Whither GM?

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The more I read about these plans, the more I wonder what the end game is supposed to be.  The administration is acting serious:  firing Wagoner, and threatening to cut off funds if Chrysler doesn't make a deal with Fiat.  Then you read the report, and the government's statements seem . . . kinda silly.  It recognizes GM's deep problems.  Some highlights:

  • GM has been losing market share slowly to its competitors for decades. In 1980, GM's US market share was 45%; in 1990, GM's US share was 36%, in 2000, its share was 29%. In 2008, its share was 22%. In short, GM has been losing 0.7% per year for the last 30 years.
  •  Fundamentally, the lingering consumer perception is that GM makes lower-quality cars (despite  meaningful improvements in the last few years), which in turn leads to greater discounting, which harms GM's price realizations and depresses profitability. These lower price points are an important impediment to enhanced GM profitability and need to be reversed over time in order for GM to bring its margins into line with its best-in-class peers
  •  GM earns a disproportionate share of its profits from high-margin trucks and SUVs and is thus vulnerable to energy cost-driven shifts in consumer demand. For example, of its top 20 profit contributors in 2008, only nine were cars.
  •  GM is at least one generation behind Toyota on advanced, "green" powertrain development. In an  attempt to leapfrog Toyota, GM has devoted significant resources to the Chevy Volt. While the Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable
  •  Absent the successful introduction of a number of new-generation nameplates, as described in the Company's plan, GM's product portfolio is more vulnerable to CAFE standard increases than the portfolios of many of its competitors (although GM is in compliance today with current standards). Many of its products fail to meet the minimum threshold on fuel economy and rank in the bottom quartile of fuel economy achievement.
  •  As GM moves through its forecast period, its cash needs associated with legacy liabilities grow, reaching approximately $6 billion per year in 2013 and 2014. To meet this cash outflow, GM needs to sell 900,000 additional cars per year, creating a difficult burden that leaves it fighting to maximize volume rather than return on investment.

In other words, when competition from Japan made it impossible to continue supporting a bloated and very highly paid semi-skilled workforce with gold-plated benefits, GM tried to grow its way out of the problem by skimping on quality.  Instead it generated volume through fleet sales, and poured most of its energy into larger vehicles where higher prices and less fierce competition allowed them to preserve better margins.  When oil prices spiked, they were totally hosed.  The result is a motley collection of badly tarnished brands and an unsustainable cost structure.  The government's plan to fix all this?

  •  Sustainable profitability: A viable GM should be able to generate meaningful positive free cash flow in a normalized business environment, generate net free cash flow over the course of a business cycle and invest capital in research and development and capital expenditures sufficient to maintain or enhance its competitive position while also earning an adequate return on its capital. 
  • A healthy balance sheet: The restructuring must substantially reduce GM's outstanding debt and existing liabilities to a level where they are consistent with both its normalized cash flow and the cyclical nature of its business. Given the deterioration in the auto market since late last year, this will require substantially greater balance sheet concessions than those called for in the existing loan agreements. 
  • More aggressive operational restructuring: The restructuring plan must rapidly achieve full competitiveness with foreign transplants and more aggressively implement significant manufacturing, headcount, brand, nameplate and retail network restructurings.
  • Technology leadership: The new GM will have a significant focus on developing high fuel-efficiency cars that have broad consumer appeal because they are cost-effective, have good performance and are reliable, durable and safe.
     
    In order to execute a new, more aggressive restructuring plan within 60 days, we will work with GM to use all available tools to implement this plan. The best path to achieve this may well be an expedited, court-supervised process to extinguish unsustainable liabilities, should an out-of-court restructuring not be possible. The Administration is prepared to stand by GM throughout this process to ensure that GM emerges with a fresh start and a promising future. Consumers thinking about buying a GM car and workers and communities that depend on this iconic American company should have confidence that GM can and will come out of this crisis as a stronger, leaner and more competitive car company.

What does this remind me of?  Oh, right:


As Mark notes, the government's plan largely seems to consist of pointing out that Toyota is more profitable than GM, so GM should be more like them.  The details, like how GM is going to handle those infamous legacy costs, are not present.

To be sure, many of them still have to be worked out.  But this plan doesn't really make it clear why they're being worked out by the administration, rather than the Bankruptcy courts.  The core tangible pieces of the plan, like making creditors take a honking big haircut, are just the sort of thing that bankruptcy courts excel at--indeed, they are much better than the administration, which doesn't actually have any authority to make a single creditor do anything.  The only part where the government is even arguably making a unique contribution is in the warranty plan, which it could surely do even if the companies go into bankruptcy.

Presumably, the administration is keeping its hand in to try to minimize the impact on Michigan, and the UAW.  But this is working at cross purposes with the desire to create a healthy company.  Conservatives are too prone to exaggerate Detroit's labor cost problem--which is certainly large, but by no means the only problem the Big Three have.  It can't be denied, however, that it is a big problem.  But the bigger problem is that GM needs to get rid of a lot of its bad marques, which would mean cutting a lot of jobs even if the workers were being paid minimum wage.  A GM rescued with the explicit purpose of minimizing the impact on autoworkers will be a GM even less likely to long survive its reorganization.

And frankly, this plan doesn't make survival look all that likely at anything remotely approaching GM's current size--not if by "survival" we mean "weaning itself from taxpayer cash".  The government can guarantee warrantees.  But it will be less effective at shedding all sorts of obligations than bankruptcy court.  The administration won't be reorganizing the way a bankruptcy does; it will be negotiating.  To be sure, bankruptcy judges, too, negotiate, particularly among the various creditors.  But they do so with the power to cramdown firmly in their hands.  If the administration wants to wield that kind of power, it will have to find new and inventive threats to level at the creditors.  They may not find them.  And if they do, it's not really in the best interests of the nation for the government to find lots of new and innovative ways to threaten private investors.

But even if the administration were just as successful at cramming down, and somehow developed the will to piss off the labor movement by forcing unwilling concessions from the UAW, they would still find themselves struggling to make GM a successful car company again.  The other thing this reminds me of is a conversation I once had with a drunk management consultant about his most recent gig at an apparently unsalvageable franchise operation.  "Some companies," he said owlishly, "are . . . just . . . screwed."  Companies in trouble can enter a vicious downward spiral:  the best employees, and distributors (like franchisees and dealers) leave when the brand erodes, and so you end up with both a nasty brand legacy, and less committed or competent people available to help you execute a turnaround.  In Detroit, the problem is particularly acute because people haven't merely left the company, or even the industry, but the whole region where they need to recruit.

With what money, or starry-eyed dreams of success, is GM going to attract the top talent they will need to build an industry-leading drive train?  What charismatic leader is going to gut-rehab the corporate culture of a firm whose employees number in the hundreds of thousands?  Companies this large are like battleships--they do not turn around on a dime.  In either sense of the phrase.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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