The Game Is GM’s Future, What’s the Ante?
By Brendan Moore
Bankruptcy has now become a practical option.
Previous to this new conclusion, I was on board with the whole premise that GM could not declare bankruptcy because somewhere between 70% to 90% of their customers would disappear, and so, then, what would be the point? They would win the battle of reducing costs, reducing their dealer population, reducing their healthcare and pension liabilities, etc. and that’s all great, but they would lose the war because somewhere around 80% of their sales volume would go away. They would then be small, weak, and unable to effectively compete.
But, if GM goes under, then they lose 100% of their business. That scenario considerably changes the calculus of how appealing a bankruptcy might be.
You might now say, but, what about the bailout? Ahh, the bailout. I think there will be some money coming to GM, but given the current state of the economy, and the current political climate, I don’t think there will be enough money (and it will take a tremendous amount) for GM to stay its current size. Don’t get me wrong, I think it’s entirely possible that GM could stay the same size it is AND pull out of its tailspin if it could get enough money to get to the middle of 2010. That’s when they start realizing savings from cost-cutting measures negotiated with the union. What I’m saying is that I don’t think there is going to be enough money made available for them to do that. I think it will be a much smaller amount than they really need, that they’ll take it, and try to make do, and end up going under anyway.
Whereas if they go BK (declare bankruptcy), reduce their costs by anywhere from 30% to 50% (don’t let anyone tell you they knew the exact percentage at this moment), lose 80% of their business, and get the same amount of money loaned to them from the federal government, they can be somebody again. I think the odds are very good that GM will be a great company again, an auto manufacturer that is respected, well-run, and finally and most importantly, is profitable.
There just isn’t enough money available to keep GM close to the same size and give them the breathing room to reform and rebuild themselves. Since that is the case, GM needs the wrenching, but positive changes that will be wrought through bankruptcy, and will have to just endure the suffering of losing most of their customers. Let’s face it, the only reasonable survival scenario for GM in the current economic and political climate is as a much smaller company.
What about the other Detroit automakers?
I can see no realistic future for Chrysler except the one that involves Cerberus selling Chrysler, whole or in parts, as soon as possible.
Ford is a different story; they are in a different situation from either Chrysler or GM. They have more money on tap than GM, and much better current and future product than Chrysler. But if GM declares bankruptcy, then Ford will probably follow because they’ll have to in order to be competitive from a cost perspective. Because the UAW is not likely to willingly give up their wages and benefits, the dealer network is not likely to shrink itself quickly enough, etc., etc., in order to bring Ford to a level of parity of costs with the GM that will be the new GM after bankruptcy.
GM, however, is staunchly resisting bankruptcy. Ford and Chrysler say that they’re not interested in it, either. The strategy in play seems to be one of holding out for enough money so that they can stay the same size and literally buy time to fix themselves.
I don’t think there will be enough money from the government for any of them to successfully execute that plan.
Will there be tremendous economic pain that will ripple out across most of the economy if GM (or Ford or Chrysler or all three) declare bankruptcy? You bet. But, 20% of their current sales volume is better than zero percent. And if they’re successful in restructuring, it’s entirely possible that the GM that emerges from bankruptcy could start out at their reduced market volume after bankruptcy and then subsequently grow.
Unlike many Americans, I am not a GM-hater; I think they’ve done a great job in revamping their product lineup the last few years, and frankly, it genuinely pains me to write about GM going into bankruptcy. Not because I’m a GM booster or apologist, but because I think GM the company deserves a better fate. It was a great company once.
But – I think this is the time for their rebirth and the only viable option I see now to facilitate that is bankruptcy.
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