GM is Doomed

During the Texas oil bust of the 1980s, a major real estate developer told me, "I thought I was in the real estate business, only to discover I was really in the oil business." His comment was made as the collapse in the price of a barrel of oil inflicted massive collateral damage on all segments of the Texas economy. Similarly, the executives running the world's major automobile companies, including those based in Detroit, have learned that they were actually in the subprime mortgage, credit default swaps and financial derivatives business. Decisions made on Wall Street drove a stake into the heart of GM, once one of the mightiest industrial enterprises in the world.

In previous posts I have commented on the strategic miscalculations and erroneous management decisions made by General Motors and its domestic competitors as contributing factors towards their imminent demise. However, it is the Global Economic Crisis, driven by financial chicanery engineered largely on Wall Street, that is sending GM, Chrysler and possibly Ford to a rendezvous with the undertaker. While U.S. politicians, who have shoveled trillions of taxpayer dollars into the hands of reckless Wall Street firms and banks with virtually no strings attached, enjoy lambasting Detroit and the auto unions for their supposed misdeeds, a recent statistic adds ambiguity to this generalization. In April, Toyota --considered to be the best run auto company in the world -- actually had a sharper drop in U.S. auto sales than GM, which is teetering on the edge of bankruptcy.

In desperation, GM has announced it will dump 1,600 domestic dealerships in the short-term, and ultimately eliminate 2,600, reducing its total dealership franchises by more than 40%. This is only part of an array of measures designed to reduce operating costs. More auto assembly plants will be shut down; additional layoffs will be undertaken while remaining employees will see their wages and benefits shrink further. However, in the wake of the financial storm that is wrecking the global economy, these last ditch and desperate stratagems are almost certainly doomed to failure. In the next several weeks, GM will file for bankruptcy protection, shed several of its brands, and accelerate the death spiral that it is now locked in. With unemployment surging, not only in the United States but throughout the world where GM has significant market share, and credit essential for auto purchases being denied to consumers -- macroeconomic factors that are far more relevant to the auto industry than brand elimination and dealership disposal -- the extinction of General Motors as an industrial corporation seems all but certain. Possibly brands such as Cadillac or Chevrolet may survive independently or be absorbed by other auto manufacturers, but the behemoth known as GM is destined for the scrapyard of history.

While Teddy Roosevelt was completing his second term as U.S. president in 1908, the first GM automobile was manufactured. In 1954, General Motors saw its 50 millionth car roll off the Detroit assembly lines, at a time when more than half a million Americans worked for GM. Now, at death's door, GM has announced that its dwindling workforce will shrink by a further 38%, reaching a planned level of 38,000. That represents a reduction of 93% from the 1954 employment figures!

The financial and political elites who dominate policymaking in America seem unperturbed. They apparently prefer having companies exist that engineer exotic financial derivatives than a manufactured product that is assembled by a skilled, well-compensated workforce. In their alternative universe, GM is expendable while AIG is "too big to fail." However, even with this melancholy certainty in front of us, I will always imagine a ride in a 1957 Chevrolet convertible as being infinitely more romantic than cruising the lanes on foot with a pocketful of securitized subprime mortgages or credit default swaps. So, America, where does the economic road ahead lead us?

Rest in peace, General Motors.

Comments

[othel]

As someone who worked in the auto industry for almost 40 yrs, I can tell you from first hand experience that GM never made mistakes - at least not as far as they were concerned: THEY WERE GENERAL MOTORS. Singularly the most arrogant group of people I ever dealt with. They were hell on their suppliers, but buffoons when it came to dealing with the UAW - which fed off the GM arrogance in fostering their own. No one wants them to go under, but there are quite a few, like myself, who can't help but feel a bit vindicated by their getting their just due.

[KillTheMessenger]

OK... the last people in the room are finally beginning to get it what has been blatantly obvious for GM share holders for the past ten years. I mean, come on, no matter how much you might despise the stock market... GM's shares have been continuously dropping. The people who sold ten years ago got a lot more of their money back than those who are still holding on, waiting for that miracle...

[FalconerHK]

Without an ideology-free, objective look at our trade policies and treaties, GM, Chrysler and most any other company actually making things in the United States is likely doomed.

We're simply not able to compete against countries with lower labor costs and/or the burden of healthcare (etc.) carried by the state instead of the employer. We also act as if US companies can sell products into other countries as freely as they sell to us, which is not the case.

As long as it's cheaper to buy imported goods and too expensive to export them, we're going to see what's left of American manufacturing disappear.

NAFTA, the WTO and other treaties might benefit shareholders in the short term but doom everyone to a third-world existence in the long term.

And now that the media has taken the position that "Buy American" is evil protectionism as opposed to self-preservation and sound national security policy, we're probably too late to do anything about it.

[KillTheMessenger]

Hmmmm.... my company is in business for the past 25 years. We have seen continuous growth, national as well as international and consistently had profit margins close to 50%. Neither health care costs nor cheap labor in other countries are any temptation to us because it would be more of a headache to move production than it would be worth for another 5-10% profitability.

That manufacturing in the US is failing is a myth. SOME manufacturing in the US has not been able to keep up with the rest of the world. That's true. But to generalize that is totally out of touch with reality. What is true is that some failing business models are trying to salvage themselves by moving abroad. Some business models are simply not possible around here, everything relying on sweatshops for instance. But then, we have to ask ourselves, do we really want to have sweatshops around here or do we not rather have another Apple, Google or "My Company" with clean, well paying jobs and regular hours?

"Buy American" is simply not possible. You can't find a digital camera made in the US. You can't find a highly efficient car made in the US. You can't find a decent notebook computer made in the US, either. And that's OK... as long as one can buy MY products ONLY in the US. And I am making sure that that's the case by always being one step ahead of the competition.

[FalconerHK]

With no middle class we're a third-world country. Blue collar jobs are the middle class. Millions of blue collar jobs have been lost. Why is fair trade as opposed to free trade a bad thing?

http://www.epi.org/publications/entry/briefingpapers_bp149/

http://www.epi.org/publications/entry/briefingpapers_bp147/

[Henry]

Seldon,
Death may await you and me, but not GM. The balance sheet, no doubt, will undergo some big time reorganization and all kinds of creditors to the company will be screwed. But GM will emerge with bets on a cleaner, more electrifying style that will put it into the throes of the decade of competition ahead of us. Think of this as the creative destruction, kind of like urban renewal.

[KillTheMessenger]

We shall talk two years from now and, trust me, you will eat crow.

[Henry]

I may be dead by then.