GM emerges from Chapter 11 bankruptcy
– Professor David Bailey works at the Coventry University Business School. The opinions expressed are his own. –
General Motors announced its exit from Chapter 11 bankruptcy protection on Friday, and pretty speedy it was, too. The firm has quickly transferred its good assets to a new carmaker (“new GM”) which is majority owned by the U.S. government, and the whole bankruptcy process has taken just 40 days.
It used to be said that “whatever’s good for GM is good for the U.S. economy”. While GM is no longer the world’s biggest automaker, by some estimates it still accounted for 1 percent of the U.S. economy before going into bankruptcy. The latter has been not only hugely symbolic of the fate of the ailing U.S. car industry, but has also been of huge importance for all the workers, suppliers, dealers and creditors caught up in its travails.
The “new GM” that has emerged from Chapter 11 last week is a much smaller and leaner firm which has shed tens of thousands of workers, closed factories, cut loose hundreds of dealerships (further reductions will be needed), ditched several brands, and – with union agreement – changed employment contracts so as to cut costs.
Under bankruptcy protection, GM has shed over $120 billion in liabilities. Its work force will also shrink dramatically, from around 90,000 at the start of this year to around 64,000 by the end of 2009.
“New GM” will include the firm’s best models and R&D and will have scrapped brands like Pontiac, Hummer and Saturn. By 2012, the new GM will comprise the Chevvy, 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
The U.S. government will take a 61 percent stake in the new GM, along with the Canadian government (12 percent), and the United Auto Workers’ retiree healthcare trust fund (17 percent). Creditors to the “old GM” will get just a 10 percent stake.
The Obama government has stressed that it does not aim to maintain a long term stake, and may look to sell off its shareholding as early as 2010, or as soon as the firm is ready list on the stock market.
A key goal for GM is to stabilise things by being able to make money even if U.S. car sales remain depressed at 10 million to 10.5 million vehicles a year. And it urgently has to get new technologies and cars to market quickly, staring with its electric Volt car in 2010. If it can do that successfully, it still has a chance, as long as it can repair its battered brand image.
In essence, the future of GM now depends on its ability to actually produce fuel-efficient cars that people want to buy and which match or exceed Japanese standards for quality. It still faces a massive challenge.
GM will never be the biggest manufacturer again. However, Chapter 11 was anyway about restructuring the firm, wiping clear most of the debts, cutting costs and reorientating 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.
Just before GM entered Chapter 11, GM Europe was split off from its U.S. parent and placed in a trust fund. GM Europe employs around 55,000 workers across Europe, with some 25,000 based in Germany, and 5,500 at Vauxhall in the UK.
The Canadian car parts firm Magna International has emerged as the preferred bidder to acquire GM Europe, although GM has confirmed that it is still talking to other bidders. The German government has promised GM Europe substantial financial support; it has very much called the shots in Magna becoming the preferred bidder, and wants to defend jobs in Germany.
That still leaves some major question marks over Vauxhall in the UK. Concerns remain that UK workers will suffer job cuts if a Magna deal goes ahead, in part because of the financial support coming from Germany to protect jobs there, and also because it is easier to lay off workers in the UK than on the continent. Magna has said it will look for up to 9,000 redundancies in Europe.
Earlier this week GM confirmed a rival bid from Chinese firm Beijing Automotive Industries (BAIC). Whilst Magna has a head start in acquiring GM Europe and is still very much the favourite to acquire the firm, unless a deal is sealed within the next few weeks, BAIC may yet be in with a chance.
It’s not such a daft idea, especially for British workers. BAIC is thought to be looking to cut capacity in higher cost Belgium and Germany rather than in the UK, and to produce GM models in large numbers in China. The Chinese market is growing rapidly and probably offers more opportunity than the Russian market that Magna is thought to be targeting. A BAIC deal would also offer GM more upside benefit with a bigger stake in a new GM Europe.
These developments have added pressure on the UK government to intervene to support Vauxhall production. The government announced a 2.3 billion pound auto support package back in January, yet not a single penny of this money has yet to reach any car producer in the UK, although applications for support are thought to be at an advanced stage now. The government needs to speed this up and get the money flowing soon.