Finance

In 2008, General Motors was recorded as the third largest automaker in the Fortune 500 by revenue. The company was the largest automaker, by sales, in the United States and the third largest in the world, by sales. With production in 34 countries, GM employed 244,500 workers around the world and sold and serviced vehicles in over 140 countries worldwide.


On 1st June, 2009 filed for Chapter 11 Bankruptcy Reorganization. Not only was it the largest bankruptcy of the year for the US Retail Industry, it was also the 4th largest bankruptcy reorganization in the history of the United States commerce. The new entity has largely been purchased by the US and Canadian Governments along with some holdings for the United Automobile Workers Union and G.M. Bondholder. The companys Hummer and Saturn brands were sold and the Pontiac brand was discontinued. When a company as large as this goes into bankruptcy, not only do its thousands of workers face unemployment, it is also poses a threat to parts manufacturers, dealerships, and myriad other allied industries. The slippery slope threatens to spiral out of control and intervention becomes necessary.
After decades, the company finally brought about an innovative product in the 2011 Chevy Volt which had built an unparalleled hype. Increasing costs during the economic crisis forced GM to shut down factories thus reducing the industrys overcapacity of cars and trucks. Eventually, when a new labor agreement kicks in, the cost of producing a car will go down and GMs products can become more competitive. Despite these factors, five severe obstacles brought General Motors, a giant in the automobile industry, to its knees. This article explores those financial and economic failures (Stoll, John D).

    Economic and Financial Failures

    Demand Shift and Uncertain Energy Policy
The first shot was the dramatic rise in energy prices in the summer of 2008. That caused a rapid mix shift in vehiclesand had a major impact on profitability. GM, Ford and Chrysler have relied on SUVs and trucks for the majority of their profits. Those vehicles commanded high sticker prices and by the late nineties made up 50 percent of the U.S. car market. When demand for the big vehicles dropped quickly and customers went for smaller, less expensive, less profitable cars, auto companies had two major issues to deal with A loss of revenue and a backlog of unwanted trucks. Another big factor was the USs lack of an energy policy. They just dont have one. When things like corn-to-ethanol were done, problems were naturally bound to rise since they didnt have a base in economics or technology. Not only did this contribute to a rising food price problem, with increased demand on grains, it also teed up problems for the automobile industry. General Motors was the slowest to respond to the market trends and thus demand shifts hit hard (Terlep, Neil King Jr. and Sharon).

The Financial Meltdown
Predictions placed the annual sales for 2009 of General Motors at less than 10 million. This is the lowest figure in over a decade, dropping dramatically from an average of 15  16 million annual sales. The drop largely derives from the lack of availability of credit. The company doesnt have the credit available to squeeze out of its crunch and customers have a reduced demand due to the low credit availability. The auto industry lives on credit as do its customers, so when access to car loans or leases is limited, sales fall off a cliff.
Legacy Costs
Every car GM makes carries legacy coststhe costs of providing healthcare and pensions to scores of retired workers. For every GM worker, there are about 10 dependents, which are defined as retired workers and their families. When the international car companies came to the U.S., the move stuck the domestics with a very large disadvantage related to legacy costs. And thats 2000 a car. That two grand must be built into the sticker price of any new GM car and truck. And thats money on top of developing, producing and marketing a carcosts that Honda, Toyota and others dont have. It makes competing difficult for the domestic automakers, like playing basketball with a bowling ball, according to the Chairman of the Center for Automotive Research, David Cole. GMs per-hour labor rate for car assembly is about 75 per hour, compared to 40 to 45 for other car companies. That particular disadvantage will be gone when a new labor agreement goes into effect (Ramsey, Jeff Green and Mike).

Sub-Par Quality and Lackluster Cars
Back in the early 1980s, while GM president Roger Smith fell in love with the idea of automating workers out of car factories, Toyota and others focused on refining their production techniques and produced much higher quality cars. Customers left GMs brands en masse. The companys market share has fallen from a high of just over 50 percent in 1962 to around 23 percent in 2007. In recent times, the quality gap has narrowed considerably but perception trails reality. Getting those customers back would require a herculean effort. Vehicles like GMs very first attempt at a crossoverthe sub-par 2001 Aztecdidnt help. Cars like that left customers will little incentive to return (CNN).

Global Slowdown
GM operates in 34 countries, and if its U.S. operation has been in decades of decline, other markets have been growing, particularly in Asia. But the financial shock has spread across the globe and sales are down everywhere. In effect, GM is bleeding from several wounds. As the largest of the Big Three, GM has been the focus of the media spotlight. But Ford and Chrysler are facing similar problems. And of course, thanks to many of the same factors, even healthy car companies are feeling the pain. The domestic auto companies werent the only ones that capitalized on the U.S.s thirst for light trucks. Half of Toyotas offerings are trucks and minivans. The difference is that Toyota doesnt come into this tough period already weakened by past mistakes. General Motors is particularly hard hit by the slow down because of the above five reasons, particularly its legacy costs and its lack of innovation (Oberois, Peter).

Chapter 11 Reorganization

The U.S. government and the Canadian government are providing 30 billion to the company to continue operating while in Chapter 11.
A proposal to form new entity that would be owned 60 by the U.S. government, 12 by the Canadian government, 17.5 by the United Automobile Workers union, and 10 by G.M. bondholder has been presented to the court for approval.
The U.S. government is backing GM vehicle warranties during the Chapter 11 process. The new GM is expected to assume responsibility for product liability, lemon law violations and workers compensation claims.
The company plans to sell its Hummer and Saturn brands, and discontinue the Pontiac brand.
Unable to sell the medium-duty truck production, and will discontinue operations at the end of July
Received court approval to borrow 33.3 billion from the U.S., Canadian and Ontario governments
The new GM company will launch a new stock IPO in early 2010
U.S. bankruptcy court approves GMs bankruptcy sale, leaving its most profitable assets intact and under government ownership on July 6, 2009
Emerged from bankruptcy protection on July 10, 2009 as a new company, which is majority owned by the U.S. Treasury

Analysis
With a new life, GM has the opportunity to correct several of its previous mistakes. Above all, the blame for its current meltdown falls on the company itself. Other automobile industries have suffered from the economic crisis and demand shifts just the same as General Motors but GMs massive legacy costs (GMs oldest former member is 110 years old and is still receiving retirement pensions), lack of innovation, and high priced vehicles make it impossible to compete in todays market (Motors, General).