Well it finally happened. General Motors (GM) filed for Chapter 11 bankruptcy protection today. Bankruptcy appears to have been necessary as the US automaker was saddled with billions in debt and obligations. The bankruptcy courts have given GM 15 billion in emergency financing so that the company can continue to operate. It took the perfect storm to drive GM to bankruptcy but it happened in 2008. GM was undone by years of declining auto sales combined with an oversupply of bonds, underfunded pension obligations and unfavorable contracts along with the worst economic environment since the Great Depression. Chrysler has undertaken similar steps and still faces the possibility of extinction. GM hopes to rebound a leaner stronger more efficient company that investors are willing to invest capital in soon. Only time will tell if GM emerges from bankruptcy as an innovative new auto company or the same old repackaged auto supplier of the past 20 years.
More Layoffs
You know that the economy is getting bad when Wal-Mart is laying off employees. The nation’s largest retailer announced that it will be laying off between 700 and 800 employees at its Bentonville, Arkansas headquarters. The cuts will be at both the Wal-Mart and Sam’s Club headquarters. Most of the jobs are in the apparel, health and real estate departments. Wal-Mart is also scaling back on the number of new store openings this year. Wal-Mart may open 40 fewer stores as compared to last year’s openings.
General Motors announced that the company will be cutting 10,000 additional jobs this year. Most of these positions are white collar jobs. These cuts are probably only the beginning at GM until the company finds a way to become profitable. I have said before that I expect that 1 of the Big 3 will not survive to see 2010. This could be through a merger, acquisition target or through bankruptcy. If GM and Ford are struggling this badly, I just don’t see how Chrysler will survive. The alliance with Fiat is not enough to save them. Chrysler has the weakest cash position and the worst sales numbers of the Big 3.
Is the government trying to force the auto companies into bankruptcy?
It appears that the federal goverment is holding off assistance to the automakers in order to drive them into a prepackaged bankruptcy. Two of the big 3 auto companies need cash immediately or they could go belly up. If the government does not provide funding to GM and Chrysler by January 1st these two companies will probably have to declare bankruptcy. Ford has a strong enough cash position that they should be able to survive into the new year.
In an effort to stave off bankruptcy and slow down their cash burn rates, the big 3 auto manufacturers have announced cost cutting moves today. Chrysler announced that it will close all 30 of its plants for one month beginning December 19th. Ford announced that it is closing 10 plants for three weeks until January 12th. General Motors has suspended construction on a new engine plant. GM will probably be shutting down more plants soon.
The White House does not want to bail out the automotive companies but the President doesn’t want them to fail during a time of economic crisis and rising unemployment. The President prefers that the companies obtain funding through a prepackaged bankruptcy. The President feels that a prepackaged bankruptcy would allow the companies to renegotiate contracts with employees, suppliers and lenders. The government would like concessions from the United Auto Workers on wages, legacy costs and benefits. The government wants to reduce the equity position of shareholders and debt holdings of bondholders.
The Big 3 do not want to go through a prepackaged bankruptcy because they believe that bankruptcy would lead directly to liquidation. GM, Ford and Chrysler believe it would be nearly impossible to sell cars in bankruptcy. Consumers would not want to make such a large purchase from a bankrupt company. The auto companies think that going through bankruptcy would cost even more than the federal funds that they are requesting. According to Bloomberg, a GM bankruptcy would cost 40 to 50 billion dollars in government financing alone.
There are no easy answers to this problem. The best solution is for a compromise outside of the bankruptcy courts but that’s easier said than done. It is troubling that the financial companies had a much easier time receiving 750 billion dollars in federal funds from the government than the automakers have had in trying to get 20 billion dollars.
Saving the US Auto Industry
Congress is meeting with all three US auto makers to try and help them avoid bankruptcy. This is a necessary step because the economy cannot handle the bankruptcy of all 3 domestic auto companies at this point in time. While there are some issues that affect all three companies such as unfavorable trade agreements and high labor costs that make it difficult to be competitive with foreign competitors. I think Congress is making a mistake though by treating all three as a collective group. These are individual corporations that each face their own unique set of problems. Below is my take on the problems for each company and how we start to fix them.
General Motors
GM just makes too many brands that are not popular. GM needs to drop unprofitable brands such as Pontiac, Buick, Saab and Saturn. Too many GM brands are seen as being an old person’s car. Honda, Toyota and Nissan build sleeker better looking cars. The stronger selling brand names like Cadillac, Chevrolet and GMC should be their core focus. Chevrolet and GMC also need differentation in design. Is there that big a difference between a GMC Yukon and a Chevy Tahoe? The Hummer brand does have value and should be sold off if possible.
Ford
Ford is in the best position of the 3 auto makers. Ford has already redesigned it plants and started producing better looking more fuel efficient cars. They have reduced their number of brand names by selling Jaguar and Land Rover this year. Ford should retain its interest in Lincoln, Volvo and Mazda while selling off its Mercury brand. Mercury sells less than 200,000 models per year and is similar to other Ford products.
Chrysler
Most of the offerings from Chrysler do very little to inspire excitement. There is not much value in the Chrysler, Jeep or Dodge names. Chrysler needs to merge with another auto company. The government should not extend any financial help to Chrysler. Chrysler is 80% percent owned by Cerebus and 20% by Daimler. Cerebus Capital Management is a private equity firm owned by some of the wealthiest men in the world. They seem to just be seeking financing to keep them afloat long enough to sell Chrysler and redeem their investment. Daimler has already valued its almost 2 billion dollar investment in Chrysler as worthless.
