GM serves up some red meat for Congress

Posted by: David Welch on December 2, 2008

Having looked over the plans from Detroit’s three carmakers that will—they hope—get them financing from the federal government, I have to say that General Motors by far had the most sweeping action to try to remake itself. Of course, GM also has the most work to do and, judging from its own characterizations, the most pressing need for cash.

GM made the case that it needs at least $12 billion to keep going, and another $6 billion if the car market worsens. To prove it’s a good bet for the tax payers money, GM says it will sell, shutter dispose or shrink beyond recognition four if its brands—Saab, Saturn, Hummer and Pontiac. Smart move. It should have been done years ago, but GM was wedded to the brands because dumping them was just too expensive and too gut wrenching. WHen it’s done, the company can focus on Chevy, Cadillac, Buick and GMC.

Next, they want to negotiate cuts with the UAW that will slash labor costs by $4.5 billion. GM President Fritz Henderson didn’t say how he’ll get it. But they’re working on it. GM will also try to cut its $66 billion debt load in half. I love this move. First, it cuts a huge burden since GM pays more than $3 billion a year in interest. Next, it’s a fine example of Main Street getting one over on Wall Street for a change. A lot of that debt was racked up to fund the union pension plan. So the working-class retirees will keep their pension while Wall Street guys foot the bill. Don’t worry, investor class, you’re still way ahead of the game.

Ford and Chrysler mostly described what they have already accomplished. Then they went on a screed about how they will make a slew of electric cars and hybrids. That will satisfy the likes of House Speaker Nancy Pelosi, who gets a load of support from environmentalists. Ford, by the way, wants $9 billion and Chrysler wants $7 billion. But I didn’t see much in the way of transformation in either plan.

GM’s plan has some real elements of a company that has finally figuring out that business as usual won’t survive. But there are two big questions: One, why didn’t Wagoner pull some of these moves sooner? And two, will it all happen soon enough? Getting rid of those brands will take a lot of time. GM needs the market to turn around and it has to get its action plan finished quickly for this to work. Otherwise, even $18 billion might not do the trick. My guess is that GM can pull it off. The stakes are too high for any one stakeholder to hold out. But it’s going to be a cliffhanger. Congress said they wanted something transformational. GM might just have it.

Reader Comments

Paul (Vw)

December 2, 2008 11:40 PM

>>> GM will also try to cut its $66 billion debt load in half. I love this move. First, it cuts a huge burden since GM pays more than $3 billion a year in interest. Next, it’s a fine example of Main Street getting one over on Wall Street for a change...So the working-class retirees will keep their pension while Wall Street guys foot the bill. Don’t worry, investor class, you’re still way ahead of the game.

Huh? "Fine example?" The reason tax payers are bailing out Wall Street is because Wall Street is Main Street now. Look at how ordinary people's 401k's have tanked. Or are you saying Main Street now only refers to people who belong to the UAW? So people who don't belong to the UAW and have to rely on their 401k's are suddenly now part of the "investor class?" Mis-characterizing who will be hurt by transferring the staggering cost of bad decisions by Detroit/unions is hardly a "fine example."

Killing Saturn over Buick? Maybe it's because Saturns are standalone dealerships? Sounds to me GM is still not getting it--even Tiger Woods won't take Buick's money--it's about selling *more* cars.

I may never buy a Detroit vehicle again.

Brett

December 3, 2008 10:10 AM

These car companies need to focus on more sustainability, 50 mpg cars, and also getting us away from using gas. They need to focus on more cars using renewable energy. Also they should apply more cradle to cradle design in their cars so these vehicles can be re used over and over, creating a lot more jobs. They should come up with a plan to buy back their bad MPG from customers, and recycle their parts into more efficient cars.

ben

December 3, 2008 10:15 AM

The message that GM needs to get is that it's running a business and not a soup kitchen. When Lee Iaccoca was CEO of Chrysler years ago he told the union that he has plenty of jobs at $17 an hour, but none at $20 an hour. You cannot succeed in a competitive business by having a cost structure higher than your competitors, unless you have products that stand out above the rest.

GM has (or at least at one time had) the economies of scale to pressure suppliers to keep the costs low. What they need to do now if they want to survive is to play hardball with the union. They may not like it, but having a stake in all this they should realize that bankruptcy won't help organize labor at all.

Squeezebox

December 3, 2008 10:20 AM

Buick should be a strictly Chineese brand, since they love them more than we do. The rest of it should be merged into Cadillac. Pontiac should be merged into Cheverolet. GMC should do heavy trucks only, merge the pickups, vans, and SUV's into Chevy. SAAB and Saturn should be merged into Opel. Vauxhall should be merged into Chevy or GMC, depending on product.

As far as the labor savings, it took a brush w/death before the union woke up and realized it couldn't keep the wages and benefits it gets now. The UAW, IUE, and URW should be much more willing to negotiate now. A low paying job is better than none.

JS

December 3, 2008 10:28 AM

Saturn's reputation for customer sales satisfaction, strong owner loyalty, and quality cars is reason enough to keep this brand, Saturn should be GM's shinning star into the future NOT be considered as a sell off brand!

TayzGpa

December 3, 2008 10:29 AM

Having worked for (and then with) General Motors for 27 years, I can tell you that A. the union and not Wagoner calls the shots at GM and has since the 40's. B. GM doesnt care and never has cared about making good business decisions. As long as there is someone around that they can point the finger at when things go south then everything is alright. C. They lost A LOT of us during the 70's when big was better, quality was (and still is) the last thing on thier minds, and long lines at the gas stations were just a temporary inconvenience. Frankly, GM is finally getting what it has planned for all these years. I would think they would be happy.

James

December 3, 2008 10:32 AM

"GM says it will sell, shutter dispose or shrink beyond recognition four if its brands—Saab, Saturn, Hummer and Pontiac. Smart move. It should have been done years ago, but GM was wedded to the brands because dumping them was just too expensive and too gut wrenching"

Why is GM the only manufacture that will make two vehicles exactly the same but under to different names???? (Colorado / Cannon......Colbolt / Cavalier & Sunfire......Vue / Acadian) The list goes on and on.....

They already dumped the Oldsmobile line which was a direct copy of Buick. Want to save the company???? Get rid of all the other duplicates!!

Also, cut your union down, there is no reason for someone to get pied $35-40 bucks an hour to put wipers on a car, on the assembly line. Skilled labor, I'm sure it is however you don't need a Ph. D. to do it.

GM wants the money.... put the plan into action now! then see if you need money.


just my two cents.

siemon

December 3, 2008 10:37 AM

Too late I guess. The cars that the big tree made for the USA market can't compete in markets outside the USA. The international trend is fuel efficient smaller cars and the big tree made the opposite. Ford Europe en Opel did understand the trend but their mothers not....

SmartA$$

December 3, 2008 10:38 AM

I used to buy only Fords. My father only bought Fords (he had a Chevy once as I recall), his father only bought Fords. I'm not buying any more Fords - sorry Detroit. I'm just not that "brand-loyal" anymore. Now I want functionalism and economy above all other factors.

Last year, I worked for a major car dealership that sold Chevy and Toyota.
There was a very clear difference in Toyota cars, but the dividing line between truck products had begun to blur. Today, I can't see anyone justify a truck unless they are rural or need the 24/7 utility of a truck - and that is a very small minority - mostly people in the trades and the self-employed, who are likely to take a write-off on the truck expense.
I think if I were Detroit, I'd move to Dallas or California. They need some new scenery to clear their heads. This bail-out won't work for more than one year at best.

Bill

December 3, 2008 10:48 AM

The only "American" vehicle that I have owned in the last twenty years has been Saturn - and we've had three. Two before Saturn was part of GM and the last when it was GM. But, dumping Saturn before Buick? They still don't get it.

I am now on my third BMW (my Z3 was made in South Carolina) and my wife has gone back to Honda (made in Ohio).

The Big Three got into this mess by ignoring the market trends of the past twenty years and focusing instead on their executive bonuses more than on investing in modern plants and fuel-efficient designs. So, let them go out of business as they should in a market economy. The workers can be re-trained to work for the other "American" auto manufacturers: Honda, Toyota, Nissan, or BMW.

Isn't it about time we eliminate the tag-line "American-made" "Union-made" as if were unique to the Big Three. A short list of examples:

American-made UAW vehicles:
Mazda 6
Mitsubishi Eclipse
Mitsubishi Galant
Toyota Corolla
Isuzu i-Series Truck
Mazda B-series Truck
Mitsubishi Raider Truck
Toyota Tacoma Truck

And the list for "American-made, non-union" is even longer.

Jan R Smith

December 3, 2008 11:40 AM

It appears that GM could tell all this to the Bankrupcy Court. This would be simpler, and to one Judge, not 555 members of Congress. Congress could assure this Bankruptcy Court that it would advance GM a sum after all these moves are made, but not before. Bankruptcy would allow all these changes to be made more rapidly, especialy changes to the UAW Contract.

Sharyl

December 3, 2008 12:18 PM

This is about American jobs.If the Big Three fall, they will not fall alone. Near estimates say that they will take atleast 10 million jobs with them. Thats not considering that those 10 million people will cut thier food bills, cable TV (to bad for the cable news channels that will lose funding and the news reporters that will lose thier jobs in the domino affect),newspapers, magazines,and the list goes on. Then there is all the community chairities that UAW members give to and the parks and bicycle trails and shelters that will lose people because Union members contribute thier time to these functions also. The lose of the United States last huge bastion to industry will be like the shot heard around the world and anyone who does not think that it will not have that much of an affect is fooling thenselves.

Sharyl

December 3, 2008 12:19 PM

This is about American jobs.If the Big Three fall, they will not fall alone. Near estimates say that they will take atleast 10 million jobs with them. Thats not considering that those 10 million people will cut thier food bills, cable TV (to bad for the cable news channels that will lose funding and the news reporters that will lose thier jobs in the domino affect),newspapers, magazines,and the list goes on. Then there is all the community chairities that UAW members give to and the parks and bicycle trails and shelters that will lose people because Union members contribute thier time to these functions also. The lose of the United States last huge bastion to industry will be like the shot heard around the world and anyone who does not think that it will not have that much of an affect is fooling thenselves.

Detroit

December 3, 2008 12:28 PM

>> Killing Saturn over Buick?

Buick is one of the strongest brands in China. They've developed a very strong line of products under the Buick brand there. It's also GM's 'founding' brand.

Joe_K

December 3, 2008 3:22 PM

Sounds like GM is making REAL progress. And reminder to you 'bailout' people....this is a L-O-A-N. You'll get your money back.

Although I will honestly miss Saturn, I'm curious to see what Pontiac will come up with, now that it'll be a specialty brand.

Steve

December 3, 2008 7:29 PM

both GM and Ford are doing well in China. I have a Ford and I am quite happy with the car. While no one would by a car from a company which is in deep trouble. too bad for American Economy.

SCG

December 3, 2008 8:13 PM

When the perfect storm hit of soaring gas prices, falling real estate and stock market values and a financial system in crises, the bottom dropped out of the car buying market because suddenly car buyers began to rethink their vulnerability. With a domestic auto industry in crisis many so called responsible leaders simplistically say that maybe the best solution would be to just allow the U.S. automobile companies to fall into bankruptcy so that they can reorganize into “something” that can compete with the imports. That’s like saying, let the patient die on the table and then we can try to revive him. But in the meantime, how do the 100s of thousands of businesses and workers survive while the geniuses are trying to figure things out. Obviously none of these bureaucrats and media pundits have a clue as to what it would take to restart such a complex industry with their deeply intertwined marketing and manufacturing relationships. We’re talking many months, perhaps years, and in the meantime the imports would be gobbling up the remaining market. So if the patient should by some miracle begin breathing again, there would be no reason to get off the table.

What some are unfairly trying to call a “bailout” is really a bridge loan, not a “bailout”. As opposed to the loans given to Wall Street and the banks, there will be a high degree of definition as to what the money will be used for and exactly how it will be spent. UAW work rules and wage cutbacks may be on the table, but since only 10 percent of a vehicles cost is represented by labor, the UAW can’t realistically be expected to provide all the cost savings necessary to make the domestic manufacturers more competitive with the advantages the imports enjoy. There are others such as management, suppliers, dealers and creditors who need to come to the table prepared to make sacrifices. They can’t expect to escape involvement. We are in a world economic down turn and the European union is giving consideration to 51 billion dollars in assistance to their auto industry. In China and S. Korea their automotive industries are also asking for assistance. Going from a 16 million U.S. unit sales market to a 10 million unit market is dramatic and traumatic to especially an automotive industry that is such a uniquely complicated and interdependent industry. This loss of market has hit everyone, both domestic and imports and everyone is cutting back. The situation has not been created by anything that the industry has done. The source of the problem originates in Washington and on Wall Street and within the financial industry.

Washington has not recognized the importance of fair trade policies. We have the most open market in the world but when we accept more than 7 hundred thousand units from S. Korea and yet we have only been allowed to export less than 7 thousand, our industry is not being fairly represented by our government. On another issue, we need to be assured the same certification regulations that we allow certain of the imports. Instead, in some cases we must certify every car we export before being allowed entry, while on the other hand for imports, if one passes certification, all pass without additional certification. Such requirements often put our products at a severe pricing disadvantage. The importance of the auto industry to the economy as a whole makes it incumbent on our government to protect it from destruction by a perfect storm of events such as we are now experiencing. The importance and criticalness of the industry to our national security as the “Arsenal of Democracy” also should not be forgotten.

The auto industry has been a source of well paid jobs that have contributed to the growth of the middle class in this country with all the infrastructure attendant with the development of such a significant portion of our society. Few recognize the fact the U.S. auto industry has had to compete profit wise with foreign companies where health care is paid for by their government. That is one of the factors that has made for such an uneven playing field for competition. Its taking America down and we need to instill again a pride in our country and a pride in our business economy. Moreover, Japanese home market protectionism and government subsidies shielded Japanese car makers and bankrolled much of their advanced technology. In this country state right-to-work laws created a safe haven for the "Japanese invasion" that was unavailable to the Detroit 3. Special state and local tax abatement packages subsidized the entrenchment of the competition in our own market. We talk about competing in a global economy but as an American industry we are finding ourselves in an uphill race while the competition has been given a level playing field at our expense.

jose D. Roncal

December 4, 2008 2:07 PM

GM Out of Gas: Too Late for Surprises

As a business executive and former CFO of major multinational businesses, one of the first lessons I learned was that top management, stakeholders and the markets do not like surprises. Allow me to repeat that, “they do NOT like surprises!”

The reason that corporations have so many internal reporting mechanisms such as planning, forecasting and a daily or weekly cash flow statements is so they can avoid surprises. They conduct periodic risk reviews in order to mitigate any potential surprises and if necessary, take appropriate actions. GM clearly knew that revenues were down, market share was down, cash was burning at the speed of light and debt was spiraling out of control.

With that in mind, it’s should have come as no surprise to anyone, that GM execs, (who arrived in Washington in a private corporate jet) requested a federal bailout—they need $4 billion just to pay their bills this month, or risk running out of money. They are seeking an additional $18 billion—$12 billion in loans and a $6 billion line of credit.

Now that they’re on the hotseat, the company is finally making plans to shrink its work force by 34%, close nine plants, shut down 1,750 dealerships, focus on four of their eight current U.S. models, cut its debt in half and win new concessions from the UAW. They may have been considering these actions for awhile, but why would they put off outlining a plan until they were running out of cash? Why now? This is not the way to run a corporation. . . or has this become the new standard?

The current board and top management have failed spectacularly, and in my opinion, the government should forget the bailout and allow the company to file for Chapter 11. However, my main concern is that the $18 billion is not nearly enough for GM to survive at current production levels anyway. Furthermore, using rough estimations, the restructuring process alone could cost GM $20 billion.

Another fallout of the global credit crunch is that auto finance companies do not have enough money to lend to consumers. But GMAC Financial Services, GM's finance arm, has applied to become a bank holding company, making it eligible for a slice of the bank bailout pie, as well as giving them access to the Federal Reserve's discount window for emergency loans.

The bottom line is that even if the government bails GM out, who will want to invest in them? I don’t mean to sound contrarian, but I am realistic enough to think that GM filing for Chapter 11 would be the best option for the taxpayer and the American consumer.

We stated in our book, “The Big Gamble: Are You Investing or Speculating?” that maybe we should not give up just yet on GM. After all GM was once considered a rock solid investment, even though in hindsight, it turned out to be mere speculation. But we were still betting that GM could bounce back and steal the spotlight from Toyota. However, looking at the reality of their current situation, perhaps it is too late now.

GM missed an opportunity to learn from the Chrysler bailout in 1979 and 1980. In that landmark case, Chrysler spent months building support for a $1.5 billion loan guarantee. Executives received zero bonuses, took deep salary cuts and negotiated for concessions across the board. Their efforts eventually helped save the company and tens of thousands of jobs. GM did indeed miss an opportunity to learn from this, but unfortunately, that seems to be true of many of today’s corporations

Common Sense

December 5, 2008 7:20 PM

It makes me extremely upset and angry when I start thinking what mismanagement and bad bets Citi Bank have done when they needed $300 billion with almost no supervision how they are going to spend them!!?? $300 billion. I will repeat one more time, $300 billion. + $150 billion for AIG + other thief that should be in jail how for making millions of American families living life worst then in third world countries.

Why they are not lending that money back to tax payers, small business? Are they sending our money outside of country?

Why we don't have $450 billion to stop foreclosures and get the economy out of this pit and we have $450 to donate to Citi and AIG? Why they are so much important then American people?

What our president is doing letting car makers going of the cliff in situation when is very difficult to sale any car even for Honda and Toyota?

Every lost job in one of Big Three's will consequently lead to loosing 10 more jobs all around the country.

I wonder are those people who are making decisions really believe in what they are saying? and are they saying truth.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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