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GM, bankruptcy, renewal « Previous | |Next »
June 1, 2009

General Motors is expected to declare itself bankrupt seeking legal protection from its creditors after running up losses of $81bn (£50bn) over four years.This will result in job losses and closed factories, with health care plans and retirement savings at risk for thousands of workers and their families.

The hope is that Chapter 11 bankruptcy will provide the means for a swift reorganisation of the company that would allow a slimmed-down version of the Detroit manufacturer to emerge from bankruptcy within 60 to 90 days.Under a proposed carve-up to be put before a bankruptcy judge, the US government is likely to get a stake of 70% in the company in return for further state aid of up to $30bn. The United Auto Workers union will initially get 17.5%, accepting shares in lieu of cash owed by GM to fund retired employees' healthcare cover. A majority of GM's bondholders have accepted an offer to swap their $27bn in debt for an initial stake of 10%, plus warrants allowing them to increase their ownership of the company to 25%.

ThompsonMGMbankruptcy.jpg Mike Thompson

Industry-wide vehicle sales in the US have fallen from 16m annually to fewer than 10m, the worst slump since the second world war. In the first quarter of the year, GM's revenue dropped catastrophically from $42.4bn to $22.4bn. The company's US market share, which reached 51% in 1962, has dwindled to 17.9% as nimble Asian rivals chipped away at Detroit's market dominance.

It was only last week the auto industry bowed to the inevitable, accepted new higher fuel economy standards, the political realities of climate change, expensive petrol and the technological reality that the internal combustion engine is giving way to another technology (electric motors or other alternatives). Prior to that, GM's standard response to falling sales and profitability had been deep cost-cutting fighting congressional efforts to boost fuel economy not innovative new product. GM's history is one of building their large gas guzzling SUV's, and, from the 1970s onwards, it ceded the small vehicles market segment ceded to German and Japanese automakers years ago. The US auto executives treated small, efficient cars as a low-margin afterthought.

Higher fuel economy standards is a step in the right direction, but it represents only a fraction of what the auto industry could do to build a greener car, which is what they have resisted for a couple of decades. GM has a history of scoffing at more energy efficient and environmentally responsible cars It was only four years ago that GM nixed the idea of building an electric car. For decades the US auto companies never moved new technologies past the concept stage, even though GM and General Motors cars were seen as dated and inferior.

Unless sales pick up, it will be hard for GM and Chrysler to make it, even with billions in bail-outs, in an overcrowded industry with a crumbling economy. To avoid the scenario of weakened companies dying or getting gobbled up by stronger competitors, they will have to deliver new product. Will they be able to sell enough cars to both pay down debt, which could still be $10 billion to $20 billion, and fund new vehicle development, in time?

| Posted by Gary Sauer-Thompson at 8:06 AM | | Comments (12)


What happens to GM-Holden at Elizabeth in South Australia? Will that be sold off along with the Vauxhall plant in the UK and the Opel plant in Germany?

Re GM-Holden. It is not being mentioned as due for sale by Detroit.

The best spin is that the Rudd Government has decided to use the car industry to help build an economy founded on knowledge industries and services as the pace of innovation accelerates. It now depends on their research and development to develop greener cars.

The German government has put billions of euros of soft loans on the table to keep the GM plants open, and so sent out a strong signal that they are backing her country's car industry.

However, the money invested in the car industry by the Rudd Government is in stark contrast to the lack of money for its backing for renewable energy.

The view of the Rudd Government, that new technologies and advanced manufacturing will lead us out of the recession and drive our future prosperity, is a truncated one. Apart from the car industry we don't get a a clear vision over what sort of industries the Rudd Government want to be at the heart of our new economy, nor much sense of a clear long-term commitment to supporting them.

we don't get much sense of the Rudd Government's vision of what the new low carbon economy would look at at all. The "low carbon economy" mentioned in relation to the ETS legislation has no content. All the financial commitment has been given to the old industries. I very much doubt that GM-Holden will become a world leader in the electric vehicles of the 21st century.

Jeffrey Sachs spells out what is needed:

The work of moving from a few demonstration vehicles to a new mass industry will take a least a decade. The government will have to support research and development, the high costs of early models, public awareness and acceptance, and the supporting infrastructure. In the case of plug-in hybrids, this means a high-performance power grid fed by sustainable power generation, such as solar or wind power, or coal plants that capture and store the carbon dioxide. For fuel cells, it means a new infrastructure of hydrogen filling stations along the interstate highways and in the major cities.

No minister in the Rudd Government is talking that talk. Neither is the Coalition. It's all about looking after "clean" coal.

GM has been on downward slide for years. In the 1960s, consumer advocate Ralph Nader revealed its cars were unsafe. In the 1970s, Middle East oil producers showed its cars were uneconomic. In the 1980s, Japanese carmakers exposed them as unreliable and costly. Many younger Americans have never bought a GM car and would not think of doing so. GM will disappear, eventually. The writing is on the wall.

An industrial adjustment is coming even if the public does not want to hear about it and a strong constituency (the midwest in the US, SA in Australia) wants to preserve jobs and communities as they are, regardless of the public cost. They--the unions---only seeing the loss of old routine jobs in manufacturing, and they overlook all the new ones doing service jobs.

Robert Reich makes some good points on his blog about industry policy. He says:

Industrial policy ought to fill in where the market fails -- providing basic research to help spur new technologies and industries, reducing the negative side-effects of the market (such as carbon pollution), and easing the adjustment of workers and communities out of older industries that are shrinking toward new ones. Ideally, these three parts of industrial policy would be synchronized so the new technologies and industries address negative side-effects while also creating opportunities for communities and workers to gain new employment.

He adds in relation to the US auto industry in midwest USA that:
Much of the industrial Midwest desperately needs new technologies and industries to take the place of the shrinking U.S. auto industry, and workers who have been (or are about to be) laid off need help transitioning to those new jobs. Could chunks of the old auto industry be adapted to producing high-speed rail or, more generally, highly-efficient people-moving systems of the future or, even more generally, green technologies that support such systems? Could some of the billions now slated to fund new non-carbon based energy sources be targeted to this?

Good questions. They are not being asked in Australia.

Germany and Europe want to keep making Barinas, and Australia wants to continue making Commodores.

Between the recession and climate change, who is likely to sell the most cars?

Well, it won't be GM-Holden that is for sure. Wrong product. They haven't made a profit since 2002 and so their market share will decline. But they say that they have a new small car coming online, better fuel efficiency in the Commodore and are now cash flow positive.

G.M.’s stock fell steadily from about $70 when Wagner took charge at the start of the decade. It closed at 75 cents a share on Friday.

All that pain, stress and waste. Not just in the auto industry, not just in the US.

And the economic elite keep cruising. Let's not play the nasty "blame game" eh?

The biggest threat -BY FAR- to my way of life isn't a handful of scruffy loons in the mountains of Pakistan... It's a bunch of clean-shaven, well-dressed tossers on Wall Street. They're the ones who are destroying the future for our children.

Read Guy Rundle's piece in Crikey about the Detroit and the GM Unions who refused to build smaller cars. He contrasts the situation in Detroit with the situation in Windsor the town in Canada the other side of the bridge. He says this encapsulates failed capitalism and [perhaps another piece] says that the capitalist experiment has failed and we should look to the social democracy like Sweden.

Budding capitalists beware even though GM was too big to fail - the shareholders get nothing.

It is amazing isn't it. It has taken decline and bankruptcy for GM Holden to make the shift to building a small fuel efficient car (to be built at its South Australian plant at Elizabeth) as well as the Commodore, even though Australian consumer demand has shifted away from the big gas guzzlers in favour of cars such as Toyota's Corolla.

And this is the meant to be the manufacturing centre piece of the knowledge economy?

It is good to see a commitment to high-value-added manufacturing given that those who had claimed that financial services can replace manufacturing as a source of national wealth have taken a big battering from the financial crisis.