On June 1, 2009, General Motors filed for bankruptcy under US chapter 11. The move was expected, but it still struck people worldwide as the end of an era. The news was reported in more than 11,300 online news agencies and publications, according to Google News statistics.
Bankruptcy has been a predictable step after GM has been battling snowballing debt in the wake of the collapse in consumer spending and credit markets in 2008. Last year it has also lost its 77-year old reign as the world’s biggest carmaker to Toyota. Its bankruptcy filing shows that GM had accumulated a staggering US $173 billion in debt.
The GM bankruptcy paves the creation of a new, much smaller company whose majority shares (60%) will be controlled by the US government. The Obama administration will invest US $30 billion in the new GM, hoping that the restructured company will be able to survive the competitive environment of the global auto industry.
To make itself leaner, GM has already shed its European operations (Opel and Vauxhall) to the Canadian car parts maker Magna International. It is also planning to sell the famed Hummer division to the Chinese company Sichuan Tengzhong Heavy Industrial Machinery Company Ltd. It will also sell its Saab and Saturn brands and discontinue the Pontiac brand.
History of GM
GM has long been hailed as a quintessential American icon. GM was founded more than 100 years ago by William C. Durant in Michigan. It soon acquired other companies, including Oldsmobile, Cadillac and Oakland-Pontiac. GM rose in prominence throughout the 1930s and the Second World War. The 1950s marked the heyday of the company, a time when the CEO of GM could affirm with candor that “what was good for our country was good for General Motors, and vice versa.”
At this time, the company accounted for 3% of the US gross domestic product. Its main vehicle was the Chevrolet, with Pontiacs, Buicks and Cadillacs creating a “ladder of success” as former GM President Alfred Sloan put it. In the mid-1950s, GM was the top US company, producing half of US cars and selling twice as much as the No. 2 corporation, Standard Oil.
Yet starting with the 1960s, GM, like the other American “Big Three” – Ford and Chrysler – found itself in strong competition with the Japanese and European car makers, which offered the economical model of the compact car. The large, fuel-guzzling American vehicles were slowly outmatched by the small and qualitative cars built by its competitors. GM’s response to the European and Japanese models, such as the ill-fated Chevrolet Corvair or Cadillac Cimarron were inadequate. GM began to struggle against increasing debt, rising labor costs and large number of dealerships.
Increasing GM troubles in the 21st century
Some believe that the GM bankruptcy should have happened sooner. As early as 2005, the struggling company was contemplating bankruptcy, but its CEO Rick Wagoner opposed it. Since then, GM continued to make a series of controversial moves, such as selling its financial arm GMAC, focusing too much of its efforts on building fuel-consuming SUVs while scrapping its pilot electrical car program.
The 2008 financial crisis exposed GM’s flimsy financial position and pushed it to seek US government support at the end of the year. GM received US $20 billion since the beginning of 2009, effectively surviving on government financing. The Obama administration then formulated a plan that would save GM from complete collapse. By doing so, it has hoped to avert the loss of thousands of American jobs according to many analysts.
Impact of GM restructuring on US employees
Even with the active involvement of the US government, it is widely expected that the restructuring will be painful for the automaker’s 92,000 US employees. While the company maintains that about 5,000 workers will be laid off, others believe that 20,000 is a more likely figure. It is also not clear how the 500,000 GM retirees, survivors and other beneficiaries, will be impacted by the bankruptcy and restructuring.
However, the GM has already been working with the U.S. Treasury to reduce its benefit obligations to retirees by two-thirds, which would imply major cuts in healthcare and life insurance. GM’s plans to cut many of its dealerships will also have a far from negligible impact on US employment.
The National Automobile Dealers Association estimates that dealerships slated for closure now will result in the loss of about 137,000 workers. This, in turn, will result in trickle-down community effects as dealerships are significant sources of tax revenues in many areas.
GM’s uncertain future
The success of the future restructured GM is by no means guaranteed. For now, President Obama is moderately optimistic, maintaining that the new GM can become “once more a symbol of America’s success”. Similarly, the new CEO of GM, Fritz Henderson, expresses a positive view of the future. By comparison, analyst Stephen Spivey of Frost & Sullivan in San Antonio, Texas, believes that the measures announced are not sufficient to turn the company around. Many other analysts are warning that a downsized GM will have a hard time competing with the increasing market share of Toyota, Honda, Nissan-Renault and even Ford.
In the end, however, GM had very little option except a restructuring. Whether this US government-orchestrated change will be successful remains to be seen.