Yesterday I watched Fritz Henderson, GM’s new CEO, on “Meet the Press.” Nice guy who skirted the tough questions and dropped no bombshells. But he made some news when he said that while bankruptcy wasn’t inevitable, “it would only be prudent” to prepare for it.
Here’s the nub of the problem:
GM must shrink $27.5 billion in debt that bondholders have been reluctant to exchange for equity, and $20.4 billion in obligations to a union-run health-care fund [VEBA]. Henderson also has said GM needs to cut more deeply than its planned 22 percent reduction in so-called structural costs in North America to $26.3 billion from 2007’s level.
That is a helluva lot of money, and the company has yet to present a viable business model for how they will operate in a new, restructured mode. Like Lehman Brothers, GM “is woven into a complex international web of suppliers and subsidiaries.”
From what I read, the bondholders are holding back, thinking they might get a better shake in bankruptcy (which is doubtful), and the union is at the table, reluctantly making more concessions. Even if the balance sheet gets cleaned up, what kind of restructuring will emerge?
Undoubtedly, we’ll see fewer brands—possibly only Cadillac and Chevrolet—fewer dealers (as tgriffith mentioned), a leaner, more focused supply chain, and lots of former employees spending more time in Detroit bars.
We’ll also see, perhaps, pressure on Ford to lean down to meet its new GM competition. It isn’t enough to sell off assets, as Ford has done. Remaking the auto industry in a new mode is not just a matter of balance sheets; it is giving birth to a new order of cars that people will want and confidently buy.
This means getting over most of the negative perceptions that have been created about GM over the years. It means honoring warranties (thus the Obama team’s proposal to backstop them). It also means, as Henderson indicated, a step-by-step approach to redeveloping public confidence in the brand(s), which can be achieved only by making desirable, quality cars.
All this is a very tall order, and now the government’s entry as majority owner further complicates matters…. Think I’ll go out for a drink.
Assuming that a “controlled” bankruptcy will occur, do you think a new GM can emerge?
—jgoods
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