It has been well over three years since industry experts predicted the impending bankruptcy of auto-giant General Motors Corp. (GM). Though hard to believe, the plain fact, of course, is that the once largest automaker is now on the brink of collapse.
With a lifeline of only 60 days that runs till June 1 to revamp itself, the odds of the venerable American icon seeking bankruptcy protection now appear extremely high, according to analysts.
The entry of higher quality, affordable, and fuel-efficient cars, made by Japanese car makers like Honda and Toyota, in the U.S. market in the 1980s, sowed the seeds for the slide of the U.S. auto industry. In the 1980s, the combined U.S. market share of General Motors, Ford and Chrysler, referred to as the Detroit 'Big Three', declined to 70.8% from 80.1% in the 1970s, according to the Automotive Data Centre.
The U.S. market share of GM, which was 44.6% in the 1970s, slipped to 41.4% in the 1980s and has been in a terminal decline since then. GM sells cars and trucks globally under the brands Buick, Cadillac, Chevrolet, GMC, GM Daewoo, Holden, Hummer, Opel, Pontiac, Saab, Saturn, Vauxhall and Wuling.
In addition to cutthroat competition, crippling pension costs and health care financing costs have made matters worse for GM. The company last reported an annual profit in 2004, when its profit tumbled 23% to $2.70 billion and its U.S. market share dropped to 27.2% from 28% in 2003. GM's 2004 global market share was 14.4%, down slightly from 14.7% in 2003.
The already declining U.S auto industry received another blow in 2005, when U.S. auto parts supplier Delphi Corp filed for bankruptcy. Delphi was spun off from GM in 1999.
Following Delphi's bankruptcy filing in October 2005, Standard & Poor's lowered GM's credit rating to 'BB-' from 'BB' and analysts speculated that GM would follow Delphi into bankruptcy.
In November 2005, GM announced its decision to slash up to 30,000 jobs and close 12 of its plants by 2008. The restructuring was expected to shrink the company's costs by $7 billion a year by the end of 2006, about $1 billion more than its earlier target.
In 2005, GM posted a loss of $10.42 billion or $18.42 per share - its first annual loss since 1992, hurt by a slump in its sports utility vehicles, increased commodity costs and charges associated with the UAW/Delphi benefit guarantee.
After a dismal performance in 2005, GM entered into exploratory talks about a three-way alliance with Japanese automaker Nissan and French automaker Renault in July 2006. Under the proposed three-way alliance, Nissan and Renault were to take a combined 20% stake in GM for $3 billion. There were mixed views on the potential of the proposed deal.
Some analysts believed that since Renault and GM's Opel subsidiary in Europe have 100% product overlap, the three-way alliance would result in a complicated structure, causing more headaches than benefits. CSM Worldwide, the automotive market forecaster was of the view that the proposed three-way alliance would allow the carmakers to share parts and designs for their models and reduce development costs.
According to some analysts, the proposed alliance was a bid by Kirk Kerkorian, the billionaire investor who then owned a 9.9% stake in GM, to boost his stake and seize control of the company.
In October 2006, GM determined that the alliance structure proposed by Renault-Nissan was not in the best interests of its stockholders and terminated the alliance talks. Following the failure of the talks, Kerkorian reduced his stake in GM to 7.4%.
Meanwhile, in April 2006, GM agreed to sell its 51% stake in GMAC, the company's financial arm to a group of investors led by Cerberus Capital management for $14 billion.
The GMAC sale was a part of GM's effort to raise cash and restore the finance unit's debt ratings, which was downgraded to junk status following the losses at GM. The transaction was completed in December 2006. The cash boost from the GMAC sale was an important step to further support its turnaround, according to GM.
True to expectations, GM showed signs of an upturn in 2006. The company narrowed its net loss to $2.0 billion or $3.50 per share in 2006 from $10.4 billion or $18.42 per share in the previous year. Excluding special items, GM posted net income of $2.2 billion or $3.88 per share in 2006 compared to a net loss of $3.2 billion or $5.67 per share in 2005. GM's revenue for the year totaled $207 billion, up from $195 billion in 2005.
In order to achieve profitability and positive cash flow, GM implemented further significant structural cost reductions in North America in 2007 and negotiated an historic labor contract with its UAW partners.
In September 2007, about 73,000 GM workers represented by the UAW union went on a nationwide strike to defend their wages, jobs and health care benefits. The strike, which was the first automotive strike in 31 years, was called off after two days after a new 4-year agreement was reached between GM and the UAW.
Rising pension costs and employee and retiree healthcare costs have been an albatross around GM's neck for decades. Under the new agreement, the UAW was entrusted with the responsibility of administering the healthcare benefits of workers through a health care trust known as VEBA (Voluntary Employee Benefit Association). The VEBA, which is set to be formed in 2010, would be funded by automakers and is meant to help control the automakers' ever increasing health care costs and clear billions of dollars in health care liabilities from their books.
By this deal, GM offloaded $47 billion of its retiree health care obligations from its balance sheet in exchange for agreeing to contribute about $35 billion -- $29.9 billion in cash and $4.4 billion in securities, to fund the VEBA.
Just when GM was starting to show some signs of improvement, the uptrend was put in jeopardy in 2007 by the declining car sales and huge mortgage-related losses related to the company's 49% stake in GMAC. GM's bottom line has been reliant on GMAC's profits since 2002.
In 2007, the company's loss widened to $38.7 billion or $68.45 per share from $2 billion or $3.50 per share in 2006. Excluding special items the company's loss in 2007 was $23 million or $0.04 per share compared to net income of $2.2 billion or $3.84 per share a year before. However, the company ended 2007 with a negative adjusted automotive operating cash flow of $2.4 billion, a significant $2 billion improvement compared to 2006.
The compounding credit crisis and slowdown in vehicle demand added to GM's woes in 2008. GM, which has held the title as the world's largest automaker for 77 years, lost the crown to Toyota in 2008. GM reported global sales of 8.35 million vehicles last year, lagging behind Toyota's sales of 8.97 million vehicles.
GM's net loss in 2008 narrowed to $30.9 billion or $53.32 per share from $43.3 billion, or $76.52 per share in *2007. Excluding items, the company's loss in 2008 ballooned to $16.8 billion or $29.00 per share from $279 million or $0.49 per share in *2007. (*2007 figures reflect continuing operations) GM's total revenue in 2008 was $149 billion, a decline of 17% from 2007.
With the decline of the U.S. auto industry proving to be catastrophic, the Bush administration extended $17.4 billion in federal loans to GM and its crosstown rival Chrysler in mid-December 2008 to prevent the embattled automakers from collapsing in order to safeguard the broader health and stability of the economy. GM's share of the loan was $13.4 billion, while Chrysler's was $4 billion. Under the loan agreement approved by Bush, the companies were required to submit their viability plans by February 17, failing which the loans were to be called back.
Over the past four years from 2005 through 2008, the 101-year-old auto giant has accumulated about $82 billion in losses.
With an ultimatum set for its turnaround, GM managed to get some concessions from the UAW, including the elimination of, 'job banks' a program that has been strongly criticized by members of Congress. The jobs bank program guarantees that when the automakers cut jobs or shutter factories, the idled UAW workers are paid close to their full wages and benefits. Following the elimination of job banks on February 2, the 1,600 GM workers who were in that program will now receive only minimal GM pay and state unemployment benefits.
A further deterioration of industry conditions led GM to seek an additional $16 billion in federal aid in February, while Chrysler requested an additional $5 billion.
On February 17, GM submitted a restructuring plan to the government detailing the methods it is going to adopt to achieve viability.
According to the proposed restructuring plan, by this year-end, GM proposed to cut 47,000 jobs worldwide -- 37,000 hourly workers and 10,000 salaried workers, including 20,000 workers in the U.S. In the earlier plan submitted to the government on December 2, GM said that it would eliminate 37,000 jobs.
As of March 26, 7,500 GM workers have opted to take early retirement benefits. At the end of 2008, GM had 62,400 hourly workers and the company plans to reduce that number to 46,600 by 2012. In 2006, about 34,000 hourly employees left the company through a special-attrition program followed by another 19,000 hourly employees in 2008. GM's workforce in the U.S., including unionized workers, is now about 92,000, down from 177,000 in 2000.
The automaker has also offered to trim its dealer count to 4,700 by 2012 from 6,246 in 2008, and to 4,100 by 2014.
The plan also calls for the closure of five more U.S. factories by 2012, in addition to the proposed closure of 9 plants previously announced last December. The total number of plants to be closed is now 14.
GM has also pledged to close or sell its Saturn, Saab and Hummer brands at the earliest. The automaker's core divisions have now been reduced to Chevrolet, Cadillac, Buick and GMC. Pontiac will serve as a focused brand.
However, the Obama administration was not satisfied with GM's proposed turnaround plan and has given the company 60 days to come up with a new strategy for viability.
On March 30, GM's CEO Rick Wagoner was asked by the government to step down with immediate effect. Fritz Henderson, the company's president and COO has been named the CEO. Commenting on the forced resignation of Rick Wagoner, President Obama said that it's not a condemnation of Wagoner's work, but rather a recognition of the need for a fresh start at the automaker.
The government has made it clear that it has no interest in running GM and that an organized bankruptcy could be the best option for GM and Chrysler. Obama has also announced that the U.S. government would guarantee all warrantees on new cars sold by GM and Chrysler, a move to assuage consumer fears and encourage vehicle purchase from these companies.
GM has $27.5 billion in debt held by bondholders and about $20.4 billion in obligations to the VEBA. As a condition for receiving additional federal aid, GM is required to reduce its unsecured debt to at least $9.2 billion through a debt-for-equity swap.
The company is in talks to get bondholders to exchange debt for equity and also wants the UAW to accept stock for at least 50% of the company's future retiree health-care obligations. However, negotiations have not made meaningful headway thus far.
Meanwhile, Ford has reached a deal with the UAW in February that would allow the company to pay about half of its $13.2 billion obligation to the VEBA with stock instead of cash.
GM has $1 billion in Series D convertible debentures that mature June 1. With less than two months left to prove its viability, the clock is ticking for GM. What will be its next move? ...Stay tuned.
GM stock is now down 13.66% trading at $1.96 on a volume of 22.49 million shares. During its heydays in 1999, the stock was trading as high as $90.
For comments and feedback: contact firstname.lastname@example.org