GM: What's The Problem And Why Should The Government Help?

By: Creative Investors 101 Saturday, November 29, 2008 11:57 AM

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GM is currently under tremendous pressure and its in the survival mode. Should the government help it? Should it be bailed out? How are the automakers different from any other industry that is currently in the cyclical downturn? These questions don't even scratch the surface of the issues at hand. Let's work through this issue in a couple of simple steps.

Why is GM in trouble right now?

Demand for cars slipped more than 20%.
GM's market share has been dramatically reduced because of the shift in demand due to high oil prices.
Product marketing hasn't been effective, even though quality of their products has been on the rise during the past decade.
Lack of design innovation relative to its peers.
Burden of the healthcare and pension benefits for retirees. GM waited too long to restructure the contract with UAW. This is probably one of the more important impediments to the company's financial stability.
UAW doesn't understand the realities of the marketplace and held a hard-line position until the company that employs tens of thousands of its members was on the brink of disaster to soften its terms. Now it may end up with not having all that many members left to pay the dues.
GM's manufacturing and operational management has been inefficient for decades and it hasn't been up to par to compete with the Japanese automakers who are significantly leaner. It's not all management's fault as many of the contracts and sourcing relationships have been established decades ago and it would not be easy to restructure the suppliers' network to maximize efficiency.
Pretty much all of these points apply to Ford and Chrysler as well, they just happened to be slightly better positioned financially, which only delays the inevitable. Whether it was luck or skill on their part, I'm not in a position to judge that.

What will happen if the government won't help GM?

GM can't survive this crisis without outside assistance and the only source of help due to the current state of the capital markets is government.
GM would have to file bankruptcy. If GM files bankruptcy under Chapter 11 and goes into restructuring mode, someone will have to provide debtor-in-possession financing in order for the company to emerge from the Chapter 11 filing. Again, only government would be able to provide that financing. If GM is for some reason forced to file bankruptcy under Chapter 7, it pretty much means liquidation. I don't imagine there would be many buyers for their assets and those who would buy wouldn't pay a fair price for the assets. So, debtors would be left with pennies on the dollar.
GM would probably close most of it's plants in the U.S., layoff most of its 240,000 employees.
GM's first-tier suppliers would lay off many of it's 1 million employees. Ripple effect from the decreased spending from ex-employees would go through the economy like tsunami, slashing jobs in the retail and service sectors. Such layoffs would undoubtedly push the unemployment rate towards the 10% mark nationally and even higher in the states with auto plants such as Michigan, Ohio, Indiana, Illinois, and Missouri
GM's sales would go even lower since consumers would prefer to buy a car from a company that will be there to provide the warranty several years from now and whose cars' resale value would hold up down the road.
Many of the GM's 14,000 dealers would have to close their doors due to lack demand for GM cars and because of GM's restructuring of its dealer network, which is something they should have done quite a while ago.

The bottom line is that GM can't survive as an ongoing entity without significant federal assistance and the taxpayers are on the hook for billions, for everything from lost tax revenues to higher unemployment costs to taking over GM's pension obligations. Basically, the decision that Washington has to make is whether to pay for GM's survival or for its funeral - it's not a question of whether the GM deserves aid or not.

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12/1/2008 3:30:44 PM by Larry Moniz The problems are of GM's own making. Since the first gasoline shortage during the Carter Administration the handwriting has been on the wall that more fuel efficient cars were needed. Instead GM, Ford and Chrysler ignored the signs and continued to produce what was easiest to make and prommote, i.e. gas guzzlers. They should have been developing more fuel economic and alternative fuel vehicles. In a free marketplace, you don't reward executives for poor management practices by bailing them out. There have been thousands of companies that failed to successfully compete and went bankrupt. Indeed, Chapter 11 might be the best alternative for GM et ali as they would only have to get restructuring approved by one person, the bankruptcy judge, rather than a majority of Congress. And please, don't use the financial bailout as an argument. That was a boondoggle with the executive branch helping out corporate buddies who also who also should have been required to reorganize. Larry Moniz Journalist and Author Reply Rating: (1) (1)

The problems are of GM's own making. Since the first gasoline shortage during the Carter Administration the handwriting has been on the wall that more fuel efficient cars were needed. Instead GM, Ford and Chrysler ignored the signs and continued to produce what was easiest to make and prommote, i.e. gas guzzlers. They should have been developing more fuel economic and alternative fuel vehicles. In a free marketplace, you don't reward executives for poor management practices by bailing them out. There have been thousands of companies that failed to successfully compete and went bankrupt. Indeed, Chapter 11 might be the best alternative for GM et ali as they would only have to get restructuring approved by one person, the bankruptcy judge, rather than a majority of Congress. And please, don't use the financial bailout as an argument. That was a boondoggle with the executive branch helping out corporate buddies who also who also should have been required to reorganize. Larry Moniz Journalist and Author

Rating: (1) (1)

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