As recently as the late 1970’s General Motors controlled nearly half the American automobile market, it towered over the economy to such a degree that people used to say, “What’s good for General Motors, is good for America.” One has to ask what that says about the US economy of today, ’cause GM’s in trouble deep.
It has just announced that it is going to downsize 30,000 jobs and closing three US assembly plants alltogether.
GM Chairman and CEO Rick Wagoner said he expects another 7 percent of salaried workers in North America would also be cut by the end of 2006, though he gave no specific number of job cuts planned there. Seven percent would equal about 2,500 jobs in the United States and additional cuts in Canada as well.
The automaker said the plan is aimed at saving $7 billion a year by the end of 2006.
Wagoner said the cuts were what the troubled automaker needed to turn around its operations but he wasn’t ready to predict when GM will return to profitability. He also wouldn’t promise this would be the end of job cuts and plant closings.
“As we sit here today, it’s our best guess and well thought out analysis,” Wagoner said.. “If we’ve learned anything in the last five years, it’s that there’s no guarantees in this business or any other business.”
Not surprisingly, the leadership of the United Auto Workers union blasted the move as unfair.
“We have said consistently that General Motors cannot shrink itself to prosperity. In fact, shrinking General Motors only exacerbates its problems,” UAW President Ron Gettelfinger and Vice President Richard Shoemaker said in a joint statement. “Unfortunately, it is workers, their families and our communities that are being forced to suffer because of the failures of others,” they added.
Whether even such drastic measures will be enough to save the ailing auto maker in the long term is doubtful. Not only has the market, due to rising fuel costs, recently turned against the trucks and SUVs that are GM’s bread and butter, but even in more favourable market conditions GM was heading for the lamp post at considerable speed.
The dysfunctional private health care and social security system in the US, ironically advocated by the wealthy who make up the bulk of shareholders in companies like GM, has saddled old established firms with generations worth of health care and pensions costs. It’s become so bad that roughly $1,500 on each vehicle produced by GM goes towards covering these costs.
The company is losing money by the trunk full and carrying a frightening load of debt, by some estimates a staggering $276 billion, and back in may credit rating agencies downgraded the company’s credit rating, deeming it’s corporate debt bonds to deserve “junk” status. This means that GM now faces higher interest rates when it want to roll over or raise new loans.
Last week, shaken by the bankruptcy of its largest parts supplier and former sub-division, Delphi (spun off by GM in 1999), GM shares sank to a 14-year low of $21, making a total loss of 47% of their value so far this year, securing GM the position as the worst performing stock of the 30 in the Dow Jones Industrial Average. Bankruptcy, or a variant thereof, might be in GM’s future too. It’s damn near become the trendy thing to do. Though the repercussions of such an act would be seismic, the company just can’t continue to bleed money like it has done lately, or it would in reality be caput in three years time anyway.
Chapter 11, a form of bankruptcy protection unique to the US, would provide protection from creditors and a couple of years in which to restructure, and not least to dump the lion’s share of their social security obligations on the government. The mere threat of doing so is in any case a good club to wield when negotiationg pay and benefits cuts with the United Auto Workers union. Foreign competitors will almost certainly cry foul over such a move, as it would allow GM to simply shrug off its past mistakes and carry on much as before. But chances are that the Bush administration would be loath to have a US corporate icon like GM being sent to the glue factory on their watch. The sheer psychological trauma to the American soul of something like that is hard to fathom.
It might seem strange then that plans are on the front burner for selling off the only consistently profitable part of the Company, GMAC (General Motors Acceptance Corp), which has grown from simply being the division offering customers financing for their purchases of GM cars, to being one of the market’s biggest players, involved even in such un-automotive activities as mortgage financing. In fact it makes a lot of sense to look at the GM of today as a profitable bank, which happens to lose money making cars on the side.
If management and the big shareholder have come to the conclusion that conventional cost cutting measures, like downsizing the workforce, won’t cut it to lift the company back intot he black, they might well feel that slicing off the profitable GMAC and floating it or selling it off as an independent company is the best way to protect assets, which would otherwise risk getting pulled down by a giant SUV sized albatross about its neck.
A stripped down auto operation could then be chapter 11’nd and knocked into some sort of shape. In fact they might quit making cars alltogether. It’s not like it’s making them any money. Instead of losing a couple of thousand dollars on each vehicle sold, they could use their bulk, co-op style, to outsource the manufacture to low cost, efficient producers in Asia and simply try to become the uber-Dell of the automotive world.
Only one thing seems certain, that the American blue collar middle class will once again get it, right in the kaboose.
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