anjan_c2007

Why GM Went Bankrupt?

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Source Rediffnews

01sl1.jpg
    The GM building beside the Detriot River, Detroit, Michigan

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    The star spangled banners wave from near the GM logo in Detriot,  

    Michigan

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    Cars on display inside the GM headquarters

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    The GM logo on a pick-up truck

General Motors Corp filed for bankruptcy on Monday 1st June 2009,

forcing the 100-year-old iconic car major which has been one of the

most visible symbols of American capitalism and economic might into

uncharted waters of nationalisation or government ownership.

This is the third-largest bankruptcy filing in American history and the largest-ever US bankruptcy in the manufacturing arena.

US Chapter 11 bankruptcy protection gives GM time to restructure its finances while being protected from its creditors.

The

bankruptcy is likely to change GM drastically and 20,000 workers are

likely to lose their jobs. GM has 92,000 employees in the United States

and supports 500,000 retirees under the contract filed with the

workers' union.

So why has the world's

best known car company gone bankrupt? What led to the fall of the giant

and how will the developments unfolding in the US affect GM India? 

In a nutshell, very high

labour costs, rising competition from foreign car makers, a frightening

spike in fuel prices, freezing of credit, the collapse of the American

economy, drop in sales caused by lack of purchasing power among

Americans due to the recession, et cetera have formed a lethal

concoction leading to the bankruptcy of the iconic carmaker.

However, General Motors's problems run much deeper.Over the years, protesting

workers' unions at GM managed to get the company to agree to contracts

that provide lifetime benefits to the members. This excessive cost of

lifetime benefits pushed labour costs through the roof.

These

costs have now reached an unmanageable proportion and the automotive

giant just does not have enough money to either make these payments or

to keep the company afloat, given the decline in sales and plummeting

profits. Expansion, upgrade, new investments were totally out of the

question.

Reports suggest that GM is

paying more than $1,500 per car that is built as just benefits to

people who are not even working for the auto giant any more. An

interesting bit of statistics says that the cost of steel used in a car

made by GM is less than what it pays its retired union members in terms

of benefits. Added to this is the huge pay that GM workers draw even for low-level jobs at the company.The

company does not have much cash and even if it adds receivables to

this, it accounts payable and accrued expenses are many times higher

than that figure. Even adding the company's current assets

(inventories, equipment on lease, etc) to this, still leaves it way

behind it current liabilities.

The United States

government, mindful of the impending death of GM, gave it over $19

billion from taxpayer money to keep it alive. It also sacked its

legendary chief executive Rick Wagoner and decided to monitor the

company's restructuring itself.

However, that has not helped revive the fortunes of the world's second-largest car company, after Toyota.Once

it goes into bankruptcy, the US government will infuse yet another

tranche of about $30 billion to refinance and restructure GM.

The first signs of GM's

gargantuan financial troubles began to surface in early 2008. When by

mid-2008, the prices of fuel touched a historic high, there was a

stunning change in consumer behaviour with Americans deciding to keep

off big fuel-guzzling cars and SUVs in favour or smaller,

fuel-efficient vehicles.

The sudden rise in the price of oil,

the deepening recession and the falling sales led to Detroit's Big

Three - GM, Chrysler, and Ford Motor Co - almost throwing in the towel.

Car loans too were difficult

to come by as banks, already reeling under the world's greatest

financial crisis, decided to freeze credit. More and more people failed

to qualify for loans, leading to a huge drop in car sales. Companies

like GM found it almost impossible to raise funds or borrow from the

market to keep from going belly up.

A study conducted by the

car firms said that the historic spike in fuel prices was the

'500-pound gorilla' that almost single-handedly kayoed GM and other

carmakers.

By the end of the year, car giants were begging for

help and the then George W Bush-led US administration decided to extend

carmakers a lifeline and pumped in taxpayer money to keep the companies

from collapsing.

Reports say that the US

government may own 70 per cent stake in the restructured General

Motors, the ailing auto maker which is battling to avert a possible

bankruptcy.

Under the GM restructuring plan, the United

Automobile Workers union would hold up to 20 per cent through its

retiree health care fund, and bondholders and other parties will get

the remaining share. Shareholders would be virtually wiped out.

However, there are some

questions on whether the new US government aid help revive the

company's fortunes. There are a lot of uncertainties involved here too:

no one is quite sure when will the US economy start turning around and

when will consumer demand for new cars give GM any hope of coming out

this mess.

The sales of new cars have plummeted by as much as

40 per cent since early 2009 and even Toyota, the world's biggest car

maker, is suffering losses.

Amidst all this turmoil, General

Motors India has kept a brave face. The company feel that there is

little reason for it to panic as the Indian automobile market, even

during this slowdown, is still growing faster than in most other

economies.

An Economic Times report, quoting a GM India source,

said that the bankruptcy will not have any impact on Indian operations.

The bankruptcy proceedings are only for the reinvention of the US

operations of GM. In the US, bankruptcy or Chapter 11 is used to make a

brand stronger to suit the changing business environment. Therefore, it

will only make GM stronger, the newspaper said.

Yours Truly

Van McCoy, an American pop instrumental group had a hit, "Change with the times", which perhaps the hidebound GM honchos did not pay heed to, as they were busy acquiring new jets, getting fatter pay cheques, perks and whitest dressed waiters on call, to flaunt their stature.The staid  gas guzzlers rolled out of the assembly line endlessly, landing in showrooms and going to deserving homes, only to frequent gas stations for the regular fills.

Even the GM retirees never had it so good!

And the result- The Goliath is Government Motors now and not General Motors, as the press has proclaimed!

anjan_c20072009-06-01 15:12:57

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Anjan da, a similar topic regarding GM was started by me yesterday. Please posts the threads under that topic.

(Moderators: Please merge this thread with the existing topic GM-GENERAL MOTORS TO GOVT.MOTORS started by me).Thanks.

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GM lost touch with the ground realities, churned out vehicles that weren't right for the time, never thought of Fuel efficiency & developed gas guzzlers.

The tell tale signs are visible from its global network too. Just see the case in India, GM hardly has any single model doing good, since the days of Opel, it has hardly learn't. Again bringing in re-engineered Daewoo products, hardly helped matters.

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A few days ago GM has backtracked on its board decision to hive off Opel and Vauxhall

to Magna, the Canadian auto parts maker and the Russian bank Sberbank.

The duo viz. Magna-Sberbank were expected to axe many mainly German

autoworker jobs.

The U turn by GM gave a new hope to the auto workers who had expected

job cuts and plant closures. GM had said that it was willing to keep

Opel and Vauxhall, two very old brands but restructure them and

intending to restart from zero. Yesterday GM announced a job cut of

about 10,000 mostly in Opel, Germany and plant closures.It has said

that its plan is similar to that of Magna -Sberbank.

Thousands from the 25000 workers of GM, Germany's (Opel) operations

gathered outside the Ruesselsheim factory to protest against GM's

refusal to sell its European operations.

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A few days ago GM has backtracked on its board decision to hive off Opel and Vauxhall to Magna' date=' the Canadian auto parts maker and the Russian bank Sberbank. The duo viz. Magna-Sberbank were expected to axe many mainly German autoworker jobs.
The U turn by GM gave a new hope to the auto workers who had expected job cuts and plant closures. GM had said that it was willing to keep Opel and Vauxhall, two very old brands but restructure them and intending to restart from zero. Yesterday GM announced a job cut of about 10,000 mostly in Opel, Germany and plant closures.It has said that its plan is similar to that of Magna -Sberbank.
Thousands from the 25000 workers of GM, Germany's (Opel) operations gathered outside the Ruesselsheim factory to protest against GM's refusal to sell its European operations. [/quote']

Magna-Sberbank also had the plans to cut the jobs of 5000 in the opel.

Come to the GM to retain the Opel. I think it is wise decision. Bcoz GME is the very important for the product development & plat form. With out opel they cant do the business in Europe. Bocz american's work in GM only Opel & GMDAT will work for the global cars..

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