The Tragedy of General Motors

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  • Topic: Rick Wagoner, General Motors, Frederick Henderson
  • Pages : 14 (6071 words )
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  • Published : March 14, 2008
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It is the instinctive wish of most American businesspeople, even those unlikely to be directly affected, that General Motors not go bankrupt. True, some people will say, "They had it coming to them." But the majority will be more practical, telling themselves that the company is so central to the economy, so sprawling in its commercial reach, that bankruptcy--"going into chapter," as restructuring folks say--is ominous almost beyond contemplation. And yet the evidence points, with increasing certitude, to bankruptcy. Rick Wagoner, GM's 53-year-old chairman and CEO, may say, as he did in a January interview with FORTUNE in his aerie of an office high above the Detroit River, "I know that things will turn around." But he cannot know that. He may not, deep down, even believe it himself. Bankruptcy isn't going to occur next week. But down the road--say, past 2006 --its probability is high. That point of view seems supported by the opinions of the bond-rating agencies, which troubled companies must keep informed and which become virtual insiders in their understanding of a company's finances and operations. In recent months both Moody's and Standard & Poor's have made increasingly grim statements, bald in their talk of bankruptcy and laden with doubts that GM (Research) can turn around its reeling North American auto operations, now reduced to an embarrassing market share of 26%. In that percentage lies a harrowing, and maybe intractable, revenue problem. Says one GM executive: "There's no fix for us unless we get revenues stabilized." Nonetheless, Wagoner and crew must also deal with the full range of GM's problems, and they add up to a Hummer-sized load. The company lost $8.6 billion last year, burning up billions of dollars in North America, earning too little back overseas. Its product mix in the U.S., heavily weighted toward trucks, pickups, and SUVs, is on the wrong side of gas prices. It has a finance subsidiary, GMAC, whose majority interest it needs to sell to keep that business healthy and itself in cash--and so far, no buyer has emerged. It is inextricably entangled in the bankruptcy of its biggest supplier, Delphi. In that imbroglio, as in countless others, it is up against a formidable and sometimes militant union whose ability to accept the full reality of GM's problems is not assured. The company is even under investigation by the SEC for accounting sins, as yet unrevealed. And gravely, it is burdened by health costs, which it supplies for a population bigger than Detroit's--that is, for a total of 1.1 million employees, retirees, and dependents. Its thriving Japanese competitors, such as Toyota (Research), pay health benefits for their U.S. active employees and dependents too. But Toyota does not have GM's retiree health burden, a mountain that at year-end totaled an unfunded $64 billion and that, in annual effect on the bottom line, adds about $1,300 to the cost of every car and truck GM makes in the U.S. Wagoner is exultant that he and the UAW gruelingly managed last year to make a deal that, if blessed by a federal judge, will cut GM's unfunded liability by around $15 billion and pare cash outlays as well. But that will still leave Wagoner facing a colossal competitive disadvantage. The cost is not his fault. Rather, it is a legacy dumped on him by CEOs of decades ago who gained a certain amount of wage restraint from the union--and labor peace for their own terms of office--by granting retiree health benefits that had neither large, immediate cash costs nor, under the accounting rules then applying, much effect on the bottom line. Today, with health-care costs exploding and the accounting rules stiffened, this mess has come home to roost. It is the problem, says Wagoner (almost certainly giving too little weight to his shortage of revenues), that more than anything else "affects the future viability of GM." In character, today's GM is a weird and painfully scarred combination of businesses. It is a car...
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