Its US parent company, once the model of the modern multidivisional corporation but later a clumsy and dimwitted dinosaur, is in bankruptcy and its European operations are being sold off. Even if it survives bankruptcy and temporary nationalization, a shrunken GM, with fewer brands and smaller capacity, is unlikely to regain its towering global dominance and prestige.The fallen industrial giant's widely expected US bankruptcy, which it entered into a week ago after months of debate and delay, has been called a defining moment of US capitalism and the end of an era in terms of its symbolic significance. The once-iconic GM, founded in 1908, is the largest US industrial company ever to seek Chapter 11-Section 363 bankruptcy protection from its creditors, with $172.81 billion in total debts and just $82.29 billion in total assets as of March 31. The bankruptcy was arranged by the White House automotive taskforce, the political calculations of which seem to have dominated business logic. GM's controversial bail-out by the US government through this bankruptcy-based intervention is part of the trend that started last fall as the US Treasury and Federal Reserve came to the rescue of the financial institutions hard hit by the subprime mortgage crisis. Daniel Henninger of The Wall Street Journal has referred to the Obama administration's automotive policy as an extension of earlier financial bailouts, ushering in “the age of the induced industrial coma” for an “America that is too fat fail.”
The US government's heavy-handed intervention in the US auto industry, motivated largely by economic nationalism and protectionism based on political expediency, follows upon its massive intervention in the US financial sector, which has resulted in the partial nationalization of the mortgage titans Fannie Mae and Freddie Mac and the insurance giant American International Group, as well as hundreds of banks. The global financial crisis, which reached its nadir with the bankruptcy of the investment bank Lehman Brothers on Sept. 15, has been a catalyst in the downfall of GM and Chrysler that found it impossible to borrow from the private credit markets to survive amid mounting losses as the demand for their vehicles plummeted in the worst recession in decades. Among the Detroit Big Three, only Ford which, unlike GM and Chrysler, did not take any federal bailout money, escaped bankruptcy thus far by having mortgaged itself to the hilt before the credit crunch, although its future remains clouded.
In the 1950s and the early 1960s, GM heavily dominated the US auto market. GM's strategy was "a car for every purse and purpose" based on planned obsolesce that nurtured the American love of the automobile with new models every year. GM has been in decline since in 1979, when at its peak it employed 853,000 people worldwide and 620,000 in the US, not only as the largest automaker but also as the largest company in the world. GM, along with Ford and Chrysler, has steadily lost market share to imports and transplants (foreign auto companies making cars in the US) since then. Last year Toyota sold more vehicles than GM, ending GM's 77-year global dominance as the top automaker in terms of annual sales.
The Detroit Big Three's declining fortunes resulted from bad management that was ultimately responsible for high wage and non-wage costs as well as inferior quality and poor product-mix, dominated by gas guzzlers, relative imports and transplants. GM became infamous for its awful industrial relations between management and labor. But often it caved in to the unreasonable demands of labor that burdened it with uncompetitive wage costs and fringe benefits. Fortune Magazine, in a February 2006 article titled “The Tragedy of General Motors,” foresaw the company's fall: “GM is a weird and painfully scarred combination of businesses. It is a car company doing poorly, and it is an insurance company engulfed by obligations way beyond its ability to pay. It's heading for a wreck.”
Under the prearranged bankruptcy deal between the US and Canadian governments, the GM management, the United Auto Workers Union (UAW) and GM bondholders, the US government acquired 60.8 percent controlling common equity and the Canadian government received 11.7 percent minority ownership. GM will receive an injection of $30.1 billion in federal money to restructure in addition to the $20 billion it had begun to borrow in December at low interest rates from the US Treasury under the Bush administration. It will also receive $9.5 billion from the Canadian government. The Voluntary Employee Beneficiary Association of the UAW, which made significant concessions toward GM's post-bankruptcy viability, will get 17.5 percent ownership and the unsecured bondholders will get the remaining 10 percent. Existing shareholders will get nothing. GM's bankruptcy in the US does not involve its European brands, Opel in Germany and Vauxhall in the UK, which GM had acquired in the 1920s and whose ownership had been transferred to a trustee prior to their majority sale to Canada's Magna International Inc., an auto parts maker, and Russia's state-run Sberbank, with a 1.5 billion euro loan from the German government. GM will retain 35 percent ownership in the European operations.
In my next column, I will discuss the prospects of the “New GM” that is expected to emerge after the “reinvention of GM” as a state-owned enterprise.
