GM's Final Chapter

So many currents are swirling around GM right now that it's hard to know where to begin writing about it. I last wrote about the failing, near-death auto maker in this post, almost one month ago. Perhaps a good starting point is my old squash partner Paul Ingrassia's well-written and -reasoned piece in yesterday's Wall Street Journal.


The salient passages in Paul's essay are these,


"Let's assume that the powers in Washington -- the Bush team now, the Obama team soon -- deem GM too big to let fail. If so, it's also too big to be entrusted to the same people who have led it to its current, perilous state, and who are too tied to the past to create a different future.


In return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver -- someone hard-nosed and nonpolitical -- should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.


That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.


These are radical steps, and they wouldn't avoid significant job losses. But there isn't much alternative besides simply letting GM collapse, which isn't politically viable. At least a government-appointed receiver would help assure car buyers that GM will be around, in some form, to honor warranties on its vehicles. It would help minimize losses to the government's Pension Benefit Guaranty Corp.


The current economic crisis didn't cause the meltdown in Detroit. The car companies started losing billions of dollars several years ago when the economy was healthy and car sales stood at near-record levels. They complained that they were unfairly stuck with enormous "legacy costs," but those didn't just happen. For decades, the United Auto Workers union stoutly defended gold-plated medical benefits that virtually no one else had. UAW workers and retirees had no deductibles, copays or other facts of life in these United States.


A few years ago the UAW even waged a spirited fight to protect the "right" of workers to smoke on the assembly line, something that simply isn't allowed at, say, Honda's U.S. factories. Aside from the obvious health risk, what about cigarette ashes falling onto those fine leather seats being bolted into the cars? Why was this even an issue?


A thorough housecleaning at GM is the only way to give the company a fresh start. GM is structured for its glory days of the 1960s, when it had half the U.S. car market -- not for the first decade of this century, when it has just over 20% of the market. General Motors simply cannot support eight domestic brands (Cadillac, Buick, Pontiac, Chevrolet, GMC, Saturn, Saab and Hummer) with adequate product-development and marketing dollars. Even the good vehicles the company develops (for example, the Cadillac CTS and Chevy Malibu) get lost in the wash.


As for Ford and Chrysler, if they want similar public assistance they should pay the same price. Wiping out existing shareholders would end the Ford family's control of Ford Motor. But keeping the family in the driver's seat wouldn't be an appropriate use of tax dollars. Nor is bailing out the principals of Cerberus, who include CEO Stephen Feinberg, Chairman John Snow, the former Treasury secretary, and global investing chief Dan Quayle, former vice president.


Government loan guarantees, with stringent strings attached and new management at the helm, helped save Chrysler in 1980. But it's now 2008, 35 years since the first oil shock put Japanese cars on the map in America. "Since the mid-Seventies," one Detroit manager recently told me, "I have sat through umpteen meetings describing how we had to beat the Japanese to survive.
Thirty-five years later we are still trying to figure it out."

Which is why pouring taxpayer billions into the same old dysfunctional morass isn't the answer."


Contrast Paul's sensibility with this quote from the Journal's article concerning GM's stock price falling to a low not seen since 1946,


"But Mr. Wagoner added in the interview that he would not be willing to resign in return for aid.


"I think our job is to make sure we have the best management team to run GM. It's not clear to me what purpose would be served" by his resignation. "


So, there you have the business-oriented analysis in a nutshell. No less an objective and savvy analyst than Pulitzer Prize-winner Ingrassia, who co-received the prize for his reporting about Detroit's resurgence during the 1980s, sees Wagoner and his team as the problem. Ingrassia's solution is a variant of the one I've suggested for several years, most recently in that linked post from last month, i.e., file bankruptcy for the faded auto maker, sell what can be sold, and let the Federal government do what it can for line workers and middle managers.


Wagoner, ever the poster boy for 'greedy' large-cap CEOs, claims he's just 'doin' his job the best way he knows how.'

As if.


Paul is right. Wagoner and his team of inept misfits have to go. A bankruptcy court-appointed receiver can dismember GM as s/he sees fit. One point on which I disagree with Paul is whether GM can exit bankruptcy, government-aided or not, as an independent firm. I just don't see the few profitable car models justifying a standalone entity. Dealerships wouldn't survive on that kind of volume. Nor would production costs, etc., be competitive on such a small market share.


Now to the political angle.


No less a leading auto industry executive than Mike Jackson, CEO of AutoNation, boldly asserted on CNBC this morning that GM must be saved, and bankruptcy was unthinkable. According to Jackson, nobody will buy a car made by a company in Chapter 11.


Really? I thought we used to trust market forces to determine the clearing price for virtually anything. In this case, you know that NAPA and other aftermarket vendors will always supply parts for high-volume cars, no matter what the make. There'll be no shortage of mechanics to service GM vehicles, either. Warranties on existing vehicles are a balance sheet liability. Warranties on newly-purchased cars and trucks will either become third-party issued with the cars, or available from them as aftermarket extras.


Of course, Jackson would like to reduce all risk associated with his current inventory, not to mention maintain his negotiating leverage with non-GM vehicle producers. That's why he prefers GM to be bailed out by the Federal government.


Politicians see votes. Pumping taxpayer dollars from fifty states into the failed companies in primarily one state is a slam dunk for Dingell, et.al. Additionally, as Ingrassia notes, there's the PBGC liability hanging over the Federal government.


If Ingrassia's (and my) recommendation was followed, the union which supports the current Congressional majority party and the President-elect would, as Paul notes, be forced, in bankruptcy, to see their existing contracts and benefits vanish. The UAW gets a much better deal by feeding off a government-subsidized, barely-living GM corpse than it does in bankruptcy court. Any chance this explains the Congressional insistence on last month's multi-billion dollar loan to the auto makers? And their further desire to shovel more aid without demanding bankruptcy?


Of course, there is a sort of perverse silver lining to all of this.


Schumpeter would note that companies in these straits are hardly the ones from which you will expect any more innovation. So if taxpayers end up owning GM, Chrysler and/or Ford, you can stop worrying that vital American corporate spirits will be crushed. Our government typically 'rescues' those who private capital will no longer touch. It's unlikely that, no matter how badly a government-run GM does, the opportunity cost will be significant.

It's not like anyone will buy a car from a government-run and -owned company. Does anyone seriously believe any good designers and managers will hang around such a company?


In fact, as my friend B and I discussed this morning, GM & Co. aren't even really important as defense contractors anymore. And America has other auto makers, as Ingrassia pointed out. They just happen to be profitable, foreign-headquartered, and located in states that typically vote Republican.


The end result of these various forces is probably going to be a government-influenced, if not run, domestically-headquartered auto sector. My prediction in this post just over three years ago will have finally, definitively come true. At least one, and perhaps three CEOs in Detroit will be gone.