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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%.
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?
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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?