The Shape of Things Yet to Come

By J. S. Smith

04.13.2009

bankruptcyWhat happens if GM goes bankrupt? The question is no longer all that theoretical. Wilbur L. Ross gives GM a 50% chance of entering bankruptcy court. Moody’s put the odds at an even more sobering 70% back in February, before President Obama’s issued a 60-day drop-dead date on April 1. And 76% of the American people don’t care if it happens.

News reports leaking out of the RenCen give an idea of what GM would look like. According to CNN, the idea is to split GM in two, creating a “good GM” and a “bad GM.” Good GM would, not surprisingly, be composed of Chevrolet and Cadillac, teamed with the stronger overseas units. Bad GM would comprise Saturn, Saab, Hummer, presumably joined with the weaker overseas units, and saddled with the older, inefficient factories and crushing debt obligations of the parent.

The idea would be for Good GM to be sold to a new entity (GM Plus?) and quickly emerge from bankruptcy. Meanwhile, Bad GM would languish in bankruptcy court, as bondholders and the pension plan take massive hits.

The pension plan would likely dump its obligations onto the Pension Benefit Guarantee Corporation (PBGC). According to Bloomberg, “As many as half of GM’s 670,000 pension-plan participants might see their benefits trimmed.” In the interests of full disclosure, those getting “trimmed” would include four members of this author’s family. This could take blue-collar pensions down from a livable $36,000 per year down to a less palatable $18,000 to $21,000 per year.

This offers even more pain for the State of Michigan, where a large number of GM retirees live. Although Michigan has absorbed numbing auto industry losses this decade, much of the pain has been minimized through early retirements. Although retirees don’t have nearly the same income as active auto workers, taking up to 50% from retirees incomes will certainly deepen the economic malaise that has mired the state for most of this decade.

At the same time, however, many have long thought that GM had too many brands in the U.S., diluting its model development and draining resources. Chevrolet and Cadillac are certainly the North American crown jewels of the GM empire and could become quite profitable in the future. Presumably, Buick could remain active in China, allowing GM to reap continued profits in what has been, so far this year, the world’s largest automobile market. GM remains in a strong position there, especially given the reluctance of Chinese consumers to purchase Japanese brands—memories of the Second World War and brutal Japanese occupation still linger.

More intriguing, however, will be the situation in Europe. Opel is experiencing great financial problems and the German government appears reluctant to help. Rumors abound that GM would at least sell a stake in Opel—up to 25%—in exchange for European aid. Selling a stake may be a good move, but shuttering it entirely is unthinkable. Without Opel—and its English brand, Vauxhall, which sells rebranded Opels in the British Isles—GM lacks a presence in Europe, which, collectively, is the largest auto market on the planet. Without Opel and Vauxhall, GM simply cannot be a globally competitive carmaker.

Although GM certainly needs reform, and has needed it since at least the 1980s, the sad fact is that it is only a few years away from profitability even in its current form. The most recent UAW contract sharply reduces wages for new workers—and as older workers retire or are laid-off, the bulk of the workforce should quickly become reduced-wage workers. Once auto sales take off again, which they will in a year or two, GM could be poised to make profits again.

Of course, Good GM would also make profits, potentially very large ones, but there is still a tinge of sadness knowing it could come at the loss of iconic brands like Buick and Pontiac, or even once-pluck Saturn. At the same time, however, focusing on Chevy and Cadillac would allow GM to mimic the structure that serves companies like Toyota and Honda so well—although they don’t use their “prestige” brands in Japan.

More disheartening is seeing what was once the proud tower of American industrial might brought to its knees in such a short period. Not that long ago, GM was the largest and most profitable corporation in the world. It had the most efficient factories, however hard that may be to believe today, and had the smartest engineers and best stylists in the business. But, as we all know, it went terribly wrong at some point.

At any rate, the United States is poised to lose a large portion of its industrial capacity over the next few months. The industrial might of the nation has always underscored its superpower status—American power was predicated on the ability to out-produce everyone else. Losing that capacity is more than just the loss of factories and other infrastructure, it is the loss of the ability to know how to make things—the engineering talent, the skilled workers, the planners. To the extent that that is lost, our nation becomes a little smaller compared to our competitors. It becomes rather difficult to, say, flex our muscles to China when it not only owns massive government debt, but also out-produces us.

Moreover, there is something more than the loss of industrial capacity and status. In the Rust Belt in general, and Michigan in particular, there is a loss of pride and a sense of community. So much of the community life and culture in this part of the nation over the past century has been based on the rhythms of car making and the assembly line. Hopefully, something better will rise from the rubble of ruined factories and vacant houses.

I certainly hope that whatever direction GM’s restructuring takes, that it will both be successful and equitable. Just ask a British gearhead how he or she feels about the demise of their car industry.

COPYRIGHT Autosavant – All Rights Reserved

Author: J.S. Smith

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4 Comments

  1. To quote PhishPhood, a poster on GMInsidenews …It depends solely on who the new buyer of the ‘good’ GM is. It could be Goldman Sach, Cerberus, a Chinese consortium, an Indian consortium, Kirkorian, anyone with enough credit and good contacts with the Feds…

    Some interesting possibilities then I might want to add the possibility of other carmakers interested to “the good GM”: VW for example could easily be #1 by buying the “good” GM and Ghosn although he doesn’t interested in new alliances for now until the financial markets are stabalized might jump on the occasion as well to get a “good GM”-Renault-Nissan unless Fiat arrived from nowhere and get a stake in the “good GM” as well as Chrysler or use the “good GM” as a plan B if the deal with Chrysler is aborted.

  2. Yesterday my sister and BIL said they were thinking about getting a new car. Either a Toyota or Honda. I said since GM was sucking your tax dollars you might as well buy American to help them pay it back. She said she would NEVER buy an American car. This from a person whose 2001 Nissan Altima hasn’t been a paragon of quality. That perception gap that Bob Lutz talked about is alive and well. I don’t think my sister is alone in wearing blinders, especially considering Toyota’s recent slide in quality.

    You can carve up GM anyway you want, but if too many people in this country are like my sister/BIL, GM is toast.

  3. Saab was mentioned as being a part of the ‘bad GM.’ But hasn’t Saab already been cut lose, and is now adrift in Sweden’s equivalency of bankruptcy court?

  4. Bill: My understanding is that Saab will be sold to the highest bidder, so it may not be around to be part of Bad GM. The whole point of Bad GM would be to create a holding company to liquidate the unprofitable parts of the company (Saab) and the damaged brands (Buick). Good GM, from what I can tell, will contain the units that can go forward and make a profit.

    James: I recently read something similar to your S/BIL in a New York Times article.

    Stephane: Someone could easily buy Good GM. Reasonably speaking, it would be a good investment.

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