White House tells GM boss to step down

[alfred russel]

I assume you're already aware of the takeover talks re Opel and Vauxhall.

Yes, I don't quite get them though. Opel isn't exactly making a profit either and Fiat (the most likely suitor) is highly indebted and there is no way they'll actually pull off a Fiat-Chrysler-GM Europe merger successfully. It's more likely that Fiat goes bankrupt next year in my opinion.
Magna+Russian investors were apparently already rebuked, some American financial investor has interest in Opel (why?) and a Chinese car maker is interested - probably mostly in the brand, know-how, but not in production capacity.

As it is the world has a huge overcapacity for car making, so someone has to go to make the market viable. At the moment it looks like it's GM and Chrysler.

Chrysler may turn out to be the multinational corporate version of a suicide bomber, taking out Fiat, Daimler and the American taxpayer along with it.

[DGuller]

Chrysler may turn out to be the multinational corporate version of a suicide bomber, taking out Fiat, Daimler and the American taxpayer along with it.

[The Minsky Moment]

The "health care trust" is taking a huge hit? Boo-fucking-hoo.

It is property - an obligation that the company accrued over many years.  I don't see how one can say with a straight face that surrendering $20 billion of cash is not a concession.

[alfred russel]

As it is the world has a huge overcapacity for car making, so someone has to go to make the market viable. At the moment it looks like it's GM and Chrysler.

If that is true, then so be it - the comapanies that fail at making what the consumer wants at a price they want to pay (relative to others) should fail.

Even if it means that UAW workers might lose their jobs.

While I'm with you in theory, that doesn't seem to be the way it is going to work. On the news I heard that the total amount that is going to be given to the automakers is about $100 billion. If Chrysler and GM don't turn around, do you really think Obama will let them fail after investing so much money?

[Berkut]

As it is the world has a huge overcapacity for car making, so someone has to go to make the market viable. At the moment it looks like it's GM and Chrysler.

If that is true, then so be it - the comapanies that fail at making what the consumer wants at a price they want to pay (relative to others) should fail.

Even if it means that UAW workers might lose their jobs.

While I'm with you in theory, that doesn't seem to be the way it is going to work. On the news I heard that the total amount that is going to be given to the automakers is about $100 billion. If Chrysler and GM don't turn around, do you really think Obama will let them fail after investing so much money?

Of course not, which is why he wants to give the UAW so much money.

[Berkut]

The "health care trust" is taking a huge hit? Boo-fucking-hoo.

It is property - an obligation that the company accrued over many years.  I don't see how one can say with a straight face that surrendering $20 billion of cash is not a concession.

It isn't if they are going to get a lot more than that back. How much taxpayer money has been poured into UAWGM? How much more will be?

[The Minsky Moment]

Someone who wanted to produce cars, for instance, would buy car or parts factories

Let's put aside the BB issue - namely that it isn't obvious that there is any buyer out there who would want to purchase an entire auto line from GM at a price above zero.  Let's assume such buyers exist and will pay.  If GM went through a standard liquidation, it isn't clear that such a sale could be easily effected.

For the sake of example only, take the Silverado plant in Ohio.  It may be the case that one secured creditor controls the land the plant sits on.  Another controls the building and some of the physical plant.  Another may control some of key equipment leases.  Another controls the Chevrolet logo and branding elements.  And so forth.   So the prospective future Silverado manufacturer has to somehow negotiate with all these potential stakeholders simultaneously, and put together a new work force of several thousand people (or renegotiate with the existing workers), and manage to get all these deals done quickly enough that the plant doesn't suffer from too much down time, wastage, or vandalism.

Not saying it's impossible, but I would not underestimate the challenge.  It's a lot of potential time and expense before even a single car is produced and sold, and all for the dubious privilege of producing Silverados.

people wanting to finance car purchases would pick up GMAC

GMAC is already a separate company - GM only owns 10 percent now, most of it is government owned.

People who want to finance car purchases don't need GMAC.  They just need to be a bank or a finance company.  The GMAC brand may have some value, although even that is pretty questionable at this point.  The existing GMAC book of business is probably a net loser which is why the government took it over in the first place.

[The Minsky Moment]

It isn't if they are going to get a lot more than that back.

All they are getting is a 17.5 percent equity stake in a company that presently has no equity value.

[Berkut]

It isn't if they are going to get a lot more than that back.

All they are getting is a 17.5 percent equity stake in a company that presently has no equity value.

Which is a lot more than 0% equity stake in a company that has no value, or the debt from said company.

And obviously, once you liquidate all the other stockholders (you know, the ones who actually have equity NOW), the new GM would presumably be worth something after being reorganized, and the Government pours in another hundred billion. UAWGM would presumably be worth at least the money Obama has promised to give them, right?

If GM is truly worth nothing now, then their "health care fund" is worth nothing as well. So why do they deserve to get something in return for nothing, when the fact that it is all worth nothing is largely their fault anyway?

[Zanza]

Chrysler may turn out to be the multinational corporate version of a suicide bomber, taking out Fiat, Daimler and the American taxpayer along with it.

Daimler's last exposure to Chrysler will be $700 million in this quarter. After that, Daimler only has business relations with Chrysler like with every other company. They have already paid billions, but they got out now.

[crazy canuck]

Why is everyone so terrified of the UAW having a fit?

I think it is because everyone else understands both the practical and legal ramifications of doing what you are suggesting.

[Zanza]

Just noticed this article on the Economist website. 

From the archive
On a clear day you can still see General Motors

Dec 2nd 1989
From The Economist print edition
The 1990s will be General Motors' toughest decade. Is the world's biggest manufacturer heading for break-up or oblivion?

SOON after General Motors's chairman, Mr Roger Smith, drives the first car off the assembly line of his company's Saturn plant in Spring Hill, Tennessee next summer, he will ride off into a comfortable retirement. The company he leaves behind faces a bleaker future.

During his nine-year reign at the top of the world's biggest carmaker, Mr Smith has spent billions of dollars and overseen huge reorganisations to little avail. Crippled by a sclerotic bureaucracy, GM watched helplessly as its share of the all-important American car market tumbled from 46% in 1980 to barely 35% this year. Now Japanese carmakers are set to boost their production in America just as GM cuts back still further. If the once-mighty GM can not find a way to reverse its slide, the next decade might be the company's last. By the turn of the century, break-up or bankruptcy (and the inevitable government rescue) could well be the fate of a company which was once America's proudest manufacturer.

Saturn will be the key to GM's survival. At first, GM arrogantly dismissed Toyota and other Japanese competitors as merely makers of little cars that got lucky in an oil crisis. When GM belatedly woke up to the Japanese challenge, it exhibited the big-company knee-jerk reaction: throw truckloads of money at the problem. Many of the billions it spent on robots and other new technology have been wasted. Saturn is the attempt of a chastened GM to re-invent carmaking from a "blank sheet of paper". Yet if Saturn is a success, the immense task of transforming the rest of the company's vast empire still lies ahead. If Saturn is a flop, GM will face naked the remorseless advance of the Japanese.

By the mid-1990s the so-called Japanese "transplant" factories in the United States and Canada will be making more than 2m vehicles a year in addition to the cars the Japanese import (now limited to 2.3m vehicles). With new-car sales in America set to fall below 10m this year, the industry is already haunted by overcapacity. Even worse for GM, Japanese transplants can build cars for an estimated $500-800 cheaper than many American-owned plants. Because their cars are better designed and marketed, the Japanese also frequently avoid offering the $1,500 discounts which are destroying the profit margins of American competitors.

Saturn is supposed to close the efficiency gap, which has resulted in GM's North American car operations losing an estimated $300m in the third quarter this year. Throughout the 1980s, GM has invested $80 billion modernising its operations worldwide (nearly three times its present market capitalisation). That spending includes some of the $2.5 billion to buy EDS to mastermind a group-wide computerisation drive. GM then spent $700m buying back GM shares from EDS's founder Mr Ross Perot as the price of ousting the outspoken critic from GM's board. Another $5.2 billion went to buy Hughes Aerospace in a yet-to-be-proved attempt to feed more space-age technology into carmaking.

Yet much of the advanced technology GM acquired at such high cost hindered rather than improved productivity. Run-away robots started welding doors shut at the new Detroit-Hamtramck Cadillac plant. Luckily for Ford and Chrysler, poverty prevented them from indulging in the same orgy of spending on robots. After wrenching management changes, some of Ford's factories are now achieving near-Japanese levels of productivity.

Saturn will use some of the most advanced manufacturing technology available, but will concentrate on the more effective use of people. GM had to resort to a joint venture with Toyota to learn that people are what count in manufacturing. Despite this benefit, the joint-venture factory in California has shown that GM's fundamental weaknesses remain.

Saturn is to be run as a separate company within GM, free of the smothering embrace of Detroit. But even with all its advantages, Saturn's future is not guaranteed because the Japanese are racing still further ahead. They are opening research-and-design centres in America to become fully integrated carmakers there. They are also moving into the market for luxury and performance cars. In the 1990s Honda could overtake Chrysler as America's third-biggest car company. If that happens, the biggest loser will be the American company with the most to lose: GM.

Mr Smith remains unruffled. He says a lot of GM's problems have been put right and that the company is now well positioned. Its spending has gone to build new plants or to modernise old ones. But he cannot expect to run the plants at full capacity. More probably, as the chart indicates, GM's market share has been permanently eroded. So more plant closures will be needed. By the mid-1990s one in four of its 130,000 managers may have lost their jobs. The company has already cut its worldwide payroll by 100,000 since 1981 to some 750,000.

With sales last year of $110 billion—roughly equivalent to the GDP of Taiwan—and worldwide production at 8m vehicles, still twice Toyota's level, GM could keep cutting back for years as the Japanese expand. But continued "down-sizing" will inevitably provoke a crisis, forcing a traumatic overhaul of the company's baroque corporate structure, says Mr James Womack, director of the International Motor Vehicle Programme—a worldwide five-year car industry study being conducted by the Massachusetts Institute of Technology. Ford faced such a crisis in the early 1980s and survived. "Ford went right to the edge and looked over," recalls Mr Womack. "Ford realised it had to start worrying about how to avoid the abyss rather than electing the next president." If GM's moment of truth comes later, rather than sooner, it might not survive intact.

Mr Smith's re-organisations have swept away some feudal dynasties at GM. But he failed to address a deeper, cultural malaise, says Ms Maryann Keller, a Wall Street motor-industry analyst. In her recent book, "Rude Awakening", Ms Keller says Mr Smith found himself hopelessly entangled in a complex corporate culture that resisted change. He did little to control the power of central-office staff over operating divisions or the finance staff over the entire company. Under Mr Smith, a finance man, GM's bean counters continued to rule. For too long, says Ms Keller, GM has "hidden behind a manipulation of the numbers rather than facing its problems head on."

GM points to its record net profit in 1988 of $4.9 billion, up 37% from 1987, as proof of recovery. But Ms Keller says that GM's record year was due more to accounting changes than to the sale of cars. Even if GM's profits recover for another year or two, she warns, "the victory is bound to be short-lived unless change occurs at the very core of its corporate culture."

If the critics are correct, Mr Smith's successor will have to undertake a wholesale reorganisation of GM management to reverse the company's decline. The chances of such a reformer emerging are not impossible (witness the surprise arrival of Russia's Mr Mikhail Gorbachev), but they are slim. When the puffs of smoke from the company's Detroit headquarters appear, the final choice of the next chairman will largely be that of the strong-willed Mr Smith himself. An outsider can be ruled out almost entirely: top management at GM is a closed shop. Even those who have joined late in their careers have found themselves unable to make the final cut. Mr Elmer Johnson, a Chicago lawyer, headed back home last year after a brief stint as an executive vice president. He harboured ambitions of being the reformer who launched GM's perestroika.

The next chairman is likely to come from among half a dozen loyal, long-term GM executives. At the top of everyone's list is 56-year-old Mr Robert Stempel, who became president a little more than two years ago. Mr Stempel is a big, blunt-talking man with a strong background in engineering—the proverbial "product man".

That makes him an attractive choice. GM desperately needs new products. It claims plenty are coming, but the company is still struggling to shed its image as a builder of mediocre, look-alike cars—at least in America. In Europe, where new investment has paid off better, a string of successes was reflected in the $2.7 billion which international operations added to GM's profit last year. Yet the battle for market share in Europe is increasing with the formation of a single EC market and with coming competition from East European exports. DRI, an economic-forecasting group, also thinks that a two-year decline in West European car sales will start next year.

GM has tried to give its American cars more flair by reorganising their production into two self-contained business units: Buick-Oldsmobile-Cadillac and Chevrolet-Pontiac-GM Canada. Something much more drastic is needed. If Mr Smith's Saturn project is not that something, GM could end its days as a decaying monument to the glory days of American manufacturing.

[grumbler]

Let's put aside the BB issue - namely that it isn't obvious that there is any buyer out there who would want to purchase an entire auto line from GM at a price above zero.  Let's assume such buyers exist and will pay.  If GM went through a standard liquidation, it isn't clear that such a sale could be easily effected.

For the sake of example only, take the Silverado plant in Ohio.  It may be the case that one secured creditor controls the land the plant sits on.  Another controls the building and some of the physical plant.  Another may control some of key equipment leases.  Another controls the Chevrolet logo and branding elements.  And so forth.   So the prospective future Silverado manufacturer has to somehow negotiate with all these potential stakeholders simultaneously, and put together a new work force of several thousand people (or renegotiate with the existing workers), and manage to get all these deals done quickly enough that the plant doesn't suffer from too much down time, wastage, or vandalism.

Not saying it's impossible, but I would not underestimate the challenge.  It's a lot of potential time and expense before even a single car is produced and sold, and all for the dubious privilege of producing Silverados.

Oh, I understand perfectly well that GM may be, as you note, virtually worthless.  However, liquidation of GM would at least make it impossible for my government to use my money to prop up a worthless corporation.

I would have preferred my government to not have thrown away the money of mine they have already invested in a worthless corporation, but those are sunk costs.  Supporting a Chapter 11 filing that increases the near-zero-value asset's value by 30% or whatever a great expense makes no sense to me.

[crazy canuck]

I would have preferred my government to not have thrown away the money of mine they have already invested in a worthless corporation, but those are sunk costs.  Supporting a Chapter 11 filing that increases the near-zero-value asset's value by 30% or whatever a great expense makes no sense to me.

That is really it.  Is this investment by tax payers in the US and Canada - dont forget we are paying a proportional share of this - getting any value other then saving the skins of the current politicians who can say that they at least tried.

[Razgovory]

I bet Berkut is a lot of fun at the labor day parade.

<International Brotherhood of Jazz dancers, Pastry chefs and Nuclear Technicians local 643 is throwing candy from a float>

"Daddy, can I get that candy"

"Oh sure, take the candy from the guy getting paid $75 an hour to sweep floors.  I'm sure they can afford it.  Those people are parasites.  That candy will make you lazy and shiftless"

"Can I get any candy?"

"Well when we get our Bitter Randian parade together.  But I don't think anyone will be throwing candy.  Nature of the beast I suppose."