GM: Chapter 11 or bust

By David Bailey
June 1, 2009

David Bailey- Professor David Bailey works at the Coventry University Business School and has written extensively on globalisation, economic restructuring and industrial policy, with particular reference to the auto industry. The opinions expressed are his own. -

GM declared itself bankrupt on Monday in one of the largest bankruptcies in U.S. history, in an attempt to seek protection from creditors.

The firm has stacked up over $80 billion of losses in the last four years, also swallowing some $20 billion in cash from the Obama administration. It is likely to need another $30 billion before emerging from Chapter 11 substantially slimmed down and free of debts.

A bankruptcy judge will decide who gets what assets. It’s not clear whether during Chapter 11 the firm will continue to function and assemble cars.

It used to be said that “whatever’s good for GM is good for the U.S. economy”. Whilst GM is no longer the world’s biggest carmaker, by some estimates it still accounts for 1 percent of the U.S. economy. The bankruptcy is not only hugely symbolic of the fate of the ailing U.S. car industry, but is of huge importance for all the workers, suppliers, dealers and creditors caught up in its travails.

Republicans have begun to criticise the U.S. president’s handling of the GM affair, but it is difficult to see what else the U.S. president could have done.

Obama had to give GM time to come up with a credible plan, and I have always thought that the firm would need up to $50 billion of government support to get through the downturn and restructuring.

Under the proposed plan, the U.S. government would get a stake of over 70 percent in GM in return for another $30 billion of state cash, with the United Auto Workers union taking 17.5 percent initially, with the union accepting shares in GM instead of cash owed by the firm for retired employees healthcare cover.

A majority of GM’s bondholders have accepted the offer to swap their $27 billion in debt for an initial stake of 10 percent with the option of buying 15 percent more later. Their agreement to do this should help in speeding GM’s progress through Chapter 11 and avoid expensive legal battles.

Whilst a minority group of bondholders are holding out for a better deal, in reality this restructuring is the only game in town.

Hopefully, the new GM that emerges from Chapter 11 will be leaner, fitter and free of debts. It will include the firm’s best models and R&D and will scrap brands like Pontiac, Hummer and Saturn.

By 2012, the new GM will comprise the Chevrolet, Cadillac and Buick brands, plus its GMC truck brand. Of particular importance, its forthcoming electric Chevvy Volt car will be part of the new firm.

“GM-Lite” will cut the number of assembly sites across North America, including Canada, to 33 within three years, from 47 at the end of last year.

Eventually, the goal is to float the new firm on the New York Stock Exchange. It will shed some 20,000 or more workers in the U.S., and has also told over a thousand dealers in the U.S. that they are at risk of losing their franchise. GM plans to lose 2,300 from its 6,000-strong network.

In a deal with the UAW which saves the firm $1 billion a year, rules on breaks, vacation and overtime have been changed, retiree benefits have been cut, and the UAW has agreed not to strike until September 2015 at the earliest.

GM will never be the biggest manufacturer again, but Chapter 11 is anyway about restructuring the firm, erasing the debts, cutting costs and reorienting the firm towards more environmentally friendly cars.

A viable car company may yet emerge from the ashes of the old GM, thanks to an interventionist U.S. government which is investing heavily in new green technologies.

The situation here in the UK is rather different. An efficient and world class car industry is struggling given the impact of recession and credit crunch, and the British government has largely been a spectator as GM Europe has been sold off.

That in turn could have a very significant impact on jobs at Vauxhall here in the UK.

Comments

a well balanced blog on GM and Mr bailey makes the point about the need for the Uk government to support manufacturing in an intelligent way. interesting that you think a reformed GM will emerge from this in good shape.

Posted by simon chadwick | Report as abusive
 

Chapter 11 is no assurance of long-term viability. The work to transform and innovate a company has to occur continuously. But all of us are familiar with the management types of cut costs, the union types that increase costs, while neither really keep their eye on the ball. As I post this comment from a notebook computer powered by a solar-recharged deep-cycle battery, I personally want to see GM collapse and fail. Oh, I’m sorry, that already happened. I meant to say, I don’t want to see the company get up.

It is the best thing for tax-payers, competitors, the environment and the nation as a whole. However my opinion hardly matters. So we will spend billions. Then we will utterly fail. The government will be less able to try this stunt again. So in the long run this is best. By all means, pour hundreds of billions into these types of companies. I’m certainly never going to buy a GM vehicle. That tone in my writing is called bad will. It is bad because government officials are boot-licked into compliance to support these special interests.

I want to see an end to people – who are struggling to survive – subsidizing obsolete companies with overpaid, mob-infested union executives. So with all due respect to the President who I personally like, I’m looking forward to the day that GM emerges from bankruptcy and becomes demolished by the competition. Praise the power of capitalism.

Posted by Don | Report as abusive
 

Everything is fine and dandy but we seem to forget where we come from. The government is to govern “for the people,by the people”, not run our businesses. (they have a hard time running the government, never mind their business ventures) It reminds me of Communism….

Posted by ruda | Report as abusive
 

SO LET’S THINK ABOUT THIS, RATHER THAN PAY UNEMPLOYMENT BENFEITS FOR GM EMPLOYEES. ITS NOW PAYING THEM FULL WAGES.
THE TAXPAYER IS COUGHING UP 50 BILLION SO GM CAN OFFER 0% INTEREST RATES FOR 5 YEARS OR $5000. HOW LONG WILL TAXPAYERS KEEP SUPPORTING THIS ?

Posted by gd | Report as abusive
 

Bush started the loans and Obama had little choice but to continue and buy some time for GM… it accounts for 1% of the US economy so you would be scrapping much of the US’ industrial complex by letting it go belly up. The state will eventually withdraw but not before GM start producing environmentally friednly cars rather than the awful pick up trucks that proliferate America’s roads. As for the ‘free market’ what Don doesn’t understand that many of the key technologies that we take for granted (computers, microchips, flat screens) were developed with US government support – your government DOES intervene and you don’t even know it. read your own history guys!

Posted by james elliott | Report as abusive
 

looks what happened to Mg Rover workers – they ended up earning loads less than at MG Rover and whilst some did OK, many took huge pay cuts. quality jobs matter and maybe supporting a firm restructuring is the right thing to do. There will still be huge job cuts (20000+) but at least this gives hope of a revamped Gm emerging form the ashes. you got a better idea?

Posted by jimmy k | Report as abusive
 

Ruda, government run banking and manufacturing in the U.S. evoke memories of my studies about 1930s fascism in Europe.

Posted by Anubis | Report as abusive
 

Thanks for the replies. Don, you are right that the firm has failed – in terms of strategic management and in terms of costs, and there are many reasons for that. However we’ll see whether this fails… I think a much slimmed down and quite possibly successful GM will emerge from the wreckage. simply letting 1% of the US economy disappear doesn’t seem like a credible option right now.

Posted by David Bailey | Report as abusive
 

so have we become a socialist state then? we’ve bailed out the banks now Chrysler and GM. then again it was the capitalist system that got us into this mess, remember?

Posted by jack o | Report as abusive
 

Jack O, Hitlers party was called the National Socialists. Germany like Italy descended into fascism (despotism) after first nationalizing finance and industry. Then the expansion of the military. Karl Marx stated that the rise of fascism in a society is a symptom of capitalism in decline. George Washington’s and Dwight Eisenhower’s farewell address’ to the nation are chilling and contemporary in their warnings to society about the threat of large standing armies and military establishments.

Posted by Anubis | Report as abusive
 

hey gd, the state won’t be paying full wages for long. over 20000 workers will be laid off and 14 plants closed down or mothballed.

The old GM screwed up. The new GM will have a chance to get elcetric cars, developed in the US, to market. whether it works or not will depend on all involved, but President Obama has thrown the firm a lifeline at least. he has also legislated to force US producers to become more environmentally friendly. He’s done the right thing, I think.

Posted by jules | Report as abusive
 

couldn’t they have just let GM go bust last year and save a pile of cash? it would still have been in administration and the government would still have to put cash in, but we’d have saved some 20 billion bucks.

Posted by Ray Mondo Man | Report as abusive
 

yeah but then there would have been 20 billion bucks less injected into the economy… so that was a form of quantitative easing. what else could Obama have done??

Posted by yeah baby | Report as abusive
 

David don’t worry about 1% of the US economy disappearing. It’s probably going to be more like 10% and i ain’t every coming back. Why would any gobal corporate invest it’s capital in the US for future expansion if it needs to be so heavily subsdies by the government. Maybe that is the reason why ! POOR US TAXPAYER

Posted by gd | Report as abusive
 

Hi gd, most governments subsidise something, so it’s a question of what and how much. Toyota and other firms have invested in the US because there is a huge and wealthy market there. They will continue to do so; indeed a Chinese firm has just bought Hummer (although I have doubts about whether that can survive in times of high energy prices…). A slimmed down and debt-free GM can generate wealth and jobs in the future. Thanks for your comment.
Dave

Posted by David Bailey | Report as abusive
 

It is obvious that between Doug Pelmear

http://www.toledoblade.com/apps/pbcs.dll  /article?AID=/20090530/BUSINESS03/90530 0338/0/BUSINESS02

and Johnathan Goodwin

http://www.fastcompany.com/magazine/120/ motorhead-messiah.html

both gas and diesel engines produced by Detroit have been in no way engineered to help the US and it citizens become oil independent. Detroit continues to cater to big oil to the detriment of our efforts to get off of foreign oil. The entrepreneurs above are making Detroit look ignorant and incompetent. This Administration should have let the Big Three fail and given the Bail Out money to visionaries like Pelmear and Goodwin. At least then you could have truly called the money “stimulus”. Only a fool would think that with all the engineers in the auto industry the only viable solution to the high cost of fuel and the reduction of emissions they could come up with was the “Hybrid”. No competing solutions; no competing technologies; while acting like the wall had been reached on the internal combustion engine and no further efficiencies could be achieved? Here is the evidence that they were either grossly incompetent or not honest with the American People.

Even the British are breaking away:

http://www.gizmag.com/tridents-200mph-10 0mpg-iceni-biodiesel-sports-car-nears-pr oduction/9928/

Notice the investment? UKP2.3M to get the car to production. For the Big Three this wouldn’t get it on paper much less to production. Obviously the cost of this vehicle is high but there are economies that could be taken advantage of to bring the cost into the range of the average US citizen.

I intend to circulate this information to every TV and Radio station and every news web site I can find in an attempt to get the word out while advising everyone I can to do the same and to not buy a car from any auto manufacturer that does not provide efficiencies comparable to what these guys get. We have already wasted billions of taxpayer money and I do not intend to waste another dime on an industry that has worked against this country and it people.

Now, Mr. President, what are YOU going to do about it? One thing I can think of is to create an Auto Industry Recovery and Innovation Czar. The two mentioned above would be very good candidates.

Posted by B.Free | Report as abusive
 

An interesting point, B.Free!

Posted by David Bailey | Report as abusive
 

B.Free, I just read the articles about Pelmear and Goodwin, and I *was* suitably impressed — and a little surprised I hadn’t heard of either one; I’ve been supporting alternative fuels for a number of years and read voraciously about green issues of all kinds. Thanks for posting the links. I do wonder if the recession has slowed them down or even shut them out.

In terms of mileage, I remember when I was living and working in El Paso, Texas in the mid-1070′s when the local paper announced some guy was coming to town to demonstrate a car he had tinkered with — the carbureator, I think — for some professors at UT-El Paso, media reps, oil industry reps, and reps from the Big Three.

His claim was he could drive El Paso-Albuquerque (285 miles) on a single gallon of gas. The New Mexico State Police even got in on the act, dispatching a helicopter to track him all the way to make sure he didn’t stop and get more fuel. Plus, the university scientists checked out the car to confirm it indeed had only one gallon of gas.

In the event, he had to coast the last few yards to the finish line — but he made it. More importantly, he had proven his point. (I didn’t witness this, but am going by media reports and what police a deputy friends who did witness it said; some of them followed him in their squad cars as part of the supervision plan.

Next thing I heard was that some company, either one of the Big Three or an oil company, I forget which, had bought his patent for some ridiculous amount ($40 million, as I recall) — and the device disappeared from the face of the planet. Or it never showed up in a vehicle, anyway.

But it’s a new day, and at least now we’re seeing some of these technologies come into play, especially electric and biofuel, though biofuel sure has turned out to be problematic, hasn’t it?

As for what happened with GM in particular, I fall into the camp that believes that the President had no other viable choice, even had President Bush not started the financial ball rolling. Further, to see tens of thousands of people who themselves had done no wrong end up on the welfare rolls would have been distressing — the 20,000+ who are facing the axe anyway are bad enough.

Which leads, by logical extension, to the Great Satan: Big Oil. Yes, I think the top dogs are just that — dogs — but lacking even a dog’s morals. That said, I wouldn’t want to see the tens of thousands of people who work, for example, for Exxon in the breadlines, either. And there’s the ripple effect, as we see with downline suppliers for GM sweating great big bullets of blood.

Though I’m American, I live in Thailand, and the Thai government has done a couple of things I’d like to see us do. They’re pushing natural gas, and they’re helping that establish a toehold in two ways: (1.) the government owns a national grid of service statons, and has installed the needed fueling equipment in some (not many, yet) of them, and (2.) they’re giving subsidies to offset the expense of changing a vehicle over to run on NG. I know our government doesn’t own service stations, but maybe it could help kickstart that (and other types of alternative fuel outlets) by subsidising service stations in some way. They’re also right now negotiating for a small fleet of municipal buses that run off the stuff, a fleet of 30 or 40 — the eumber isn’t settled yet, and there’s some disagreement between some officials about whether to lease of buy the buses. But at least the Thai government finally woke up and smelled the coffee, as we now have, so maybe we could take a page from Thailand’s book. One thing the U.S. is doing that could be expanded is to increase its own use of alternative fuels, as well as alternative energy, such as solar panels. In fact, the Air Force is hot on this in an increasingly big way, and the other services are pausing and taking a second look.

A point that the naysayers need to have made to them yet again is to stop these silly cries of “Socialism! Communism! Fascism!” The government has long subsidized all sorts of things, with governments from every party that won an election ever since whenever the first subsidy was granted. (For canals in the early 19th century, maybe?)

Anyway, thanks again a lot for posting the links.

Posted by Mekhong Kurt | Report as abusive
 

well Mehkong Kurt sums it up brilliantly. well done. By the way, the Israelis are investing big time in a nationwide network of elctric recharging points so that electric vehicles can take off. Its this kind of infrastructure that we need. I think there are some much smaller scale efforts in the UK as well. If the Chevvy Volt is to work – along with cars by Tesla etc, then we need a new infratsructure to support new, greener technologies (assuming we generate electricty in a sustainable way, of course).

Posted by Jamie Khan | Report as abusive
 

This all needs a broader industrial strategy to put in place a green infrastructure (e.g. recharging points) which the free marketeers won’t like – then agian look where the ‘free’ market got us. Financial meltdown.

Posted by Ajay | Report as abusive
 

Surprise, surprise, surprise,
Businessticians (Businessmen in Politics-wonder who they are really for?) are giving other Businessmen billions of dollars that really haven’t had an effect on America and her Economy, but these actions HAVE moved Billions of Taxpayer money from hard working Americans into the hands of more “Businessmen”! Hey, how many of you out there in Main St. have helped your buddies get a job or some money?

Didn’t Obama go to Yale, or Harvard (definately Ivy League) the same places where most of those on GM’s Executive Board went to get higher, pricier “Education”?

How many constructions workers, Farmers, and factory workers from all corners of America know a “Businessman” educated in a Ivy League school, or a Politician personally?

Hmmm, a separate society of people who keep themselves distant from the masses, and use MONEY as a divider? Why are rich kids taught at “Private Schools”? Why don’t Public Schools take how “Private Schools” teach the kids(obviously how they teach those kids works) and implement those styles?

My, my, is this small group of highly educated, very rich people very carefully creating a “Monetary Aristocracy”, a division of purpose where they(Ultra Rich) are the only ones with education and who have the money to run for office? Ooops, they already did.

If you look at this Political system (made up of Businessmen- not statesman like George Washington, Ben Franklin, or Thomas Jefferson) as slowly and purposely making use all dependent on “Government” for a “Stream of Income” (welfare) to become financial slaves!

Then these intelligent “Businessmen” then can blame the Government for making this country a “Socialist” country. Which I am sure they would then try and convince the public that “Business” has their best interest at heart as they continue to dismantle our Constitution, Liberties and Freedom as “Business” and “Banks” continue to act like Communists trying to own everything.

Our Constitution guarantee’s Life, Liberty, and Property. What are these “Businessticians” doing to our country?

Posted by C. D. Walker | Report as abusive
 

In some earlier posts on this “Great Debate”, i railed against (Ivy league) Business Executheves of “The Big Three” for their Idiotic use of Management Styles.

I would just like to post http://en.wikipedia.org/wiki/Hawthorne_e ffec
(What a great Collection of Human Knowledge, as easy to read, learn, and grow as having a new phone.)
This “Study” was done in 1931-1932
(I think the Fed began printing our money in 1933?)

“Bank wiring room experiments”

“The purpose of the next study was to find out how payment incentives would affect group productivity. The surprising result was that productivity actually decreased. Workers apparently had become suspicious that their productivity may have been boosted to justify firing some of the workers later on.[12] The study was conducted by Mayo and W. Lloyd Warner between 1931 and 1932 on a group of fourteen men who put together telephone switching equipment. The researchers found that although the workers were paid according to individual productivity, productivity decreased because the men were afraid that the company would lower the base rate. Detailed observation between the men revealed the existence of informal groups or “cliques” within the formal groups. These cliques developed informal rules of behavior as well as mechanisms to enforce them. The cliques served to control group members and to manage bosses; when bosses asked questions, clique members gave the same responses, even if they were untrue. These results show that workers were more responsive to the social force of their peer groups than to the control and incentives of management.”

They KNEW, and did it for Greedy Profit anyway.

And if they didn’t? With the Business Ethics 101 all students are required to take; They should get their money back and sue their school.

Posted by C. D. Walker | Report as abusive
 

If you want to take a look at http://en.wikipedia.org/wiki/Theodore_Ro osevelt and read up on what Theodore Roosevelt tried to do, why, I believe I am only following the same ideas as one of the greatest Presidents in History. The right things to do are timeless. 100 years ago he, and America, were faced with many of the same issues.

“He distrusted wealthy businessmen and dissolved forty monopolistic corporations as a “trust buster”. He was clear, however, to show that he did not disagree with trusts and capitalism in principle, but was only against corrupt, illegal practices. His “Square Deal” promised a fair shake for both the average citizen (through regulation of railroad rates and pure food and drugs) and the businessman. He was the first U.S. president to call for universal health care and national health insurance.[6][7] As an outdoorsman, he promoted the conservation movement, emphasizing efficient use of natural resources. After 1906 he attacked big business and suggested the courts were biased against labor unions.”

I ask you what is so different about what i suggest, and this President who’s face graces Mt. Rushmore right next to Lincoln, Jefferson, and Washington.

True Statesmanship examples are littered throughout our great history, we only need to remember lessons we should have already learned.

Posted by C. D. Walker | Report as abusive
 
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