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What bankruptcy would mean to GM
Plunging market share, huge layoffs and a copycat filing by Ford. Those are just a few of the likely outcomes if GM can't avoid bankruptcy court.
By Robert Walberg
Rick Wagoner, chief executive of General Motors, has tried to comfort investors by saying GM has no plans to file for bankruptcy protection.
Cold comfort, I'd say. The company's deeds, if not the CEO's words, point to an acute need for some sort of bankruptcy plan, even if just as a contingency. Consider: GM (GM, news, msgs) lost nearly $4 billion over the last year; its credit rating dropped to junk status; car sales plunged as GM built bigger cars and trucks just as gas prices skyrocketed; its cash horde has been cut nearly in half; and its leading parts supplier, already in bankruptcy, faces a possible strike that could shutter GM plants for weeks if not months.
It would be irresponsible of management not to at least have some bankruptcy plan in the works, so that if the worst-case scenario did play out, they would be ready with a recovery plan. Below, I'll outline what a GM bankruptcy might look like, and how it would impact workers and competitors.
No leadership, no vision
First, a quick look at what management is doing now. GM's main push in coping with its current troubles is to cut back production deeply enough to create a balance between supply and demand. To achieve this objective, management announced that it will be closing a total of 12 plants and support facilities and slashing 30,000 employees by the end of 2008.
Basically, this course is a tacit admission by management that it has no interest in developing a plan to increase customer demand for its cars. That would require real vision, real leadership and real innovation. These are not traits Wagoner has displayed to date.
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Management is obsessed with lowering GMs cost structure. As Ive argued for months, the greater threat to GMs status as a leading auto manufacturer is its total lack of foresight and its bland, bloated product mix. Unless management starts to address the real reasons why its market share continues to decline, the company will remain on a path that ends in bankruptcy court.
And that destination isn't out of the question. In the late 1970s, the U.S. government considered Chrysler too big to fail. But now we have seen giants such as Enron, WorldCom and UAL go belly up with little impact on the economy. Investors, employees and, most importantly, management shouldnt expect the government to step in and help.
If GM goes, does Ford, too?
What would a GM bankruptcy look like?
First, as weve seen with the airline sector, headcount would be slashed dramatically. The 30,000 jobs scheduled for termination over the next few years would be a relative drop in the bucket. Instead of cutting 17% of the overall North American workforce, the percentage would be closer to 30% to 40%, or somewhere between 50,000 to 70,000 workers. The Buick, Saturn and Pontiac lines would almost certainly be eliminated, or at least seriously cut back.
For those fortunate enough to hold onto jobs, the concessions demanded from them would be draconian. It should be noted that the recent announcement trumpeting additional cost-cutting measures would save the company only about $1 billion more than was already planned in previous restructurings. A big number, but nowhere near the cuts precipitated by a bankruptcy.
The pain wouldn't be limited to GM employees, either. If the filing is seen as a way for an automaker to finally break the auto unions and get labor costs under control, expect Ford Motor (F, news, msgs) to be next in line.
The impact on the U.S. auto industry would be huge, as a trip to bankruptcy for our two biggest producers would cement Honda (HMC, news, msgs) and Toyota (TM, news, msgs) as the worldwide leaders for generations to come, with General Motors, Ford, DaimlerChrysler (DCX, news, msgs), Nissan (NSANY, news, msgs) and Hyundai (HYMLF, news, msgs) fighting it out for third place. Tough to imagine how either one of the struggling US producers ends up winning even that battle.
Shrinking market share
As it stands now, GMs planned production cuts will mean that the companys market share will be close to 23% -- roughly half of what it was decades ago and well below were it stood just a few short years ago. If bankruptcy becomes a reality and the cutbacks are more severe, the companys worldwide share of the auto market could easily plunge into the mid-teens.
In all honesty, I dont think either automaker is headed into bankruptcy anytime soon. Concerns over a potential strike at Delphi are probably being overstated by the market at this point. But even if Delphi were to be out for a couple of months, GM can still avert a cash crunch by selling a majority share of its financing unit for billions. In fact, one reason for the more aggressive restructuring plan and the defiant attitude regarding bankruptcy protection is to protect the value of that asset.
If GMAC bidders were to think that GM was on the brink of bankruptcy, they might be inclined to wait for a fire-sale price. Given the transparency of the effort by GMs management, however, it is still unlikely that the financing arm will return the type of cash originally anticipated by management. Nevertheless, you can bet that management is doing all it can to find a buyer willing to pay anything resembling a reasonable price.
So, management deserves some credit for taking some of the steps necessary to fight another day. If GM ever wants to be a major player again, though, the Board of Directors needs to admit that the current management team lacks the imagination, innovation and resolve necessary to accomplish that goal.
GMs next restructuring announcement shouldnt focus on cutting health care costs, closing plants, trimming pension benefits or reducing the number of hourly workers. It should focus on change at the top, and it needs to be done soon or the entire empire could come crashing down.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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