Monday, March 30, 2009

General Motors Surrenders

Steven Rattner (left) and Ron Bloom (right) - Time Magazine

There is an element of politics whenever a chief executive departs, just as there must be in the timing of Rick Wagoner's departure from General Motors. In this case the White House has made quite clear its rationale in strict legal language. This week findings of the Presidential Task Force on the Auto Industry were posted on the White House website, including "Determination of Viability Summary: General Motors Corporation," which states:

The Loan and Security Agreement of December 31, 2008 between the General Motors Corporation and the United States Department of the Treasury ("LSA") laid out conditions that needed to be met by March 31, including the approval of Labor Modifications, VEBA [pension plan] Modifications and the commencement of a Bond Exchange.

As of the date of this memo, the above steps have not been completed, nor are they expected to be completed by March 31. As a result, General Motors has not satisfied the terms of its loan agreement.

The report, which takes exception with a number of key assumptions in the plan put forth by General Motors, goes on to state:
...even under the the Company's optimistic assumptions, the Company continues to experience negative cash flow (before financing but after legacy obligations) through the projection period, failing a fundamental test of viability.
In short, the Task Force put GM's best plan through a "stress test" and it failed.

Those who fear the Administration is being heavy-handed are reminded that it was General Motors that asked for the loan, then asked for another, then failed to produce a viable business plan. Today it became clear that the Administration would enforce market discipline by putting General Motors through the same kind of "financial workout" that other lenders routinely enforce when companies fail to meet their obligations to bondholders.

The Task Force is fully loaded with economists. Headed by Treasury Secretary Tim Geithner and Larry Summers, Director of the National Economic Council, the Task Force includes another seven members of the Cabinet and the Director of the White House Office of Energy and Climate Change, Carol Browner. The staff are directed by Steve Rattner, a corporate workout specialist, and Ron Bloom, whose experience includes advising the United Steelworkers union. Other Official Designees include economists Diana Farrell [no relation to the author], Gene Sperling, Austan Goolsbee, and Jared Bernstein, Chief Economist to Vice President Biden. Goolsbee's agency, headed by former Fed Chairman Paul Volcker, is specifically charged with (among other things) "reducing corporate welfare," according to remarks made today by Office of Management and Budget Director Orszag.

This new toughness on corporate bailouts occurs just as President Obama heads off to London for the G20 (Group of Twenty) Summit. There the Administration faces one more important sales job--that of convincing leaders of the other major world economies to fully and harmoniously participate in resetting the global financial system. A draft communique prepared for issue on April 2, pledges participants to supporting an "open world economy based on market principles, effective regulation, and strong global institutions."

One could fit nearly every version of capitalism within the confines of those broad, competing goals. For General Motors and its stockholders, lenders, suppliers, employees and pensioners, however, the options have decidedly narrowed.

See also Responses from Readers, a summary of reader comments when we asked in November whether the auto industry should be bailed out.

A collection of posts about the US Economy is maintained here.

To learn more about our work in consulting, please see our Profile, download a brochure about our Practice, or check out our Case Studies.

Contact JP Farrell & Associates, Inc.


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9 comments:

Anonymous said...

GM called for it. GM exemplifies Corporate American short term thinking, many will follow. To make things short, Deming predicted, but smooth talkers and narrow minded leaders won over a better way proposed by people with wide knowledge like Deming. The worse is not yet here, in my humble opinion. I have a lot confidence that US will come back from this crisis sooner than others; however, misery and caos are next door, can last more than people anticipate.

BR

Anonymous said...

The conventional view is that GM did this to themselves through not addressing issues that everyone has been telling them for years. This is what the press repeates endlessly and it becomes accepted wisdom. It is actually incorrect. First, What put GM and Chrysler in fear of bancruptcy; FORD living on lots of credit; and Toyota experiencing its first losses is the world wide economic depression. No one is buying cars..... from anyone. Second, If you look at the facts, GM is by many measures the most efficient manufacturing firm in the world. Their product quality and reliability rivals and often beats the Japanese. Third, GM does sell what people want. They were the first recognize the direction that the market was moving with the consumer demand for light trucks and SUVs. That is waht people wanted through the 80's, 90's and into the new millenium. So what is the problem? Besides the economic earth quake, GM has never recovered market share because the media in general prefers to beat on them for past errors rather than recognize the progress they have made. Also, the California Vegan Deomcratic movement views anything foreign as good and anything domestic as bad. Lastly, we do not subsidize our auto industry and we do not place tariffs on their competitors.... AND WE ARE THE ONLY AUTO PRODUCER WHERE THAT IS TRUE.

Anonymous said...

I have worked contract for GM since the late 80's. I used to say back then that I was surprised GM was still in business......no one could EVER make a decision and most of the IT management wanted to take zero responsibility for any of their projects, which always led to "blame the vendor". They were also #1 in shipping IT jobs off to India, then complaining when the requirements were wrong, deliverables were late, etc. GM's mantra seems to be, "buy American, but hire H1B's"!

Peter said...

From the product perspective, I love GM's current direction. I own two GM vehicles, and both have 100% reliable, with 0 issues in 50,000 miles of driving, including the brutal Michigan winter snow conditions. If GM can maintain their current product quality and style direction, they deserve to, and can succeed.
In my job for a GM supplier I have contact with a broad group of managers within GM. Unfortunately, the common thread within the large majority of GM management I've had contact with is arrogence, mismanagement and ignorance. It is almost as if GM trains their managers to be arrogent bullies, and ignore reality, supplier relationship, basic people skills, and useful management trends whenever possible.

Based on these two perspectives, I am I fully behind Obama's actions to challenge and change the management culture of GM. There are a lot of people within the GM organization that care about GM, care about South-east Michignan (where GM's collapse would be utterly devastating), and care about the car industry in general.

However, I see a lot more GM leaders being forcably required to leave against their will before those with the vision, courage and skills to save GM will have a chance to do so. Sadly, I expect that those people may prefer to see their own company destroyed before they concede that their own mismanagement has brought GM to where it is today.

Anonymous said...

GM’s problem is that it builds exactly what people want: large SUVs and pickup trucks. That’s what people want. But once every ten years or so, energy prices spike and consumers decide gas guzzlers aren’t worth the pain. When this happens GM can’t retool their plants fast enough. GM loses market share. Can you believe that they once held 60% of the market and employed millions of Americans. This market share did not disappear in a single fell swoop. It bled away slowly over 35 years of corporate mismanagement.

Even today, GM does not build a world-class economy car. There is no viable GM version of a Camry, Prius, or Civic. Its most economical car is the Chevy Avia, a car built in Korea by Koreans using Korean parts. GM does not even try to be better than the Japanese.

GM says they want to be as good as Toyota but never quite manage to get there. What they fail to realize is that if I want a Toyota, I’ll buy a Toyota – not some domestic knockoff.

GM waves the flag to encourage consumers to buy American and then ships tens of thousands of IT jobs to India. Exactly how many American jobs does it take to run an American company? Zero? One?

GM executives, making eight and nine digit incomes, blame union greed for the company’s financial problems. Hate the unions all you want, but I bet GM’s IT workers wished they had joined a union before their jobs disappeared across the Pacific.

The management at GM has not learned from its past mistakes. GM does not have a clear vision of what kind of car-builder it wants to be. GM is not committed to creating or preserving American jobs. Bankrupt now or bankrupt ten years from now – what’s the difference?

Anonymous said...

America has always prospered from innovation, not manufacturing. America has never prospered from manufacturing and it has only become worse as a result of global integration. Innovation such as automation (cotton gin), interchangeable parts, division of labor, assembly lines, etc. allowed us to excel in the beginning, but other countries are able to undercut America on labor. Due to our standard of living, we will always suffer a cost push economy, unless it is something value added enough to justify the additional cost.

What's most annoying is that America has become a management infrastructure where creativity is considered a disruptive and unstable source of risk, whereas maintaining status quo is regarded to be safe and reliable. If you are creative, you had better be able to, at least, act Left Brained or you have a struggle ahead. Big companies can steal ideas with no affordable defense for the inventor or buy and eliminate it, like the Honda electric car; cost and complexity of gaining patents and defending them spirals; and venture capital requires a product already earning a profit.

America must encourage, value, reward, and manage creativity and innovation, with its own space and budget - America's true long-term investment. GM should be redefining their industry, e.g with fast trains, SegWay type liaisons (good going, by the way!), and micro nuclear reactors; not whining about horse carriages going out of vogue. MGM

Anonymous said...

If GM cannot make a better car they should just copy Honda Civic and Honda Civic hybrid. It is pityfull to see the big mighty GM uncapable of allocating few milions to actually deliver what the ENTIRE WORLD NEEDS. It might be internal politics and briliant management blindness! Europeans told them - smaller and lighter. They do not have one Jetta diesel. The government helps them because they are responsible too for zero leadership. Where is the penalty for these incapable leaders? The penalty is only on us the little guys that loose the job(I lost mine 10 days ago) - never ever a penalty on them. Now, they should bring some money from home as they took home huge salaries last 20 years. Event the bancrupcy is not going to punish the management. I do not work in product design but I could say the too large number of brands and models without one name brand equal to corporation name (like Ford has) with the blind decision to produce what the market wants - not even 1 model that is good for future (the flagship) - this is terrible. We accet no excuse that they had no courage to lead and change to unify the corporation. They have seen this comming their way and did nothing. That is my humble but bitter oppinion.

Anonymous said...

Folks, Ross Perot told the GM execs in 1988 that they did not understand the business they were running. He said they are isolated from driving cars because they had chauffers. They got a new GM car every 3 months, so they had no concept what it was like for a customer. None. He told them in Detroit at the Economic Club meeting that they needed to drive 10 year old cars to understand what business they were in. They bought him out for 750 Million Dollars, but arrogantly turned away from his advice. It is still true today. Hyundai was the worst car manufacturer 5-6 years ago. Now they are better than GM or Chrysler. I have only ever bought new GM cars. I like the products and the company, but style must return to regain sales in the market. Can GM now come out with a model like the K-car that saved Chrysler in 1980? They are on the verge of bankruptcy and have plans only to cut staff and cut production numbers. Neither will pay back loans owed to vendors, stockholders and the government. Without increasing sales, there is no future.
GM, prove me wrong and sell sell sell cars.

Jenny Goren said...

General Motors announced their plan to reduce pension liability on June 1. The plan is set to reduce pension liability by an estimated 26 billion dollars, and offers select salaried U.S. retirees a lump-sum payment. Other retirees may continue to receive a monthly pension payment. Navigating these choices will be a complicated process and it is suggested that the advice of a competent financial advisor be obtained. To learn more about initial eligibility and the options of the General Motors (NYSE:GM) Pension Buyout plan visit http://gm-pension-buyout.com/?page_id=38. A free white paper is also available at this site. The decision deadline is set for July 20, 2012.