November 18, 2008

About GM

Well, there's no shortage of opinions today out about GM. WhosPlayin' has a good (if simplistic) piece. Andrew Sorkin's article over at DealBook is beating the hell out of the unions and advocating the elimination of management as the US forces the company in bankruptcy.

While this may surprise you given my vocation, I'm with Sorkin. Chapter 11 is necessary.

First, let's head back to WP as it neatly points out that in the case of the automakers, things aren't as cut and dry as we'd like.

More important still is the opportunity cost of saving the automakers. It is suggested that millions of jobs might be lost if the firms folded. That may well be true, but those workers would not remain unemployed forever.

While this is true, the intermediate term pain will be very heavy and the effects cascade through the economy. You can't just scrub out the automakers and their payroll without causing dislocation nationally. For instance, the Big Three dealerships here in Central Texas provide for sales and property taxes, revenue that would have to be replaced if the companies were liquidated. That's just one of the effects from liquidating the automakers. Don't forget up to 10% of our workforce out of work as a result. That, plus our already high unemployment, would be a one two punch taking us directly into depression.

Nah, the best thing to do is for the government to force them into a Chapter 11 re-org. But with a catch... 40% of the equity when the company returns to the public markets must be reserved with 20% to current shareholders of record on the date of the bankruptcy and the remaining 20% to the pension plans to make certain there is no cut to pensions. This will make it easier for workers to take the necessary cuts in benefits (sorry, you'll have the same crappy health insurance we all have) and slight cuts in pay to stabilize the company. Allowing existing shareholders to benefit post restructuring will make sure that pension funds nationally that carry GM stock will be able to benefit from a resurgent auto industry.

Then, it's gotta be restructured.

I'm all for merging GM and Chrysler but the brand strategy Sorkin lays out is incomplete...

Both companies would have to jettison brands — lots of them. In the case of G.M., frankly, the only ones worth saving are Cadillac, Chevy and Buick. (Buick? Yes. Despite its lackluster sales and fuddy-duddy image in the United States, it’s a huge seller in China.)

That means Saturn, Pontiac, GMC and Saab would all disappear. Deutsche Bank estimates that reducing G.M.’s brands from eight to three would bring down the company’s cost base by $5 billion annually. If you’re able to shut the dealerships too, lop off another $4 billion. Chrysler is an even sadder situation: the only brand with any value is Jeep. Its Dodge Ram truck lineup could be merged with Chevy, which would also pick up pieces of the GMC business. And Chrysler’s minivan business could be combined into the Chevy brand as well.

Saab and Saturn should be merged and model numbers reduced. Saab is, oddly enough, a great brand. As for Chrysler, Pontiac and Dodge? Kill them.

Some of you will no doubt think I'm crazy with only 'slight' paycuts. For one thing, this is temporary measure to boost earnings to pay off debt and rebuild the pension plan and you don't have to make massive cuts to achieve that objective when you're not paying a dividend. Once the company is restructured, with new management in place and a manageable debt load, you take it public again and with the money raised overfund the pension plan to 105% of obligations assuming a 5% asset growth rate. If there's any left over, cut pay down debt. GM has gotten itself into this mess in part by ignoring the pension plan that it's been underfunding for 30 years. But that's just part of the problem... the rest of it is management.

For them, there should be nothing.

Posted by mcblogger at November 18, 2008 10:54 AM

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One of the things that nags on my mind is this: Given the popularity and success of the non-native brands like Toyota and Honda who also provide plenty of good American jobs and sell a good product, why do we feel it necessary to rescue the "big 3" because of their nominal "American" brand?

If we gave them a bail-out, wouldn't the true beneficiary be the shareholder - who may or may not actually be American?

I agree. Let them eat Chapter 11. And let Rick Wagoner take a hike. I'm sure some other dumb-ass board somewhere will hire him.

Posted by: WhosPlayin? [TypeKey Profile Page] at November 18, 2008 09:44 PM

actually, we could sell them immediately out of an 11 reorg into Honda. Or Toyota.

Yes, a loan will save shareholders, most of whom are Americans or trustee's for Americans. However, my way they'll still have some equity left. The other way and it's only a matter of time until it all collapses. Again.

Posted by: mcblogger [TypeKey Profile Page] at November 18, 2008 10:01 PM

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