Posts Tagged ‘general motors’

GM Is Now “Government Motors”

December 22nd, 2009 Comments off

After emerging from bankruptcy, the supposedly “new” General Motors is in reality a nationalized, government-owned automotive corpse. Courtesy of Obama economic policy, the American taxpayer now owns 62% of GM, which is increasingly (and accurately) being referred to as “Government Motors.”

The United States, which has long preached to the world the virtues of unbridled free market capitalism, unpolluted by any form of state intervention, is now prepared to subsidize any unprofitable corporation, be it in finance or manufacturing, as long as it is “too big to fail.” GM is now a ward of the state, something President Obama claimed he had no intention of bringing into fruition.

And what about this supposedly new GM? In the last few months, we have seen a lot more of the old GM; irrational last-minute reversals on key decision-making, such as ditching the long-negotiated sale of Opel, and the recent dumping of the corporation’s CEO, who had only months before replaced a previous CEO, fired on the orders of the Obama administration.

The tens of billions of dollars in taxpayer money being dumped down the sinkhole that is GM may be the worst manifestation of “cash for clunkers.”  Instead of sound economic and industrial policy, the politicians in Washington seem content to add even more public indebtedness on to the balance sheets of generations of Americans yet unborn, all for the sake of keeping zombie companies on taxpayer-subsidized life support.



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Fritz Henderson Resigns as CEO of General Motors

December 2nd, 2009 Comments off

After only nine months on the job, Fritz Henderson is resigning as chief executive officer of GM. He had replaced former GM boss Rick Wagoner, who was fired at the direction of the Obama administration, which has injected up to $ 50 billion in taxpayer money into the bankrupt automotive manufacturer.

So this is the “new” GM? It seems apparent that a major internal conflict has arisen within the corporation’s board of directors. A sign of this internal strife was the last-minute decision by the GM board to scrap a deal Henderson had worked out to sell Opel, the company’s European subsidiary, to a Canadian led consortium. In an earlier post, I expressed my view that GM was mad to tear up this agreement, which provided a sound  means to unload a loss-making entity GM simply did not know how to manage.

What does the sacking of Henderson mean in the long-term? Probably confirmation of my earlier assessment, which was that General Motors is toast. Unfortunately, a lot more taxpayer money will be expended before the truth can no longer be denied.

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General Motors Must Be Out of its Corporate Mind: The Opel About Face

November 6th, 2009 Comments off

The zombie automotive behemoth that is General Motors would have been long buried but for the  intervention of the U.S. government and massive infusions of cash, borrowed by the overleveraged American taxpayer. Supposedly, in exchange for taxpayer support, GM was supposed to downsize and focus and a few core U.S. brands. Part of this restructuring was the elimination of foreign brands, the largest being European-based Opel. After months of negotiations, a consortium led by the Canadian automotive parts firm Magna International Inc., also involving a Russian bank, with significant financial support from the German government, was on the verge of buying Opel from GM. The legal papers were ready to be signed, but now GM’s management and board of directors have had an about face.

The surprise decision, made at the last moment, to scuttle the carefully crafted deal worked out by Magna, was based, so says GM, on a more positive outlook for their business. Hours after the decision was made, GM also announced it was axing 10,000 Opel employees, sending the workers of the firm’s German factories on strike.

What we have here is an impulsive, instinctive example of flawed corporate decision-making, choosing to discard the months of international negotiations for a sale that would have taken Opel off of GM’s back and balance sheet. Instead, we have a clique that wants  to hold on to the fantasy that GM remains the world’s largest automaker. As for the U.S. taxpayers who will be the ultimate losers, the “new” General Motors couldn’t care a wink.



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GM Is Toast

May 16th, 2009 Comments off
During the Texas oil bust of the 1980s, a major real estate developer told me, “I thought I was in the real estate business, only to discover I was really in the oil business.” His comment was made as the collapse in the price of a barrel of oil inflicted massive collateral damage on all segments of the Texas economy. Similarly, the executives running the world’s major automobile companies, including those based in Detroit, have learned that they were actually in the subprime mortgages, credit default swaps and financial derivatives business.
In previous posts I have commented on the strategic miscalculations and erroneous management decisions made by General Motors and its domestic competitors as contributing factors towards their imminent demise. However, it is the Global Economic Crisis, driven by financial chicanery engineered largely on Wall Street, that is sending GM, Chrysler and possibly Ford to a rendezvous with the undertaker. While U.S. politicians, who have shoveled trillions of taxpayer dollars into the hands of reckless Wall Street firms and banks with virtually no strings attached, enjoy lambasting Detroit and the auto unions for their supposed misdeeds, a recent statistic adds ambiguity to this generalization. In April, Toyota, considered to be the best run auto company in the world, actually had a sharper drop in U.S. auto sales than GM, which is teetering on the edge of bankruptcy.

In desperation, GM has announced it will dump 1,600 domestic dealerships in the short-term, and ultimately eliminate 2,600, reducing its total dealership franchises by more than 40%. This is only part of an array of measures designed to reduce operating costs. More auto assembly plants will be shut down; additional layoffs will be undertaken while remaining employees will see their wages and benefits shrink further. However, in the wake of the financial storm that is wrecking the global economy, these last ditch and desperate stratagems are almost certainly doomed to failure. In the next several weeks GM will file for bankruptcy protection, shed several of its brands, and accelerate the death spiral that it is now locked in. With unemployment surging, not only in the United States but throughout the world where GM has significant market share, and credit essential for auto purchases being denied to consumers-macroeconomic factors that are far more relevant to the auto industry than brand elimination and dealership disposal-the extinction of General Motors as an industrial corporation seems all but certain. Possibly brands such as Cadillac or Chevrolet may survive independently or be absorbed by other auto manufacturers, but the behemoth known as GM is destined for the scrapyard of history.

While Teddy Roosevelt was completing his second term as U.S. president in 1908,the first GM automobile was manufactured. In 1954, General Motors saw its 50 millionth car roll off the Detroit assembly lines, at a time when more than half a million Americans worked for GM. Now, at death’s door, GM has announced that its dwindling workforce will shrink by a further 38%, reaching a planned level of 38,000. That represents a reduction of 93% from the 1954 employment figures!

The financial and political elites who dominate policymaking in America seem unperturbed. They apparently prefer having companies exist that engineer exotic financial derivatives than a manufactured product that is assembled by a skilled, well-compensated workforce. However, even with this melancholy certainty in front of us, I will always imagine a ride in a 1957 Chevrolet convertible as being infinitely more romantic than cruising the lanes on foot with a pocketful of securitized subprime mortgages. So, America, where does the economic road ahead lead us?

Rest in peace, General Motors.


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Is The U.S. Auto Industry Doomed?

March 31st, 2009 Comments off
Detroit has become an urban wilderness. Only a few miles from the downtown core of the Motor City can be found once vibrant neighborhoods that are now devoid of human life. Only abandoned homes remain, extinguished of their occupants by a tidal wave of foreclosures. Recently, the local and even national media have reported on a phenomenon unique in metropolitan America; animals that had not inhabited Detroit for decades, including industrious beavers, were now reclaiming their previous habitat, as more and more areas of urban Detroit have been transformed into pastoral land. No better metaphor can exist to point out what has happened to the heart of America’s once mighty automobile industry.
As the Global Economic Crisis destroys worldwide consumer demand for automobiles, two of America’s three remaining domestic carmakers, General Motors and Chrysler, look to President Barack Obama for salvation. They, however, are not alone. The financial and banking system are first in line, while states and cities starved of tax revenues are also clamoring for help from the Obama administration. No doubt President Obama has many burdens weighing on him as he seeks to provide leadership for a national and global economy in tatters. Obama did not cause the decline of the U.S. automobile industry, and no doubt he is trying to do his best in formulating policy regarding Detroit and well as the many other ailing sectors of the U.S. economy. However, the recent decisions regarding G.M. and Chrysler that Barack Obama has made will not, in my view, do much to reverse the dismal fate that seems irreversible for the once proud car builders of Detroit.
The perspective from the White House appears to be that the two domestic auto manufacturers are in dire straits because they have not formulated a business plan that is viable in current market conditions. They have therefore, in effect, been sent an ultimatum. Chrysler is being told to merge with the Italian automaker, Fiat, while G.M. was compelled to fire its CEO, and must “restructure” radically within two months, or face bankruptcy. Washington will only provide funding for the duration of the ultimatum, with further support only available if the expectations of the Obama administration are met in full.
With respect to Chrysler, the attempt at a shotgun marriage with Fiat is just another failed automotive merger in the making. The record of foreign carmakers buying large or controlling interests in American auto companies has been universally disastrous. One need only look to Chrysler’s relatively recent merger with Mercedes-Benz, at which time the joint company was known as Daimler-Chrysler. Prior to that catastrophic union, which Mercedes-Benz management will forever regret, there was the purchase of American Motors by Renault, the French auto giant. The end result of that merger was the extinction of AMC, with its remnants bought by Chrysler. It should also be pointed out that Fiat abandoned the American car market decades ago, so it is totally unfamiliar with the dynamics of the U.S. auto marketplace.

General Motors is a much larger carmaker, with a global presence and vast overhead. Its very size defines the essence of the problem being faced not only by G.M. but also by other global car builders, including Toyota, Nissan and Ford. Currently the world has the manufacturing capacity to assemble more than 90 million automobiles a year. However, the Global Economic Crisis has created a vortex of demand destruction in the car business, reducing global demand to around 50 million units. The overhead for maintaining this complex, global manufacturing infrastructure is staggering, and can only generate profits if sales match production capacity. With worldwide sales reduced to 50 million cars, no major car company can make money.

The only solution for preserving General Motors is to provide sufficient demand for its manufacturing capacity. This demand need not be restricted to cars; during World War II Detroit became the arsenal of democracy, as its assembly lines retooled to build the weaponry that helped defeat Nazi Germany and Imperial Japan. However, in 2009, political leadership appears to lack the imagination to see the potential of harnessing the productive capacity of the auto manufacturers in other directions that can facilitate global economic development and recovery. What we are left with are ultimatums that provide only two possibilities: bankruptcy now, or becoming “leaner” with the future possibility of insolvency still hanging like a sword of Damocles.

I do not think the Obama plan for preserving a domestic U.S. auto industry, as presently conceived, will work. At most, it may preserve fragments and echoes of what was once the mightiest industrial productive capacity on the planet. Unlike the Great Depression of the 1930s, in which industrial giants such as G.M. and Chrysler did survive and eventually prosper, the Global Economic Crisis is devouring what were once seen as the pinnacles of economic and industrial might. If G.M. and Chrysler are in fact doomed, along with much of what remains of America’s industrial capacity, this will be largely due to a policy decision that establishes the financial sector as the center of gravity for the U.S. economy, reflecting the vastly more significant taxpayer dollars that have been allocated to that sector, with far fewer strings than are being attached to the paltry aid given to Detroit.

How is it possible for the U.S. to rebuild its economy if the industrial sector, epitomized by companies such as General Motors and Chrysler, is largely sacrificed on the altar of Goldman Sachs, AIG, Bank of America and their ilk?



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Auto Industry In Global Depression

March 5th, 2009 Comments off
A certain indicator of how dire the circumstances are for the global automobile industry is the behavior of Toyota, which is without a doubt the most important and healthiest car manufacturer on the planet. It has now joined with Detroit and European auto producers in soliciting their governments for a bailout. Toyota has formally requested that Tokyo provide a “bridge loan” of $2 billion, this request following recent sales figures indicating that the Japanese behemoth experienced a decline of 40% in sales of motor vehicles in its largest market, the United States.
Toyota is in trouble, and it is actually in far better shape than almost every other auto manufacturer. When it comes to the competition, things are much worse. Especially with General Motors, which witnessed a catastrophic drop in sales of 53% in February, the news is becoming increasingly grim. The full force of the Global Economic Crisis is impacting all the grandiose plans and decisions of the world’s automakers, in the process shredding them to pieces.

Why is it that virtually all of the auto manufacturers are in varying states of deep distress? The answer lies in the nature of the automobile business, and strategic decisions made on the basis of dream-like optimism. This is reflected in the staggering levels of over-capacity in auto manufacturing worldwide. At present, the combined capacity of all the carmakers throughout the world amounts to more than 90 million cars annually. The deadly demand destruction being inflicted by the Global Economic Crisis has reduced purchases to about 50 million units per years, meaning that the world’s auto companies have nearly double the productive capacity that can be absorbed by current consumer demand.

The automobile business is one of the most costly and complex to run. The industry produces a consumer product annually in the tens of millions of units that is costly, complex and customized. The productive infrastructure required is both vast and exceedingly expensive. Before the onset of the Global Economic Crisis, the world’s carmakers bet heavily on a rising global marketplace that could annually absorb up to 100 million cars annually, and leveraged themselves to the maximum extent to finance the creation of the global network of assembly plants, parts manufacturing factories and distribution networks. The business model became far more globalized, adding another layer of complexity. For example, a U.S. customer who purchases a certain VW model will end up owning a car assembled in Germany, but equipped with an engine built in Mexico. In other words, a Mexican VW plant builds an engine, sends it across the Atlantic Ocean to Germany, which in turn sends it back across the Ocean in the form of an assembled car, to be purchased at an American dealership. This global supply chain is expensive, fragile, and only makes economic sense if all the manufacturing components of the business are operating at full capacity. What I just described has all the characteristics of a Rube Goldberg business model, yet virtually every major automobile company in the world conducts their business according to the pattern I have just described.

With the collapse in demand caused by the Global Economic Crisis, practically every major auto manufacturer is faced with the identical problem; over-capacity that was established with high margins of leverage, leading to massive losses with a worldwide demand for only 50 million cars each year. The reaction thus far by the automakers is to besiege their governments with requests for massive bailouts, warning that without the public purse to cover their losses, the result will be layoffs, disastrous collateral damage to the overall economy and the extinction of the industrialized base.

There is no easy solution to the massive economic problems impacting this now globalized industry. What is clear is that the auto industry is in the midst of a deep global depression. And while much of the reason for their distress lies with very bad business decisions and strategies, the leaders of the car industry are probably correct in claiming that their demise would bring about severe consequences. Unfortunately, there may be no alternative, as the issue may ultimately come down to who becomes insolvent first; the auto companies or the sovereigns being asked to bail them out.


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