Fortune Mag: The Tragedy of General Motors

[Guest Josh]

FORTUNE Magazine) - It is the instinctive wish of most American businesspeople, even those unlikely to be directly affected, that General Motors not go bankrupt. True, some people will say, "They had it coming to them." But the majority will be more practical, telling themselves that the company is so central to the economy, so sprawling in its commercial reach, that bankruptcy--"going into chapter," as restructuring folks say--is ominous almost beyond contemplation. And yet the evidence points, with increasing certitude, to bankruptcy. Rick Wagoner, GM's 53-year-old chairman and CEO, may say, as he did in a January interview with FORTUNE in his aerie of an office high above the Detroit River, "I know that things will turn around." But he cannot know that. He may not, deep down, even believe it himself.

Bankruptcy isn't going to occur next week. But down the road--say, past 2006 --its probability is high. That point of view seems supported by the opinions of the bond-rating agencies, which troubled companies must keep informed and which become virtual insiders in their understanding of a company's finances and operations. In recent months both Moody's and Standard & Poor's have made increasingly grim statements, bald in their talk of bankruptcy and laden with doubts that GM (Research) can turn around its reeling North American auto operations, now reduced to an embarrassing market share of 26%.

Continue Reading "The Tragedy of General Motors"

[regfootball]

HELP HELP THE SKY IS FALLING

IT's PEARL HARBOR

OH MY GOD ITS 9/11

OH DEAR LEO CAN'T FIND KATE

CARROT TOP JUST SHOWED UP FOR DINNER

Jesus, i am so fking sick of all these doomsday articles.

[Ghost Dog]

It's a very well written article.

[CARBIZ]

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ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ

ZZZZZZZZZZZZZZZZ

[nzr]

ghey

[Clownzilla]

HELP HELP THE SKY IS FALLING

IT's PEARL HARBOR

OH MY GOD ITS 9/11

OH DEAR LEO CAN'T FIND KATE

CARROT TOP JUST SHOWED UP FOR DINNER

Jesus, i am so fking sick of all these doomsday articles.

I AGREE! Listen, I beleive GM will make the comeback to end all comebacks! I think these doomsday

articles, while tireing, will give GM more of a reason to show the media and all the Japericans that GM will be the the worlds best vehicle company!

[nzr]

I AGREE! Listen, I beleive GM will make the comeback to end all comebacks! I think these doomsday

articles, while tireing, will give GM more of a reason to show the media and all the Japericans that GM will be the the worlds best vehicle company!

Japericans, rofl!!

[camaro]

I am a staunch supporter of GM. But to tell you the truth, lately, the "doomsday" articles are starting to all say the same things: retirement benefits, health care, and the union. Although one author of one article may simply copy another article's contents, each one bascially says the same thing...GM may be beyond the point of return and is just preparing itself for bankruptcy. You'll never hear anything like that from GM's exective board but you have to admit that there may be those types of contingency plans in the works.

I will not say that GM is going to go bankrupt. It may not. The real fact here is this: "Ladies & Gentleman, it's going to be a close one". [Photo finish.]

[ponchoman49]

It's a sad sad time to be a GM car fan!

[cmattson]

Almost all of the article's written about GM going bankrupt seem to have stemmed from investment/money publications. Since then, other auto-publications picked up on and have floated the idea. Seeing how several big-name airlines have been able to shed their pension obligations (to the US taxpayers, thank you very little), I think they are making the easy and obvious connection that GM will inevitably have to do the same. Being where the stories have originated, this is looked at solely from a beneficial-to-stock-price type of perspective. I'm not putting myself in the same camp. GM's very different from the airlines in several ways:

GM can reduce it's labor costs. You've all seen the numbers of how many GM employed 10-15 years ago and how many they employ today. GM's reduced its expensive American workforce by 40-50%. GM CAN move labor/part sourcing offshore. Take a look at an airline. Outsourcing pilot/baggage-handler/flight-attendants isn't an option. The only thing available to an airline to outsource is the mechanic duties. How feasible is it to fly an airplane to a cheap-labor foreign nation to have routine maintenance accomplished? At today's fuel prices?

GM didn't go throw the leveraged-takeover bs that several airlines went through in the eighties/nineties. Take a look at NWA: they acquired several billion in debt from the take-over of Al Chechi. When times were booming, they didn't seek to pay-down their debt-load; instead the companies executors took home big fat bonuses. The union labor didn't enjoy any of the boom period because they had agreed on a 10-year wage freeze (prior to the boom the company was struggling under that debt-load and bankrupcy was looming). While GM's pension-debt is astonishingly large, it's future money. It's money GM doesn't need to come up with tomorrow, or next week. As long as GM can right-itself relatively soon, it can work-its way out of it's pension debt -- especially since GM's American workforce is significantly smaller.

Bankrupcy doesn't work the same for a auto-manufacturer as it does for an airline. Airlines work with a hub-and-spoke type of system. NWA has hubs in Detroit and Mpls. Detroit and Mpls enjoy direct flights to almost anywhere. Anybody else using NWA will (most likely) have a stop-over in a hub-city. NWA dominates the airport here in Mpls. There is virtually nobody else. They own the majority of the gates here. Matter of fact, within the last year, they were after the governor here to give them *every* gate at the terminal & kick the other airlines to a smaller terminal. If NWA were to go bankrupt, most people flying out of Mpls would *still* use NWA as they'd virtually be the only one to give them non-stop service to their destinations. Passengers wouldn't care about NWA's debt obligations as long as they could pay their paultry couple of hundred bucks and get to/from their destinations. Now back to GM. If GM were to go bankrupt, would you plunk down tens of thousands and not know if the company was going to be there in 5 years? Woudn't you worry about part availability? Your investment, in time and money are much, much larger with an auto purchase as it is for a airline ticket.

GM's got money. They've got cash reserves. They've got GMAC. Attempting to sell just half of GMAC is rumored to fetch $10-$15b -- and that price is depressed becasue of the speculation that it's bond rating wouldn't improve that much due to "troubled" GM still owning half of it. Sell it all and it would likely fetch $30-35b. Invested, that would virtually completely negate GM's pension obligations.

GM's product is ever-improving. Pontiac Solstice? Saturn Aura? Buick Enclave? Product sells. Nissan was a bit player when they were acquired and they recovered and grown -- all because of the product alone. Nissan still isn't known for their interiors, for their initial quality, or their durability.. but they've got hot-looking and hot-performing products.

GM's got more of the market than anybody. They are still the largest auto manufacturer on the planet. Factor this in: build "must have" products that allow you to gradually raise the vehicle sticker price & you've got one hell of a bump in cash flow.

Wall Street doesn't care about these perspectives. They *do* care about how GM could file some paperwork and be out from under $billions$ virtually overnight.

I'm saying it right here and now: GM going bankrupt? BS.

[regfootball]

"retirement benefits, health care, and the union"

all things that have no contribution to the finished product for the consumer.

not saying that this means we need to eliminate those sorts of things, just saying that this is the obstacle to success in many ways

[cavalier36]

"retirement benefits, health care, and the union"

all things that have no contribution to the finished product for the consumer.

actually they might have something to do with it.. GM has to spend alot of money on retirement benefits and health care. so it gives them less money to work with on development, research, advertising, and materials used in the vehicles.. GM also pays its employees alot more for doing the same job.. Honda for example pays its workers about $11.90 starting wage. if GM was to hire a new assembly line worker they would be paid somewhere around $18.00 an hour.. around a $6.00 an hour diffrence.. I know i have worked for GM and for Honda..

[turbo200]

It's a sad sad time to be a GM car fan!

we knew this was coming. the lineup looked weak two years ago, and knowing that the 800s were going to have to hold up the fort for so long, along with an outdated car lineup, and the promise of even more half-baked cars, it would have been hard not to see this coming. It's been an onslaught of bad news though, you just have to try and rise above it, and understand that even in the worst times, all it takes is one product hit to start the momentum again.

[Northstar]

But down the road--say, past 2006 --its probability is high

Umm, wow, I would hope with $20 billion in the bank and over $100 billion in assets that GM wouldn't go bankrupt this year. I really don't see GM going bankrupt for at least another 5 years, as $120 billion is a lot of money, and within 5 years I think GM will be turned around and unleashing its own assault.

[Ghost Dog]

Umm, wow, I would hope with $20 billion in the bank and over $100 billion in assets that GM wouldn't go bankrupt this year. I really don't see GM going bankrupt for at least another 5 years, as $120 billion is a lot of money, and within 5 years I think GM will be turned around and unleashing its own assault.

The 100 billion in Assets Belongs to the Employees. GM won't have access to it. GM owes about 31 Billion more to that fund. IF 50 % of GMAC is sold the Government (PBGC) could sieze the proceeds to make up part of the difference.

[I hope GMRULES again]

This is not what GM needs now, this story is on the cover of next weeks Fortune magazine.The dirty laundry is hanging out for the world to see.

[cmattson]

The gov't could seize it only if GM weren't paying the minimum into the fund. The gov't allows corporations to "underfund" these pension plans -- allowing suspected investments to make up the difference -- which is why some of that number is a bit inflated. GM's got a whole division of investment brokers whose job it is to place GM's money in a fashion that it exceeds what the market is doing. There was a nice article on it not too long ago.. I can't remember where I read it. It was quite interesting. GM's had this strategy for a long time & their return on investment was staggeringly good--way better than the average. I'll see if I can remember where I saw it..

[the_yellow_dart]

How is 26% market share embarassing?

In most industries, nobody has that much....

[enzl]

How is 26% market share embarassing?

In most industries, nobody has that much....

It's only embarassing when you used to have 50%. Although, to be fair and to showe how numbers can be twisted, GM makes/sells as many cars now as back in its heyday, only the market is much larger.

I don't believe the bankruptcy scenario is likely...but all bets are off if the union refuses to cave or an extended strike at Delphi occurs...

[PontiacTechNJ]

It's only embarassing when you used to have 50%. Although, to be fair and to showe how numbers can be twisted, GM makes/sells as many cars now as back in its heyday, only the market is much larger.

I don't believe the bankruptcy scenario is likely...but all bets are off if the union refuses to cave or an extended strike at Delphi occurs...

50% in the 50s and sixties , that was before we decided in the US to be the world trade nice guy and drop all tariffs

[Ghost Dog]

The gov't could seize it only if GM weren't paying the minimum into the fund.  The gov't allows corporations to "underfund" these pension plans -- allowing suspected investments to make up the difference -- which is why some of that number is a bit inflated.  GM's got a whole division of investment brokers whose job it is to place GM's money in a fashion that it exceeds what the market is doing.  There was a nice article on it not too long ago.. I can't remember where I read it.  It was quite interesting.  GM's had this strategy for a long time & their return on investment was staggeringly good--way better than the average.  I'll see if I can remember where I saw it..

http://www.cfo.com/article.cfm/5136027/c_5...&origin=archive

If General Motors sells its consumer finance subsidiary, who gets the proceeds? The company? Shareholders? The folks who guarantee pension funds may have something to say about this, observed The Wall Street Journal.

When a company's debt ratings are below investment grade and its pension fund is underfunded, noted the Journal, the PBGC has leverage to demand that the company contribute proceeds from asset sales to its pension funds, according to the report, which cited the agency's website.

[Ghost Dog]

The gov't allows corporations to "underfund" these pension plans --

Those Loopholes are about be closed.

http://www.cfo.com/article.cfm/5435568/c_5..._todayinfinance

So Long Footnoted Liabilities

Pensions and other retiree benefits are graduating to the balance sheet.

Verizon, Ford, and ExxonMobil, pay attention. It looks as though pensions and other retiree benefits are about to graduate from the footnotes to the balance sheet. And companies that have previously been able to hide underfunded retirement programs may have to count them as liabilities — often multi-billion-dollar liabilities.

In November, the Financial Accounting Standards Board voted to move toward a proposal that would require companies to report the difference between the net present value of their pension- and other retirement-benefit obligations and the amount the company has set aside to meet those obligations.

While Verizon refused to comment, it is far from alone. Ford and General Motors have underfunded their retirement obligations by $44.7 billion and $69.0 billion, respectively, and other big names facing a shortfall include ExxonMobil ($16.4 billion) and AT&T ($14.8 billion).

Edited February 9, 2006 by Ghost Dog

[Guest buickman]

Waterfalls begin as raindrops

Avalanches begin as snowflakes

Bankruptcies begin with poor decisions

General Motors' current difficulties are the direct result of decades of poor decision making. Many blame Roger Smith for today's troubles. Certainly Mr. Smith made very costly mistakes. He invested roughly $40 Billion on technology such as robotics. F. Alan Smith (no relation), who was chief financial officer, claimed that for the same amount we could have bought Toyota and Honda. Now the reverse is true, they can buy us! Yes, Roger Smith had failings, he attempted to replace human relations with automation, and in hindsight that was foolish.

These days, poor decision making continues. Spinning off GMAC, cutting wages and benefits, alienating dealers, and disastrous marketing can all be squarely blamed on a lack of leadership at the top. In order to reverse course, the shareholders and Board of Directors must focus on the Corporation's leadership structure. GM is far too large for any one person to occupy multiple positions of responsibility. The Chairman should be a financial expert who creates the long term vision and direction for the company. This individual needs to be separate from the President who is in charge of world wide operations. Under said President should be an executive with primary responsibility for North America, and this individual needs to be a "car guy". Currently General Motors has one man, Mr Wagoner, who is attempting to carry out all three of these tasks. It is easy to see why he is doing a lousy job at each of them. GM does need to restructure, but at the very top where it matters most. It is impossible for one person to function effectively as Chairman, President, and Chief Operating Officer.

Once a realignment of leadership occurs, GM has a chance to rebound in the marketplace. That resurgence will begin through implementing better decisions. We must go back to the basics of selling cars and the best way to accomplish positive results is to place one person firmly in charge of just North America and hold that person accountable. The future viability of GM and the good of our country hangs in the balance.

Buickman

Founder

www.GeneralWatch.com