and assemble cars for the new GM? Do the two GMs have to cooperate to the detriment of the old GM? What do the creditors of the old GM think? And lastly is the old GM a continuing entity or does it just go into liquidation when the new GM no longer wants it?

Some creditors have already appealed the formation of the new Chrysler. Chrysler was a cleaner separation because all of its brands moved. But certain creditors felt that the sale of select assets to the new Chrysler was just a standard reorganization thinly disguised to benefit some creditors over others. With Chrysler at least a new party, Fiat, is a participant in the “purchase.” This does not leave much justification for GM when the owners of the new GM and are just a subset of the creditors of the old GM.

All told the GM bankruptcy journey has just begun, and it won’t be short and certainly not sweet. I see no product plan, no manufacturing plan and no appeasement of the creditors. All I see at this point is President Obama implementing social policy and trying to protect the Pension Benefit Guarantee Board.

Disclosure: Author is long AIG.

Comments

[BeachRider:]

GM's problems also stemmed from self-competition. For example, people shopped Chevy against Saturn & Pontiac, reducing the margin on the GM-deal. GM also built the cars so that Saturn/Pontiac/Buick/C... adaptations could be handled within the factory. This made the GM cars less attractive and unnecessarily complex/costly. GM's 1950s model for market domination crumbled as they attempted to leverage common materials. GM needs a more attractive product line that is simpler and more profitable. This is all in addition to a clear plan to control costs and market products.

Jun 03 01:01 PM

[NetworkKing76:]

I am curious if GM is exploring separating manufacturing from design, etc. like the technology industry. I think people are using the excuses of decades ago for not doing this. Design and manufacturing must be closely linked...blah...blah..... the 21st century! You can design an entire car on a computer and run test models and start all over again.

A manufacturing GM could integrate its value chain (i.e. buy largest suppliers) and develop platforms that can be customized for or by each customer (i.e. "New" GM, New Saturn and Hummer owners, up-and-coming car companies). Now is a perfect time to do it before demand returns to historical levels. **note: people aren't going to continue repairing the same 8-10 yr old car but so long...

Jun 03 01:16 PM

[aja8888:]

Is the Volt dead? Or soon to be at $40,000 per copy?

Who will buy the new (same old) cars if the current pent up demand is picked up by Ford, Toyota, Honda, etc?

I really doubt that GM "loyalists" are still in great numbers (my GM-buyer relatives are all dead now).

I bought a VW diesel that meets the 50 state emissions criteria nad gets 40+ MPG. No more GM for us.

Jun 03 04:19 PM

[Leftfield:]

I'm thinking you could take the old GM parts with the extinct brands and create an industrial enterprise zone. Limit government interference, stupid costs and requirements, maybe even taxes for at least some period of time and watch the inspired entrepreneurs take that thing to smashing success. We have the anchor of mama government stifling the best in the human spirit in this country leading us to this pathetic pass. This creative "experiment" would prove the laws of human nature and economics all over again to the disbelieving geniuses running things now who don't know them at all.

Jun 03 07:40 PM

[dmilkman207:]

I am for one quite bullish on GM long term prospects. Why? great brand loyalty with a good chunk of consumers. Not like they used to have,but enough to be quite sucessfull. Now that they will shed that retiree overhang, they might be just make money. They can not go bankrupt again, can they? I think maybe in the next few years there will be major breakthroughs in new technology with gasoline a thing of the past, everyone will in the new auto market. GM, with the backing of the US goverment will be positioned to do nicely. Lastly, no one gives them a chance. A sure sign their new stock ,when traded will skyrocket. I am happy to say I am in, when my GM notes are converted to equity. I am holding on to them, I expect 100 cents on the dollar someday. (It may take a few years)

Jun 11 04:52 PM