Jason Mathew's  Instablog

Despite shedding billions in bondholder’s 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 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 administrations (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 or Honda.

The government made it clear whom they 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 & 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 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 2 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.