GM Situation

How to Save an Automaker

On March 19, 1971, one share of General Motors cost $41.43. On November 25 2008, a share was worth $3.56. In November, General Motors asked Congress for a loan of $10 billion. On December 2, 2008, General Motors asked for a $12 billion loan to survive until “late march” (Thomas). In this situation, money cannot solve GM's crisis. To prevent bankruptcy, GM plans to “slash its numbers of workers, vehicle brands, and plants” (Thomas). GM is a company plagued with expensive labor contracts and an inefficient management. GM does not have a future if it does not file Chapter 11 Bankruptcy.

General Motors had revenues of $180 billion in 2007. In 2007, it manufactured its cars in 35 countries "and produced nearly"9.37 million GM cars and trucks (GM.com). Surprisingly, GM reported a loss of $38.7 billion for the fiscal year. In the last three business quarters, GM has lost over $20 billion (GM.com). According to Chris Isidore, a CNNMoney.com senior writer, GM lost “$2274 for every vehicle the company sold worldwide during the quarter” (Isidore). GM is on a path to disaster. Unlike Ford and Toyota, it does not have a plan to become profitable. GM’s current profit margin is -13.24% (Yahoo! Finance). The company will be forced to ask Congress for another loan in March. GM can only survive if it files bankruptcy and reorganizes its contracts with the United Auto Workers.

The United Auto Workers (UAW) is a labor union located in Detroit, Michigan. GM has made several unfortunate contracts with the UAW throughout history. First, GM cannot downsize its workforce or outsource jobs without paying expensive penalties. A worker with 10 years of experience receives $140,000 if he loses his job. A worker with 7 years receives $70,000 (United Press International). Additionally, U.A.W. workers earn a lot more than automobile workers in the South. GM has a "$25-per-hour labor cost disparity with its Japanese competitors" (npr.org). GM also has trouble with its legacy cost. Legacy cost is the total cost of a retiree's pension, health, insurance, and other benefits. Even though GM only has 300,000 employees, it supports 800,000 retirees (Mandel). Toyota only has 80,000 retirees (Mandel). For every vehicle sold, GM has to use more than $2000 for employees' health care and pensions costs (Welch). GM uses more than $15 billion per year for its pension program and $5 billion for healthcare (Welch). GM initiated and maintained these obligations since the 1950’s when it signed the “Treaty of Detroit” with the UAW. Simply, GM granted “comprehensive health insurance, pensions, cost-of-living adjustments and income protection” to UAW workers (Moberg). Obviously, GM has taken too many financial obligations that it cannot meet. These obligations prevent GM from manufacturing cheap and profitable cars.

One expensive obligation GM had made is the job bank. The job banks pay “union workers almost their entire salaries even if there isn’t work for them” (Carty). The “the job banks was written into the UAW contracts” in 1984 (Carty). At the time, GM was “attempting to make factories more automated and flexible” (Carty). In 2005, GM had more than 47,000 people in its job banks (Hoffman). Job banks have hurt GM financially. Today, it still has 1,404 people. Don Grimes, a professor of industrial and labor relations at the University of Michigan, states that the “costs of the program may not be as high now because of the shrunken workforce, but they could soar in two to three years if market share keeps falling” (Carty).

In addition to creating job banks, the management has made many mistakes. They are unable to adapt to foreign competition. Toyota and Honda now have higher resale values than GM cars. GM can only profit when they sell trucks and SUVs because its labor costs do not surpass the vehicle’s price. Additionally, the management was unable to create hybrids like its Japanese competitors. Instead of building fuel efficient cars, the management has invested billions of dollars into SUVs, trucks, and Hummer vehicles. They were unable to respond to gas hikes in 2006 and 2007. In 10 years, GM stocks have dropped by 70%. In 2007, GM pay its “executive more than $40 million” when its “stocks dropped by 19 percent and it lost $39 billion” (Krolicki). GM losses this year have doubled compared to 2007. The management has also made too many obligations with the U.A.W. that are hurting the company.

GM only has one option: Chapter 11 Bankruptcy. Congress must deny GM the $12 billion loan. Through Chapter 11 protection, GM would have opportunities to "reduce costs and streamline operations" under "court supervision" (Mitchell). Bankruptcy would force an end to the GM's legacy costs and healthcare system. The US government has a bankruptcy process for companies like GM. A bankruptcy judge will help GM dissolve its union contracts and remake their labor structures. In the short-term process, many people will lose their jobs and businesses. Executives who have made mistakes will be fired and others will see their paychecks decrease. However, once GM emerges from bankruptcy, it will be able to sell efficient and cheaper automobiles. Like Toyota, Hyundai, Nissan, Honda, BMW, and Volkswagen, GM will be able to make cars in America and still make money.

According to Bill Ackman, a hedge fund manager, bankruptcy is "simply a tool to help repair a debt-ridden balance sheet" (StreetInsider.com). Through bankruptcy, GM is protected from creditors while they are still able to operate. As the automobile market has become competitive, GM does not have the right products for Americans. Japanese cars get better mileage and they are cheaper too. GM also has the opportunity to "work out its obligations with those suppliers that are still solvent, and help speed the rationalization of its dealer body" (Taylor III).

If General Motors continues to survive through government loans, the situation will become desperate. GM will have to pay $70,000-$140,000 for every worker it fires. GM says it plans to “cut up to 31,000 jobs from its U.S. work force” by 2012 (Krolicki). Additionally, the company calls for “a reduction of nine facilities, and 1,750 fewer dealers” (Thomas) by 2012. As of December 9, 2009, General Motors has a debt of $45,160,000,000 (Yahoo! Finance). It will be difficult for GM to pay back its creditors and loans despite these cuts. There’s no evidence that GM will sell more cars in 2009. Are Americans willing to buy cars from a company that will always be on the brink of bankruptcy? Are Americans willing to bail out GM again in March 2009? If so, will Americans bail out GM again in late 2009? Will they bail GM out once more in 2010? There is a simple dilemma in this situation. Should GM file bankruptcy now or later?

Works Cited

"About GM." GM. 2008. Online. 9 Dec.2008

"GM Labor Deal May Change U.S. Auto Industry." npr.org. 26 Sept. 2007. Online. 9 Dec. 2008

"Historical Earning." GM. 2008. Online. 9 Dec. 2008.

9 Dec. 2008

Capital IQ. "GM: Key Statistics." Yahoo! Finance. 9 Dec. 2008 Yahoo!. 9 Dec. 2008

Carty, Sharon. "Labor talks may tiptoe around jobs bank." USA Today. 27 July 2008. USA Today. 9 Dec. 2008

Hoffman, Bryce. "Gettelfinger: Jobs bank 'almost gone'." The Detroit News. 21 Nov. 2008 9. Online. Dec. 2008

Isidore, Chris. "GM loses $4.8 billion in quarter." CNNMoney.com. 26 Jan. 2006. CNN.

Krolicki, Kevin. "GM says needs fast $4 billion from U.S. to survive." Yahoo! News. 2 Dec. 2008. Yahoo!. 9 Dec. 2008

Mitchell, Daniel. "Say no to the auto bailout." CNNPolitics.com. 13 Nov. 2008. Online. 9 Dec. 2008

Moberg, David. “Treaty of Detroit Repealed.” IN THESE TIMES. 13 Nov. 2007. Online. 9 Dec. 2008

Schneider, Howard. "Pounded by $38.7 Billion '07 Loss, GM Plans More Buyouts." washingtonpost.com. 13 Feb. 2008. Online. 9 Dec. 2008

Taylor III, Alex. "GM: Better off bankrupt." CNNMoney.com. Online. 15 Oct. 2008 9 Dec. 2008.

Thomas, Ken. "GM Asks Government for $18 Billion." The Street.com. 2 Dec. 2008. The Street. 9 Dec. 2008 .

United Press International. "UAW, GM Agree on Severance Program." redOrbit. 22 Mar. 2006. Online. 9 Dec. 2008.

Welch, David. "Why GM's Plan Won't Work ." BusinessWeek. 9 May. 2005. Online. 9 Dec. 2008