The GM Bankruptcy Continues

[WarrenJ]

It was early in 2007 that my favored financial adviser, Porter Stansberry ( http://www.stansberryresearch.com ), proclaimed GM a "dead duck." Some might say he was early, but I got out of GM stock. Saved me a small fortune. He can tell you of a surprising number of other companies about to bite it.

He doesn't seem too pleased about the current "solution."

Apparently, "spreading the wealth around" applies with special rigor to creditors of General Motors. They've been offered 10% of the new company. The UAW will get almost 17.5%, plus warrants for another 2.5%. The only logic to such apportionment is political, not financial. Fearing a lawsuit – which they'd lose – the Feds offered bondholders warrants on an additional 15% of the new company, potentially bringing their stake to 25%. My bet is those warrants won't ever be worth a penny. While the union agreed to give up reimbursement on Viagra and Cialis for retirees (I'm not kidding), it did not agree to any further reduction of wages, health care, or pensions for current employees...

That means we should be publishing letters from the chairman of GM again within a few months. But at least the next bankruptcy will finally wipe out the people who most deserve it (emphasis mine, W).

FWIW,

Warren

[Cadillac Jim]

I agree. The UAW and it's intransigence in allowing lean plants to be designed or built in the USA and their total cost of labor was a major factor in the bankruptcies of GM and Chrysler and was a major liability to Ford. Check out these articles from the Detroit News:

Article Series from August 2007

Smart Ecnonomy Typepad blog from November 2008

The defining quote from the Detroit News is from the 2007 series:

Ford sources said it [the Ford plant in Camacari, Brazil] is the sort of plant the company wants in the United States, were it not for the United Auto Workers, which has historically opposed such extensive supplier integration on the factory floor.

With the UAW owning big stakes and thus maintaining corporate Board seats, this catering to the labor base instead of the marketplace will likely continue. With Congress owning majority shares and pressuring GM and Chrysler to design and build cars that nobody wants to buy, that's too many strikes. Current pundits are comparing the takeover of the US auto industry, except for Ford, with the Amtrak takeover in 1970. I think that the difference is that Amtrak is affordable but massive nonviable corporations that exist at least partly as a pipeline of public funding to the shrinking and the UAW are not.

There are many things that caused this; even Toyota and Honda went to Tokyo in January for government help, and there are other examples worldwide. A major difference here in forces that brought down GM and Chrysler? The benefits and retirement plans negotiated by the UAW over the years that drove up US automotive labor costs 50% higher than non-UAW plants in the US and abroad, and their successful resistance to allowing progress in reducing the amount of labor in automotive production as even Ford has done in Brazil. Perhaps the UAW labor cost is just another bubble of the last 30 years that gained its last exuberant momentum in this decade and burst in 2008. And, maintaining it at public expense, by putting the UAW in ownership roles in lieu of "debts" that more rationally should be simply disavowed in bankruptcy court, fly in the face of the reality the automotive marketplace and is less than thoughtful.

[WarrenJ]

A major difference here in forces that brought down GM and Chrysler? The benefits and retirement plans negotiated by the UAW over the years that drove up US automotive labor costs 50% higher than non-UAW plants in the US and abroad, and their successful resistance to allowing progress in reducing the amount of labor in automotive production as even Ford has done in Brazil. Perhaps the UAW labor cost is just another bubble of the last 30 years that gained its last exuberant momentum in this decade and burst in 2008. And, maintaining it at public expense, by putting the UAW in ownership roles in lieu of "debts" that more rationally should be simply disavowed in bankruptcy court, fly in the face of the reality the automotive marketplace and is less than thoughtful.

The UAW did exactly as it was supposed to: ask for pie-in-the-sky benefits and fight like heck for them.

Management, OTOH, failed in its job: take the strikes and fight like heck to contain outrageous demands.

The UAW made the bed they currently lie in and die in, but on balance, management was out-to-a-gourmet-lunch when they should have been knocking heads over pizza and diet Coke in the late hours. All of the big three are guilty of this.

Regards,

Warren

[Cadillac Jim]

Yes, GM had it's Roger Smith from 1981 through 1990, a period which saw massive blunders, including the we-don't-have-an-engine period of Cadillac, the loss of identity of most GM brands, etc. But, in the 1990's, GM had enough capital to buy Toyota and indeed formed equity-based partnerships with Toyota, Isuzu, Mitsubishi, Suzuki, and others.

The survival strategy of any large corporation that has serious inertia in its burn rate includes management of operating capital in the face of foreseeable contingencies, and the probability of bankruptcy over a 5-year or 10-year period is always kept to a low level, say 1%. When the improbable bad events keep coming, the business plan morphs to keep the probability of survival high. GM bled cash for a decade without doing what it is doing now, only more so. Their bad. GM should have done the obvious:

• Closed plants to keep production capacity high while maintaining a viable burn rate for the foreseeable future,
• Built lean plants that are competitive with those of other large automakers, and
• Negotiated labor agreements that kept labor costs in line with those of the rest of the industry.

Ford did some of that and seems to be squeaking by so far. Chrysler probably never had the daylight since the 1970's to manage their probability of survival in bad times. But GM did have the cash assets to manage their survival, but didn't. Why? Perhaps, just perhaps, the UAW would have shut them down for a year or more if they tried, and thy might very well have failed in the end, an in any case they would be down $100B or so for the effort. But, Ford did it -- or is doing it or enough of it to survive so far, so why couldn't GM?

[WarrenJ]

But GM did have the cash assets to manage their survival, but didn't. Why? Perhaps, just perhaps, the UAW would have shut them down for a year or more if they tried, and thy might very well have failed in the end, an in any case they would be down $100B or so for the effort.

And "The UAW made the bed they currently lie in and die in . . . "

Regards,

Warren