Errors Led to GM Bankruptcy

Published: 10th June 2009
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There is a lull in the feverish pitch of activities in the automotive world as General Motors filed for bankruptcy protection on June 1. General Motors tried to keep off from filing for bankruptcy which would lead to government control. It is not everyday that General Motors, which was the epitome of American capitalism and economic might was humbled by factors beyond its control.

Even as it filed for bankruptcy, General Motors created a record of sorts. It now has the title of being the third largest company to file for bankruptcy in the history of America and the largest bankruptcy in the core manufacturing sector. Luckily, for GM, the bankruptcy protection under Chapter 11 will give it time to restructure its finances and protect it from creditors. It has affected 92,000 workers directly employed by GM and 5 lakh retired employees.

Auto Analysts say that General Motors started loosing out on customers when it started the multi-branding strategy in 80's. The company also laid special thrust on manufacture of big passenger vehicles. Then the world changed drastically and GM was caught unawares. It was a lethal combination of high labour costs, rising competition from Asian car manufacturers, extremely high fuel prices, freezing of credit, economic meltdown, increased number of unsold cars. These were visible on the surface, but GM's problems ran deeper than a short economic downturn..

In over 100 years of its history, workers union have struck work and held protests demanding better lifetime benefits. As General Motors was reporting high profits, the company officials would often succumb and agreed to workers. Over the two decades, the cost of these benefits pushed labour costs through the roof. A prominent auto reports suggested that the company was paying US $ 1,500 per car that it built as benefits to people who no longer worked for them. Interestingly, the report also pointed out that the cost of steel needed to make the cars was less than the amount it paid to retired union members as benefits. Moreover, even the workers employed low level jobs drew huge salaries.

The company did not have much cash and even if it included receivables to this, its payables and expenses were many times higher than those figures. Even now the value of current assets put together, is lower than its liabilities. As these costs reached giant proportions, GM just did not have enough money. It had to choose to either make these payments or to keep the company afloat. To rub salt on raw wounds, new car sales declined and profits plummeted drastically. Further, expansion and new investments were postponed due to lack of funds.

The first signs of problems surfaced in early 2008. Fuel prices skyrocketed and consumers did a volte face on fuel guzzling cars and SUVs. Instead, they flocked to Asian car manufacturers like Honda Motors, Toyota and hybrid cars. The historic hike in fuel prices too knocked out any hope by GM and other US car manufacturers to sell their big cars.

When the global meltdown started in October 2008, American banks decided to freeze loans. More people failed to qualify for loans and car sales dropped. Moreover, banks refused to raise funds for General Motors. After June 1 bankruptcy protection plea, GM has got busy restructuring its house. It is speculated that the labour union the United Automobile Workers(UAW) would hold up 20 percent stake in the company through its retiree health care fund and the bond holder and other parties will get the remaining share of the company. Shareholders are likely to go empty handed. The government is expected to hold 70 percent of the stake in the government.

There are a lot of uncertainties involved and GM's hope of coming out of this mess rests on whether consumers want to buy their products, after the world has changed.

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