7 Reasons Why the New GM Might File for Bankruptcy

Despite shedding billions in bondholders' debt, paying creditors pennies on the dollar, winning UAW concessions, cutting thousands of employees, dealers, manufacturing facilities and obtaining $50 billions in financing/loans from the Treasury, GM’s (GMGMQ.PK) bankruptcy plan may not work.

The road to bankruptcy has been long and the reasons for this failure much longer. A review of restructuring plan reveals incredible cost reduction efforts but more importantly what GM/Treasury have deliberately decided not to change. GM’s current bankruptcy plans may not secure GM’s future and could ultimately lead to a bankruptcy repeat.

Seven reasons why the new GM could re-file for bankruptcy:

1.) $1400 in per vehicle costs went untouched to ensure re-election and voter satisfaction rather than shareholder value.

The day GM filed for bankruptcy, GM owed pensions to more than 650,000 individuals. In 2004, GM publicly stated pension costs amounted to $695 a vehicle. GM is selling nearly 1 million less vehicles and retiree pool and grown significantly over the last years yielding an estimated $1400 per vehicle pensions cost. GM is not addressing this cost burden via bankruptcy.

This administration (Treasury) knows the 55+ age demographic is the most active voter base with the highest voter turnout, so the Treasury and politicians have deliberately chosen not to upset this voter base by not reducing pension obligations. Adjusting executive pension packages has a nominal relative impact and illustrates the selective (wealth discriminatory) bankruptcy practices.

2.) Bankruptcy court ruling did not establish labor rate parity with Toyota (TM) or Honda (HMC).

The government made it clear whom it stood behind when it reorganized GM. According to Financial Week, the labor movement spent $385 million to elect Obama and other Democrats. Nobody writes such large checks without expecting something: this was payback time. Has a company ever emerged from bankruptcy without union labor rate reductions? UAW conceded flat wages and additional health care cost burdens but are these actions really differentiated from non-bankrupt Fortune 500 companies?

3.) Reducing dealer count will have nominal impact on GM’s cost structure yet significant downside impact on market share.

GM is absolutely “overdealered” but eliminating 3,000 dealers is not the way increase market share. 1000+ dealers were eliminated over the last 5 years and little evidence exists to support a sales or share increase in a given market area post dealer termination. Improving dealer throughput cannot be cured simply by cutting competition.

Second, GM had an opportunity to re-evaluate their distribution network and “change the game.” The exclusive dealer franchise business model is flawed and “sister” vehicle development worse. GM could have established an all GM retail experience in metro markets and selected the best dealer operators, instead they cut and believe survivors will sell more.

Does anyone believe a Buick GMC store will attract the best investors/dealer operators compared to Honda? Dealer reduction plans do not address viability concerns of a standalone Buick GMC or Cadillac store.

Finally, a human element exists with people that lost dealer jobs and residents of the markets that GM decided are not viable. This is not a small number and many will not remain brand loyal. Consumers will undoubtedly be inconvenienced for service and pay higher prices due to less competition.

4.) Government and UAW as majority owners = poor management.

The U.S. government and the UAW will be majority owners in the New GM. GM and the Government both took on excessive debt and promised to much to too many yet one (government) is dictating terms to the other. Labor unions are primarily political creatures, the politics of organized labor could force GM and to stay in bureaucratic methods and lead to limited operational leverage.

In the future, will the UAW vote yes to a pay cut? Many are to blame but the fingerprints of this administration are all over the labor/pension elements of the restructuring plan.

5.) GM will be at a strategic competitive disadvantage with no ability to financially engineer sales with 0% loans and extend consumers credit.

GM no longer has controlling interest in its main financing arm, GMAC. For years GMAC would finance customers that most banks would not. GMAC is now a bank holding company and will only support 0% loans and financial incentives with significant GM cash payments/subsidies. Ford (F) and other manufactures will have a weapon of sub-vented financing rates to pump sales while GM will be forced to match with huge cash expenses to support similar marketing programs.

6.) GM Europe operations will only get worse, supply base is weaker than the U.S. and surviving brand equity is weak.

European and Asian suppliers use credit insurance to support automotive business unlike the US. In November 2008, the big three European credit insurers – Euler Hermes, Atradius and Coface – stopped writing policies for suppliers trading with GM and Ford. In absence of insurance the supply base for Europe will undergo dramatic changes over next few years, which only further add complexity.

Second, GM sold Saab and Opel, its premier European brands. Apple pie and Chevrolet do not resonate with Europeans and neither Chevrolet or Cadillac have established brand equity with consumers.

7.) 35-MPG energy requirements in 2016: GM currently has one vehicle that meets that standard today.

A senior administration official stated the new guidelines will cost automakers $1,300 per vehicle, a move that could cost automakers $13 billion to $20 billion annually. GM’s expected compliance costs will be around $3 billion annually. The new GM will not have retained earnings so GM must generate ate least $3 billion in free cash flow to fund compliance investments alone. GM’s newer products such as the Chevy Malibu, CTS and the newly designed 2010 Buick Lacrosse are second to none but energy compliance will likely cripple new product development when GM needs it most.

In fairness, Toyota has two vehicles that meet proposed standards but the point of differentiation is Toyota has proven the ability generate operating cash flow and execute capital investment projects.

For years, GM denied bankruptcy as an option when the reality was that it would take more than a bankruptcy ($50B in Government support). Former GM executive, Alfred Sloan wrote in his 1965 memoir, My Years With General Motors

Any rigidity by an automobile manufacturer, no matter how large or how well established, is severely penalized in the market.

GM clearly did remember those words and for a moment will emerge from bankruptcy a stronger, leaner new GM.

Unfortunately this experience may be short lived and the cumulative mistakes of on-going restructuring efforts may lead to a bankruptcy repeat.

Disclosure: I do not hold positions in General Motors or other automotive firms.

Comments

[casey00001:]

GM with a "Real" bankruptcy! What a concept. What you describe should have happenned but won't happen until the day after 11/2/2012 (next election). In a real bankruptcy all the existing agreements with the UAW would have been thrown out, bondholders would have been treated fairly and GM would have had a chance. A Gov't subsidized shell of the company will be left three years from now. There was absolutely no reason to get rid of the dealers, who is going to drive to the next town/major city in some cases to buy a GM car?

Jun 25 08:22 AM

[Randall-L:]

Ms. Mathew must not know there are Toyota factories in the U.S. where their employees earn on average the SAME rate of pay (and in some cases more) as workers in U.A.W. represented U.S. auto factories. The U.A.W. has conceded benefits and two tier wage pay, which would bring total hourly wage and benefit compensation in line with foreign auto makers in the U.S.

Maybe that's why it wasn't brought up in bankruptcy - it was already dealt with.

Jun 25 08:22 AM

[harbi:]

This guy knows what he is talking about, and I agree with him 100%. I will also add the 8th point which is, producing and importting cars from China is like shooting yourself in the foot, not only GM will pay a heavy price in the future, but all the other car manufacturers and the country.

Jun 25 09:48 AM

[Rwong8200:]

It will be interesting to see how Saturn does. They will have much more flexibility then any of the other GM divisions. In the end they may be the winner.

Jun 25 10:07 AM

[Rwong8200:]

It will be interesting to see how Saturn come out of this mess. They appear to have the best options. GM I fear for and where does Chrysler fir into the market?

Jun 25 10:10 AM

[BuyAmerican:]

GMAC changing to a BHC has no impact on GM's ability offer 0% as a sub-vented interest rate, as in the past (just they will in the future) this was a GM supported incentive offered in place of a rebate. Otherwise a very good article and it is scary to see what is to come of GM as there were no real changes made to the GM operating structure as there were to Chrysler's...

Jun 25 11:04 AM

[a. palmer jr.:]

Part of the problem is GM and other American car companies can't meet the 35mpg mandate without making their cars feel like you're riding in a big tin can. Toyota, VW, Honda, etc. have been refining small cars for several years now and their small cars feel like you're riding in a mid-sized American car. Once people compare the 35mpg offerings the ballgame will be over.

Jun 25 01:00 PM

[notsosmart:]

like it or not the world has changed & this continues.like it or not capitalism has changed & this continues. hard to believe a lot of car dealers finally got their comeuppance.saturn was ok re price untill the trade in hassle.there is something wrong with a financial/ material situation when you can lose thousands of $ just by driving out of the dealership.you may call it capitalism or any other ism but its not right.well now at least less thresholds.

Jun 25 04:12 PM

[tommind:]

Hey Jr. have you forgotten the ford fusion maybe you need to drive.Is a midsize fuel econ like a small car, like best in it's class "41mpg".


On Jun 25 01:00 PM a. palmer jr. wrote:

> Part of the problem is GM and other American car companies can't
> meet the 35mpg mandate without making their cars feel like you're
> riding in a big tin can. Toyota, VW, Honda, etc. have been refining
> small cars for several years now and their small cars feel like you're
> riding in a mid-sized American car. Once people compare the 35mpg
> offerings the ballgame will be over.

Jun 26 12:01 PM

[Detfan:]

Actually GM is in great shape, totally discounting the authors points. The reduction of GM dealers is necessary where there is too much duplication in major cities. GM's rural dealers remain strong, and GM will still have many hundreds of dealers more than Toyota after the reductions are complete.
Union income has already reduced, and is now lower than foreign transplant employes. With all the GM restructuring over the last few years, GM will be making $5,000 per vehicle more than they did just five years ago (source John Holstein, author, "Why GM Matters". GM has gone from being middle of the road in mileage ratings, but now has the most segments of industry leading vehicles in mileage of any manufacturer. GM is already moving way past the imports on getting to the 35 MPG mandate. The Chevy Cruze will get well over 40 MPG. the Chevy Orlando will get well over 40 MPG, and the Chevy Spark will get almost 50 MPG. The electric Chevy Volt will be rated at 100 MPG, and there will be several iterations of the Volt being built by 2012.

SO, I'm not too worried about GM. I just looked at the next industry leading vehicle that GM has launched, the Chevy Equinox, which gets 32 MPG, which beats the Rav-4 at 27, and the CR-V at 28. Industry leading interior and fit and finish, just like most of GM's recent launches.

GM's retail market share has been stable for almost three years now, and is now beginning to increase. Meanwhile, GM is exploding in emerging markets like China, where they almost at a pace of 2 million vehicles sold this year.

Costs are way down, profit is going way up. GM breaks even now at 10 M SAAR, which looks like may happen when June sales get reported next week.

Jun 26 12:33 PM

[hootie:]

I agree 100% with Mr. Mathew. I am currently in management with GM and I can tell you that nothing has changed. Don't be fooled by all the news stories about union concessions. The truth is, the union gave nothing back. Why should they? As long as Obama is in power they won't have too. Obama will continue to bail out the union. Make no mistake about it, Obama did not bail out GM he bailed out the UAW. Things are so dismal here that every member of management that I know is looking to jump ship ASAP, myself included. What a sad ending to an American industrial icon.

Jul 07 12:12 PM

[Jason Mathew:]

First and foremost, I appreciate commentary on posted article, several reader comments offered an opposing perspective on the 7 reasons originally stated so I wanted to provide further evidence supporting my original rational.

Reader comment: UAW labor parity exists

Labor rates have improved through a two-tier pay structure, however, only newly hired employees will be paid at labor rates between $12-$15 an hour, all UAW workers did not accept a pay cut. As of today GM employs 55,000 blue collar workers and the majority of that population is still paid nearly a $30 premium relative to Toyota and Honda workers. It will take additional buyouts (with tax payer money) or 10 years of attrition to reach labor parity. Billions have been saved but labor parity is not yet equal.

Reader comment: GMAC changes have no impact on GM

GM no longer owns 100% of GMAC and ultimately will own less than 10% per restructuring plan. With the two entities essentially decoupled, offering 0% loans and financially engineering sales will be more expensive as GM will realize little or no GMAC revenue/profit going forward. Initial evidence of GMAC independence occurred when GMAC stopped issuing credit to car buyers with less than a 700 credit score and GM had little say in the decision. Ford, Honda, Toyota will continue to own and operate and realize returns from their financing arm.

Reader comment: Government regulation will have no impact

Several vehicles in 2011 will meet federal standards, however, with 30+ vehicles (post Pontiac/Saab/ Hummer divestiture) and 50% truck sales mix, billions will be required. The impact is first timing, second source of capital and third compliance method. Investments must begin immediately given vehicle development time line and although GM may generate profit, earning billions annually is not easily foreseeable. Where is the money going to come from? Part of GM’s MPG compliance is focused on hydrogen technology. This administration is skeptical on hydrogen, reduced hydrogen budget spend in favor of other alternative energy options and has no plans to develop a hydrogen infrastructure. If the government is not backing hydrogen how is GM going to recoup the billions in hydrogen vehicle investment? Cap and Trade will be an additional burden on manufactures to spend billions to reduce carbon emission as early as 2015.

Reader comment – GM will be viable at 10M SAAR

Maybe, industry volume is less important then GM volume/share that was estimated at 20% in the restructuring plan. June results put GM at 19.7% share (already under) and with no Pontiac, Saab and Hummer sales volume and expected share erosion; GM will likely level out around 15% market share going forward.

I sincerely want GM to succeed, I am simply pointing out reasons why that may not be likely. I welcome any rational opposition to seven reasons listed. Thanks!

Jul 08 09:24 PM