Will General Motors ever fix itself? Facing a massive recall, declining market share and a huge blow to its credibility, the so-called “new” GM looks a lot like the “old” GM. Although the company is profitable now and has a solid balance sheet, one has to wonder what will happen in the next inevitable economic contraction.
Why is the “new,” post-bankruptcy, post-bailout GM stumbling? Trace it back to the bailout: GM should have gone through a normal, economic bankruptcy instead of a government-managed political bankruptcy. This political bankruptcy prevented GM from fully addressing its problems and preparing itself for the future.
Good Bankruptcies and Bad Bankruptcies
The purpose of bankruptcy is twofold: 1) to determine whether a company can make a future for itself with a restructuring or if it is a lost cause and should be liquidated, and 2) if said company looks like it can succeed, to restructure it and fix as many of its problems as possible. GM was clearly a prime candidate for restructuring in 2009 with valuable assets, some strong brands and technology. Of course, politicians like President Obama and Vice-President Biden took advantage of the public’s confusion over how bankruptcy works to leave the public with the impression that the liquidation of GM was imminent – thus facilitating the unneeded government takeover.
An economic bankruptcy and restructuring (what GM should have had) means jettisoning debt, reworking labor and supplier contracts, shrinking to a “fixable” size – in other words getting down to your core competency, and clearing out the management that created the mess in the first place. And this process is not reserved for bankrupt companies. Any company having a near-death experience needs to follow this plan.
Such a bankruptcy process has been the well-worn path of now-successful companies who either went through bankruptcy or came close. Wilbur Ross saved LTV Steel this way. Lou Gerstner pulled IBM out of its death spiral. Alan Mulally turned Ford around. In each case the process was bloody and wrenching: layoffs, fire sales and nervous moments. But the result has been a trio of companies that returned to profitability and growth. Each of these leaders knew their companies had to focus on returning to profitability no matter how many jobs were lost or sacred cows would be sacrificed in the short-term. The alternative would have been liquidation and no jobs at all.
That remorseless (but ultimately successful) process did not happen at GM. Instead, GM went through a political bankruptcy. In doing so, the priorities of the federal government and Obama took precedence. In this political bankruptcy, the government wanted to protect the UAW, make the Volt, keep GM as big as possible and get out of bankruptcy as fast as possible.
The UAW did take a hit, though its president astonishingly said, “I think it’s a disgrace we had to do anything.” The Volt may be a decent car but its contribution to GM has been negligible. At a total volume of less than 75,000 units over four years, it is less than 1 percent of one year’s total sales volume. Not to mention that, after leading in sales in 2012 and 2013, it has fallen behind Nissan, Tesla and is barely holding off Toyota.
But the real costs to GM are the continued poor management and the poor choice not to shrink GM to a fixable size. The fast exit from bankruptcy meant that there was little time to dig into the company’s problems beyond contracts, debt, and pension obligations. A bankruptcy pursued by bondholders (who would have ended up with the equity upon exit) would have pushed for new management and a new corporate culture, just as Ross, Gerstner and Mulally did. What good is shedding debt if the same people are going to make the same mistakes?
We see now the results as the GM culture of cover-up continues. When Mulally started at Ford one of his first acts was to force his managers to face reality, admit their mistakes and then address those mistakes aggressively. Has GM turned that corner? It doesn’t look like it.
Too Big To Succeed
As costly as the culture of cover-up has been, GM’s refusal to strategically scale back in size and determination to be the world’s number one carmaker by volume has been even more costly. While the company did shut down Hummer, Pontiac, and Saturn (not that anyone was buying them), GM refused to sell Opel (GM Europe).
GM had been losing money in Europe since 1999 with no end in sight. Even so, the German government was foolish enough to cobble together a bid for this albatross. At the last minute, GM decided to keep Opel, explaining that Opel was key to its “global strategy.” What was that? Losing money on every continent? Or was the real reason that the Obama administration could not bear the thought of GM falling to third place among the world’s carmakers?
GM predicted Opel would be profitable by 2011. The actual results were $700 million in losses – followed by $1.8 billion in losses in 2012. Today Morgan Stanley values Opel at negative $11.5 billion. To be fair, that’s a $4.5 billion improvement from Morgan’s last valuation. Who knows, maybe by 2018 GM Europe will be worth a McDonald’s Happy Meal. Keeping Opel might be the worst business decision of this century.
The contrast with Mulally and Ford is striking. Mulally sold off Volvo, Aston-Martin and Jaguar Land Rover. These were difficult losses to swallow, but they allowed Ford to focus on its core and helped finance Ford’s recovery.
The Market Prevails
By providing an unnecessary safety net and putting political priorities over economic ones the Obama administration picked up a political victory in its handling of GM. Nevermind that it was built on the lie the bankruptcy would mean liquidation. As with much of the administration’s policies, the political profits were pocketed by Obama while the economic costs were put off and then paid for by others.
If GM had gone through the normal bankruptcy process, the pressure of self-interested investors and the unforgiving market would have caused more short-term pain but GM would have had to face down the full range of its problems. Today’s GM would be smaller, like Ford, but would have a better chance to grow and sustain itself.
Government Motors may have been a political triumph, but the “new” GM and its workers are paying a steep price for it.