The Game Is GM’s Future, What’s the Ante?

By Brendan Moore

11.20.2008

I have arrived at the conclusion that GM will probably not survive the next year in its current form; and in fact, may not survive until the end of 2008.

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.

COPYRIGHT AUtosavant – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

Share This Post On

10 Comments

  1. Who would buy a car from a bankrupt company when they could just go to a solvent competitor? Bankruptcy for GM would be catastrophic for our nation,

  2. “Who would buy a car from a bankrupt company when they could just go to a solvent competitor?”

    The number that GM throws out is twenty percent. According to their research, that’s how many would take a chance on a car from a auto company that declared bankruptcy and is now restructuring.

    No idea where they get that number, but that’s what they say.

  3. GM deserves to go: it killed a potentially viable electric car a long time ago, it has too many brands, it has sucked all the life out of Saab…I could go on. However, should the workers – union and non – have to suffer too?

  4. The United States needs a domestic auto industry without a doubt. They just don’t need the one they have currently.

    But make no mistake, a national auto industry is very important. Speaking as a foreigner, I suggest you do whatever you need to do to fix the one you have, to re-fashion it into something that stands a chance of first surviving, and then, prospering.

  5. There is only room for two of the “big 3” in the US market. I agree that GM could viable, if they continued to make changes and actually build cars people like. Ford is probably in better shape, but Brendan is right, if GM goes chapter 11, then Ford needs to do the same. Chrysler should have been broken up when Daimler dumped it a couple of years ago. Sell Jeep to Hyundai and the other brands to Magna or a Chinese consortium. The names are worth something to someone.

    I do not think that the collapse of two or even all three ‘American’ car makers would be the end of the US auto-industry. Honda and Toyota employ more American workers than the big three. Mercedes & BMW have factories or assembly plants in North America. Volkswagen is going to open a plant in the US. Certainly the employees of the big three and some of their suppliers will take a hit, but the industry will not disappear. The US is one of the largest car markets in the world, and since the 1980s it has made sense to build the cars here, rather than importing the finished product.

    After three decades of ‘reaganomics’ and free market ideology, its time for the business community and the chamber of commerce Republicans to put up or shut up. The economic downturn means some car companies are going to have to go out of business and workers are going to lose their jobs. Thats ‘the magic of the marketplace.’ The car executives made bad decisions and procrastinated on solving their labor and cost problems. According to the logic of the market the losers go out of business. You cannot spend the profitable decades trumpeting the virtues of the capitalist system and then when you hit the skids demand socialism when it suits you and the shareholders.

  6. Matt L

    We have to wait and see with the current economic context (some even think of the “Great Depression II”), maybe other automakers will have to review some of their plants. Lately Honda just shot down for 2 months, the Swindon plant in the UK http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article5203818.ece
    and Toyota lay off 3000 temp workers http://www.bloomberg.com/apps/news?pid=20601087&sid=aYTDkEfkwqg4&refer=home
    it’s only temp workers but if the economy climate go more worse and if sales continued to tank, they’ll be laying people off in NA just as they are in Japan.

  7. Matt L.

    Regarding aboe comment: “Honda and Toyota employ more American workers than the big three”

    Here is the data. You are only off by a factor of four.
    This is consistent with the other experts I’ve been seeing in the media and the web, you don’t have a clue what you are talking about.

    From http://corporate.honda.com/america/

    “Today, Honda employs more than 25,000 people in all 50 states.”

    From:
    http://www.toyota.com/about/our_business/toyota_in_america/our_numbers/index.html

    Toyota: “U.S. Direct Employment 36,632”

    From:
    http://www.cargroup.org/documents/FINALDetroitThreeContractionImpact_3__001.pdf

    “Detroit Three employed 239,341 hourly
    and salary workers in the United States at the end of 2007”

    Thus, Toyota and Honda employ only 25% as many employees as the big 3. Note, I don’t have the data handy, but the multiplier effect in the supply base is much higher for the big three as well, as they tend to make and buy parts in the US.

  8. How does the number of dealers affect GM’s bottom line? This isn’t clear to me.

    I also suspect that the savings of the 2007 labor contract assume 2007 sales volumes. I’m not sure there will be much of a cost reduction at the current level of sales.

    1. The lower wage applies to new workers. How many of those will they be hiring?

    2. The healthcare cost reduction assumes that the OEMs can fund VEBA. How’s that going to happen?

  9. I have been listening to both sides of this arguement for months. I can see the validity of either point of view.

    THINK ABOUT THIS:

    One of the overwhelming costs that face us as a nation is the retired government worker benefits carried until they die. What would happen if the nation shed the cost of all these peoples benefits? The nation would be in a much better financail position, able to better compete. This concept would go over like a stone balloon in all corners of the country. So, why are people so willing to shed the auto workers benefits but not goverment employee?
    As you can see, I have more questions than answers.

Submit a Comment

Your email address will not be published.