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Death of a Giant: General Motors to Fail?
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Thread: Death of a Giant: General Motors to Fail?

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    Default Death of a Giant: General Motors to Fail?

    What if GM goes broke?

    Neither a bailout nor bankruptcy may save General Motors or the other Detroit automakers. So imagine the cost of losing GM, starting with millions of jobs.
    By Michael Brush

    ...

    Soon we may wave goodbye to a true American legend: General Motors (GM, news, msgs).

    Yes, it's almost unthinkable that this century-old industrial giant could go the way of the DeLorean. But the maker of Chevys, Buicks and Caddies has been driven to the brink by lousy management, intransigent labor unions, high gas prices and an economic slump that has kept Americans off showroom floors.

    GM cars are selling so poorly that revenue plummeted 45% in October. Its stock has slumped to levels not seen since the days when it introduced power steering. Cash flow has dried up to the point where 2009 could be the year that GM dies.

    The government is debating a bailout for GM and its Detroit brethren of about $25 billion. But cash alone wouldn't save GM, Ford Motor (F, news, msgs) or Chrysler, a trio that can only facetiously be called the Big Three anymore.

    Politicians would have to find the guts to stand up to the labor unions and the retirees taxing the companies' resources. They'd have to find the courage to boot out the managers who led the automakers into this mess. Without those changes, a bailout would just be a bandage.

    The alternative, using bankruptcy to slough off lenders and reorganize the way airlines have done, might not keep automakers alive either. Unlike an airline ticket, a car is a long-term purchase. Consumers say they wouldn't buy a car from a company in bankruptcy because they worry that warranties and replacement parts might not be there when they needed them.

    If I had to bet, I'd bet on a bailout -- either right away in a vote on a loan package that could come in Congress as soon as this week or after Barack Obama takes over as president Jan. 20. But let's hope real change comes with it.
    The stakes are huge
    Imagine the potential ramifications of losing just GM, the biggest of the Big Three.

    Millions of jobs: General Motors employs 123,000 people, and losing those jobs would be bad enough. But GM's demise could set off a chain reaction that might cost the country almost 3 million jobs. Here's how.

    General Motors regularly owes auto-part suppliers such as Delphi and American Axle & Manufacturing (AXL, news, msgs) lots of money. If GM declares bankruptcy, a court could relieve GM of its obligation to pay off its debts to those suppliers, which could topple them. The death of GM could have a similar effect in the longer term.

    "The ripple effect could be huge," says Van Conway, a bankruptcy expert at Conway MacKenzie & Dunleavy in Birmingham, Mich., who has worked on restructurings and turnarounds in the auto sector.

    "If General Motors goes down, their supply base will go down," agrees Brett Smith of the Center for Automotive Research. That might disrupt production at Ford and Chrysler enough that those two car companies would fail as well.

    In this disaster scenario, the upper Midwest could lose nearly 3 million jobs, the Center for Automotive Research calculates. It estimates the Big Three automakers employ about 240,000 workers. The car business supports an additional 974,000 jobs among suppliers and related companies, and 1.7 million jobs are created by all the money all those people spend.

    Sure, foreign automakers with U.S. factories, including Honda Motor (HMC, news, msgs) and Toyota Motor (TM, news, msgs), would pick up some of the slack. But many of the cars they sell here, such as the hybrid Prius, are made abroad. So these companies wouldn't do enough hiring to offset all the job losses, and they generally pay workers less.

    The hit to the consumer: Yes, we'd all lose the option of buying GM favorites like the Malibu or the Silverado. You'd hear no more romantic songs about pink Cadillacs or red Corvettes.

    But more seriously, the loss of domestic auto companies would cut the number of producers, which means less competition. The remaining automakers would raise prices, at least in the short term, predicts David Thomas, a senior editor at Cars.com. "You would be paying a lot more for a Toyota Corolla than you ever thought you would be paying."

    ...

    "That is one way they keep their costs low," says Thomas, of Cars.com. So a GM failure would be another blow to an ailing industry already hit hard by subscription and revenue.
    The cost to government: Lost jobs and lower wages means lost tax revenue. Federal, state and local governments would lose more than $156 billion in the three years after a failure of the Big Three in Detroit, the Center for Automotive Research estimates. That's money that other taxpayers -- or their children -- would have to make up.

    The demand for government services would likely rise as well, as many of the best-paid blue-collar workers in America started job hunting in a weak economy. Auto-sector pensions would have to be picked up by the government -- a huge cost. And both autoworkers and the automakers' retirees would likely need help with health care just as Obama and congressional Democrats were looking for ways to cover the uninsured.

    The political cost: If one or all of the Big Three auto companies failed in the first year of Obama's presidency, it could leave voters disillusioned, wiping out much of the good will he has built up and making it harder for him to lead on other issues. The loss of General Motors would also be a hit to our prestige as a nation. Americans share a passion and pride in their cars.

    Practically, losing millions of good jobs will make it the task of turning this economy around that much tougher. Letting GM die is not something any politician would want to answer for.

    The problems run deep
    How did GM get into this mess? Politicians need to understand the problem if they are going to help get GM out of it.

    Reason No. 1: missing the trends. Consumer ratings and car reviews confirm that the quality problems which once plagued Detroit are long gone, Morningstar analyst David Whiston says.

    Yet many American consumers are now loyal to foreign brands, a sea change from Detroit's good old days. Why is this? Because foreign car producers such as Toyota do a better job of knowing what consumers want and using innovation to get there, says Steve Spear, an expert on the auto sector who is a senior lecturer at Massachusetts Institute of Technology.

    While General Motors focused on churning out gas-guzzling SUVs and the Hummer over the past two decades, Toyota was watching subtle shifts in consumer desires and applying technological innovation to develop a fuel-efficient hybrid car. The result: Toyota's Prius is a big hit while GM's Volt is still stuck on the production line, Spear says.

    To GM's credit, its fleet includes the largest number of vehicles that get better than 30 miles per gallon. Yet GM made another tactical blunder in this area: It has put fuel-efficient cars low on the list of models getting upgrades over the past few years. The upgrades made its larger cars more competitive, Cars.com's Thomas says, but left GM without desirable fuel-efficient cars when gasoline prices spiked this year. That drove consumers to foreign competitors.

    Reason No. 2: costly labor. Give credit to the United Auto Workers for agreeing over the past few years to big job cuts, a transfer of retiree health care to company-funded trusts and other concessions that will bring down wages.

    But despite these changes, UAW employees are still an elite group. What other employees get rich perks like 95% of wages when laid off, tough job-security measures and rich retirement benefits without having to put a penny into a 401(k) plan?

    JPMorgan Chase analyst Himanshu Patel estimates GM has had to pour $103 billion into employee pension and retirement health care plans since 1992 -- money that could have been used to fund much-needed restructuring, research and product development.

    Unions will have to give up more to make GM competitive with Toyota and other nonunion automakers.

    Reason No. 3: poor market timing. For some reason, GM managers failed to raise money during the peak of the credit bubble, as Ford did, or late last year right after it had a groundbreaking labor agreement in hand, or even last spring before auto sales nose-dived, points out Patel. Now it's too late, and GM is in a cash crunch.

    Indeed, there has been speculation that GM will have a hard time lasting until Obama takes office without a bailout.

    The bankruptcy solution
    Notice something about these three problems? You can trace them all back to management and the UAW. But GM chief Richard Wagoner has indicated he doesn't plan to leave, and the unions have rejected the idea of making major concessions to get government aid for GM.

    That's why bond market vigilantes such as John Lekas at Leader Capital Management in Portland, Ore., believe bankruptcy has to be a part of any bailout plan for GM. "You need a changing of the guard over there," Lekas says. "To give them $25 billion without bankruptcy is nuts...

    In bankruptcy, new management could be brought in -- a typical maneuver in Chapter 11. The tricky part is who would select the new management team. It could be a government oversight panel that gets help from outside consultants and debt holders.

    In bankruptcy, GM could offload its pension obligations to the Pension Benefit Guaranty Corp., which would pay employees only a fraction of their expected benefits. And if both management and unions bargained in good faith but hit an impasse, a court could force big changes on the union, including lower wages and a streamlining of workplace rules, says Stephen Selbst, a bankruptcy expert with the New York-based law firm Herrick, Feinstein.

    Link

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    Default Re: Death of a Giant: General Motors to Fail?

    Quote Originally Posted by Nickdfresh View Post
    What if GM goes broke?
    .....
    Soon we may wave goodbye to a true American legend: General Motors (GM, news, msgs).
    Don't worry.
    "Logovas" might supply the America by Ladas
    Of course if CHina don't ruin the Russian car concern first
    Last edited by Chevan; 11-20-2008 at 08:26 AM.

    "I decide who is a Jew and who is an Aryan "- Hermann Goering

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    Default Re: Death of a Giant: General Motors to Fail?

    Quote Originally Posted by Chevan View Post
    And "Logovas" that produces a Ladas might survive the GM
    I think GM will survive GM.

    But it's going to take a combination of bankruptcy and gov't intervention to fix the inherent problems of gross mismanagement, coddled Union labor contracts (and I'm a very pro-union type lefty, it greatly pains me to say this, but it's the truth!), and GM's tendency to try to create and manipulate the market for their own benefit rather than reacting to it...

    Incidentally, I've read Chevy does well in Russia, and Buick is the rage of China! That's their future, and their only hope...

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    Default Re: Death of a Giant: General Motors to Fail?

    Quote Originally Posted by Nickdfresh View Post
    I think GM will survive GM.
    Possibly. Maybe probably. It might be too big for your government to allow to collapse. For the time being.

    We've just sunk millions of taxpayer dollars into keeping our (mostly your and Toyota) car industry alive, which in due course will prove to be a waste of money by a dumb government which hasn't learnt anythng from all previous wastes of my taxes to socialise capitalist losses while never bothering to socialise their profits, the tax avoiding bastards the capitalist corporations are!

    However, a while ago I read a (in my primitive financial market and economic understanding terms) highbrow article explaining how CDS (credit default swaps) would bring the world economy down as the third or fourth wave in the current collapse. It used GM as an example and showed how there would be a cascading effect through various national economies if GM went into Chapter 11 or just went bust. Now we might get to see if it's so. (if so, this will make the author a legend as one of the few who managed to predict anything correctly in the current disaster! )

    Quote Originally Posted by Nickdfresh View Post
    But it's going to take a combination of bankruptcy and gov't intervention to fix the inherent problems of gross mismanagement,
    Why should the government, using the taxpayer's dollars, bail out a bunch of incompetent arseholes who've plundered the company for obscene executive benefits while avoiding every bit of tax they could?

    And the answer is because, like it or not, it's the old story that if you owe your bank $100,000 and can't pay you have a big problem, but if you owe it $100m the bank has a big problem. The figures in the current disaster are so far beyond that that the nation has a problem, caused by the modern capitalist scum who plunder public companies for their own benefit and return little profit to their shareholders while often screwing their workers.

    Quote Originally Posted by Nickdfresh View Post
    I'm a very pro-union type lefty
    Me, too. But the unions here didn't create the system which pays those who do least the most and, now, expect the taxpayer to dig these incompetent selfish morons out of the shithole they've created.

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    Default Re: Death of a Giant: General Motors to Fail?

    Yesterday the ceo's of the Big 3 flew to Washington asking for help. It was revealed these great thinkers of industry chose to travel on corporate jets costing and estimated $20K each. Brilliant.

    My theory has been that big US business would take the bailout and continue business as usual. The week Congress approved the $700 billion funding several Wall Street firms celebrated with parties costing upwards of $500K and "seminars" as costly. The action of the automotive ceo's reinforces my thinking.

    The US economy requires assistance. Simply writing checks to continue what has proved unwise decision making will delay the inevitable. The process that drives and executes business planning demands a change in approach.. Officers can reap financial rewards based not on performance but on guarantees. Not to say the total blame is on management. Many other factors to consider. But they are in charge and “change” must begin some where. As of this date I am not aware of any press relating to restructuring the payment of bonus monies.

    Perhaps a better place to begin the makeover of the US economy is with the Federal budget and the financial packages of elected officials. I “repeat” my demand for Federal legislation requiring a balanced budget. And has anyone discussed how the $700 billion bailout will be funded? Regarding the package politicians have blessed themselves with, that financial package is among the most employee friendly I have seen. Individuals who dedicate some years to public service should be rewarded. A stint in Washington should not be a lifetime award.

    My apologies to the Nick for going beyond the scope but discussions of the “bailout” really touch a nerve.

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    Default Re: Death of a Giant: General Motors to Fail?

    They need tough love.

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    Default Re: Death of a Giant: General Motors to Fail?

    If GM would bring back the 62 Corvette with all the new modern brakes and such..it would have a hit on its hands. I would buy one!!

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    Default Re: Death of a Giant: General Motors to Fail?

    GM should concentrate on manufacturing bicycles and motorized fuel efficient mopeds. GM has failed to see the demand in this field. If they are to survive they must face reality and invest in things the American people want:Bicycles

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    Default Re: Death of a Giant: General Motors to Fail?

    I'm sure that's what Americans want. I live in The States, and when I moved here 11 years ago, I saw tonnes of SUVs, and very few cars(non-gas-guzzling behemoths), then, I saw an increase in cars, and a decrease in SUVs. Now, I see an increase in SUVs.

    America makes me feel smart, and I wonder why the Hell they do what they do. At least when gas is 200<x a barrel, Europe has public transportation, which I see the USA lacks in. If they need to go to the store, they get in their .002 mile/gallon SUV, when they could easily walk there in two minutes...

    Oh my! My anti-America/American side is strong today!

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    Default Re: Death of a Giant: General Motors to Fail?

    As long as we can drive to our McDonalds to eat our Big Macs, everything will be alright...

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    Default Re: Death of a Giant: General Motors to Fail?

    Oh my! My anti-America/American side is strong today!

    Churchill,
    If you moved here at 4 and been here 11, you're for all intents and purposes an American. So....NO ANTI-AMERICANISM!

    (I assume you all emigrated?)(From let me guess?)
    "Freedom is never more than one generation away from extinction. We didn't pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same." - Ronald Reagan

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    Default Re: Death of a Giant: General Motors to Fail?

    I am strongly anti-American against their policies. Most Americans, I have no problem with, many I am good friends with, but people who voted McCain instead of Obama, only because Obama is black, I wish to drive an ice pick though their spleen, out their left nose hole...

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    Default Re: Death of a Giant: General Motors to Fail?

    Churchill,You know I'm just kidding.

    Did you all emigrate from your namesake?
    "Freedom is never more than one generation away from extinction. We didn't pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same." - Ronald Reagan

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    Default Re: Death of a Giant: General Motors to Fail?

    Quote Originally Posted by Churchill View Post
    I am strongly anti-American against their policies. Most Americans, I have no problem with, many I am good friends with, but people who voted McCain instead of Obama, only because Obama is black, I wish to drive an ice pick though their spleen, out their left nose hole...
    That sounds like Guantanamo.

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    Default Re: Death of a Giant: General Motors to Fail?

    There is the parable of the rowboats,one, owned by toyota, had 8 men in it, one coxwain with his megaphone, directing 7 oarsmen. The other, owned by G.M. had also 8 men, 7 coxwain, and one oarsman. The Toyota boat was very efficient, with its one director, and 7 men powering the craft to great speed, with synchronous, fluid motion, and a clear view of the task to be accomplished.
    The G.M. boat however was a chaotic frenzy of 7 directors, (a committee) arguing when was it best to holler "stroke", was "stroke" a proper command, and who thought up the idea of using "stroke" to begin with, and finally who would be the one to give the order to do so.When all of these questions were decided, then came the arguments as to who would begin the chain of management decision to give the command, and so on down to the one who would tell the single oarsman to pull.
    All the while the toyota boat, singular in its purpose was making way toward to finish line, while the chain of command on the G.M. boat was just issuing the first order to the rower. And, mightily did he heave, and pull at the oar,,(no jokes please...) only to find his efforts wasted by the burdensome number of directors. It is apparent who won the race, and painfully obvious why they won it. The G.M. boat owners said we must do something, we must have more meetings, and keep more charts, and spent alot of time seeing to these magic talisman so that we may triumph. The oarsman said, I have much to do today, why must I go to a meeting? the wisemen of G.M. answered saying, "because it is mandatory", And, asked the oarsman, must I keep 6 charts when I have work to do? again the answer was, "because it is mandatory" The oarsman scratched his head, and asked where does the time come from to do these things? and was answered, "from production, because that is not mandatory" So finally, the one oarsman, seeing the water rise within the boat, decided to swim for it. G.M. has been stymied by its huge burden cost,A rigid, centralized management system, too much middle management, the level least needed because it is the least productive, and adds no value the the processes it oversees. They cannot lead, only manage. And usually it manages to lose money.
    Last edited by tankgeezer; 11-20-2008 at 11:21 PM.

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