The Fate of Empires and Search For Survival (Part Five)

Daniel O’Callaghan’s digest of Bob Lutz’s 2011 book, ‘Car Guys vs Bean Counters’. In this concluding part, GM hits the buffers and goes cap in hand to the US Government.

(c) leblogauto

At the start of 2008, the outlook appeared quite promising for GM. Its more recent models had been well received and the company had won North American Car of the Year for 2007 and 2008 with the Saturn Aura and Chevrolet Malibu. The company had agreed with the UAW a new wage deal and a plan to move the worker healthcare liabilities off the GM balance sheet and into a new fund that GM would set up, but would be controlled by the union. It was envisaged that these deals would strengthen the heavily indebted balance sheet and improve the company’s competitive position against the foreign auto companies.

During the first quarter of 2008, the US sub-prime mortgage market collapsed. Heavily indebted homeowners, with little or no income with which to service their mortgages, began handing back the keys and walking away. This was to lead to what became known as the Global Financial Crisis, the greatest shock to the economic system since the 1929 Wall Street Crash.

GM, through a subsidiary of its GMAC financing arm called ResCap, was a substantial player in the huge sub-prime mortgage market. This had proved a valuable source of additional revenue for the company, propping up GM’s vehicle manufacturing core business over a number of years. Suddenly, ResCap was posting alarming losses and forecasting much worse to come from its enormous exposure to the mortgage market.

Fuel prices also rose sharply, peaking at double the pre-crisis level. GM, having relied for so long on the sale of full-size SUVs and trucks for the bulk of its automotive profits, was uniquely exposed. Second-hand values of these vehicles collapsed and new sales evaporated with consumer confidence. GM did, of course, offer smaller and more economical vehicles, but profit margins on these were very thin by comparison.

In the autumn of 2008, it became clear that GM, as well as Ford and Chrysler, were running out of money. The banking industry, in a state of turmoil, had no appetite to lend, so the three companies approached the US government. The Bush administration was in its final months, awaiting Obama’s inauguration, and had no appetite for organising a rescue. The Republicans wanted the incoming Democrat administration to pick up the bill, and the blame, for the inevitable bailout.

The three CEOs were hauled before congress and humiliated by grandstanding congressmen for their alleged profligacy and lack of foresight. Even their mode of transport to Washington for the hearings, by private jet, was used as a stick to beat them.

Prior to the crisis, Ford, either by luck or with extraordinary foresight, had raised a huge cash pile of over $30bn by mortgaging everything, including the rights to the Blue Oval. Consequently, the company managed to survive without a government bailout. GM had only $15Bn in cash and was burning through this at a rate of $5Bn per quarter.

Rick Wagoner, GM’s CEO, was again humiliated at a second round of hearings. Without Lutz’s prior knowledge and to his disgust, GM published a series of advertisements admitting its failed product strategy and promising to do better. This provoked Lutz to announce his retirement, a decision he later reversed when he saw the plans to rescue the company.

Despite, or perhaps because of its humiliation and admission of failure, GM received funds in various forms to allow it to continue trading into the spring of 2009. President Obama set up the Automotive Task Force. This group investigated GM thoroughly and formed a positive opinion of its design and manufacturing capabilities but criticised its muddled marketing and overlapping multiple brands as well as its finance, accounting and, in particular, its hidebound and bloated general management.

A Viability Plan for the survival and future shape of the company was developed. Saturn, Pontiac, Hummer and Saab would die. GM would focus on Chevrolet, Buick, GMC and Cadillac. The dealer network would be cut back drastically. Rick Wagoner, accepting corporate responsibility for GM’s collapse, was forced to resign.

The economy continued to struggle through the first half of 2009. GM was again running low on cash and it became clear that a Chapter 11 bankruptcy filing, a legal mechanism designed to protect a company from being wound up by its creditors while it was attempting to reorganise its finances, was the only viable option. GM filed for Chapter 11 on 1 June 2009, wiping out its existing shareholders and a large proportion of the value of its bonds (debt).

Opel/Vauxhall, in Lutz’s view hugely disadvantaged by high German labour costs and the intransigence of the IG Metall German auto union, was put on the block. An agreement was reached to sell to Magna Corporation, which wanted to move from being the world’s leading parts supplier to a vehicle manufacturer. This deal was later cancelled by the new, post-Chapter 11 GM board appointed by its major shareholders, the US and Canadian Governments and the UAW.

There was a huge cull of legions of management and administrative staff in an effort to reduce the company’s cost base. GM shed 27,000 employees before the end of 2009. The UAW agreed labour reforms that would put GM broadly on equal terms with foreign-owned US manufacturing plants.

GM emerged from bankruptcy after just six weeks, recapitalised with over $40bn of new equity from both governments. This caused outrage amongst right-wing politicians, directed at what they now called Government Motors. Sales slowly but steadily recovered, and the company began a return to profit. Crucially, these profits came from its vehicle making operations and the company was no longer reliant on GMAC or ResCap to support a loss-making core business.

Bob Lutz retired from GM on 1 May 2010 but subsequently worked as a consultant to the company.

Author: Daniel O'Callaghan

Shut-line obsessive...Hates rudeness, loves biscuits.

12 thoughts on “The Fate of Empires and Search For Survival (Part Five)”

  1. Dear Daniel, thanks for this deep and reasoned view of such an interesting book.
    While reading your text, it has come to my mind my experience with car guys and bean counters while working for German, Korean, American and Japanese car companies here in Spain (35 years so far!)
    As seen from inside the company, it goes beyond car guys vs. bean counters, because in the day by day, the top boss does not only decide between SUVs and sport cars, but about salaries, dress code, promotions, and even the corporate Christmas party!
    My favourite one amongst all the ones I’ve met is Ben Heyderich, who was born close to Frankfort in 1933, son of a Luftwaffe general who died at Stalingrad in 1942. Due to the postwar situation in Germany, he went to the USA and later to Canada, where he became (in this order) wood cutter, lawyer and acrobatic pilot at the Royal Canadian Air Force.
    During an acrobatic air show in Pensacola (Florida, USA) he became friend to a US Marine Corps pilot named Bob Lutz.
    Later he was sent to a Canadian military base in Germany, but an accident while landing his plane in 1960 took him to the hospital for six months. Then, he drove south his Opel Olympia cabrio to the sunny Spain, to end his health recovery, got in touch with some old Army friends sent to the recently opened US bases, and started a new role as their”provider of vehicles”. Keep in mind that vehicle importation was nearly forbidden in Spain till 1979.
    And from then on he became Spanish importer of BMW, Lamborghini, Alfa Romeo, Lotus, Porsche, VW, Saab, Kia, Kawasaki motorcycles, …
    Why did he get the rights to become Spanish importer of BMW? Because then Bob Lutz was one of the BMW top bosses. When Ford opened his factory at Valencia, why did Ben was granted a Ford Dealer downtown Madrid? Because the President of Ford Germany was Bob Lutz.
    Sadly, Ben Heyderich passed away during an air show in Lithuania, aged 73.

    1. Hi Luis, thanks for your kind words. I’m glad you enjoyed this series. It was fascinating to research and fact-check around Lutz’s book. He’ll be in my gunsights again, in a piece on the history of Saab under GM ownership, which will be coming to DTW in the near future.

      Thank you also for sharing the extraordinary life story of your friend, Ben Heyderich. What an amazing tale! He must have been a very smart and talented individual.

      I have personal experience of working for large US corporations for most of my career, in my case it was the investment banking industry, but exactly the same stifling rules of conformity applied. You were either “one of us” or not. The highly talented “nots” still achieved, but the preferment of less talented individuals whose faces fitted was still blatant. It was fun to watch when such individuals got promoted beyond the limits of their abilities, as happens on a number of occasions. GM was clearly damaged by such a culture.

  2. Many commentators are speculating that the 2008 crash will seem like a minor difficulty compared to the current crisis sweeping the globe.

    If that is the case, the consequences are almost imaginable. Private and corporate car sales could collapse and weaker companies come under severe pressure once again.

    GM could benefit from a protectionist US administration keen to support its blue collar voting base, but hard decisions will need to be made over the coming months.

    Corvette and Cadillac aside, is there anything GM does that is not already covered by its traditional Detroit rivals or newer EV start ups?

    1. Reading between the lines, the only bit of GM worth saving is Corvette and the trucks business. Cadillac is the walking dead and there´s nothing in the Chevrolet and Buick range that is not done better by Toyota.

  3. I have just found a Toyota that stands in for Buick, the Avalon, with its brown interior and odd styling. It´s up against the Chevrolet Impala and Buick Regal Avenir. Okay, maybe I´d prefer the Buick but most people might not. The Avalon is pleasantly nuts inside.

    1. Hi Richard. The Avalon interior is indeed pleasantly nuts:

      Lots of nice tan leather(ette?) And an interesting semi-integration of the sat-nav screen.

      As it’s before the 9.00pm watershed, I thought it best not to post a photo of the exterior, not wishing to frighten those of a nervous disposition. The front grille is large enough to consume galaxies in the manner of a Black Hole.

    2. Daniel: thanks for posting the interior. The centre console is a very clever design indeed. I have not seen that done. Tesla have unimaginatively propped an iPad on the dash. Other companies have murdered the archicture to jam the screen into the other bits. This one looks like a really good compromise. I think I like this car! You don´t have to look at the exterior. Park the car nose in to the wall, look up as you approach.. that sort of thing will help avoid it most of the time.

    3. The huge grille almost distracts one from the ugly and uneven shut-line above it.

      Toyota used to be so good on shut-lines. What’s gone wrong?

    4. Wow. That sliver of body coloured material above the grille is an oddity. It has to be there for legal/technical reasons. You´d never draw that shutline, would you? There are two rat holes at the ends too. If legal/technical reasons demanded that line I´d ask my staff to rethink the proposal more fundamentally. The laws of physics do not demand that overall-shape of grille; there must be a “huge monster grille” concept that avoids those awful panel gaps.

    5. Seen from other perspectives and without a wide angle lens the Avalon doesn’t look any worse than any other of the current usual monstrosities. Instead of a dozen separate grilles they used a single one which necessarily is huge.

  4. I love Richard’s analyses. Perks me right up.

    It’s worth pointing out the obvious on both the Avalon and Camry – there are two separate actual grille designs depending on which of the two model lines you’re speaking of. Daniel’s pic shows one, Dave’s the other, less alarming one. Both sin in the looks department.

    Camry and Avalon are the same basic chassis under the skin, and the front ends are one piece plastic bumper caps except for the grilles. Daniel’s is the $37.96 special bulk purchase from a dustbin manufacturer. Dave’s is the $50 special from a practioner of plastic art, ahem. The chrome at the top of the bumper cap itself is a mere added silverized capping, not a shut line – soft bumper caps are not all that dimensionally stable in my experience, especially with temperature. They’re structurally held fairly tightly where they meet the sheet metal at the sides and allowed to bow out elsewhere. Looks as though someone at Toyota got the dimensional specs wrong, because every picture even on Toyota’s website shows the same flaw at the actual bonnet shutline, down at each end.

    The seats shown are semi-aniline leather on the “Limited”. That’s a $50K car in Canada and they’re still trying to flog 2019 units. Or for $5K less you can get the XSE with pleather. Daniel shows the XSE exterior, but the Limited’s interior.

    http://www.fowfurniture.com/blog/tips-and-guides/semi-aniline-vs-full-aniline-leathers/

    As for GM’s US range, there aren’t any cars worthy of much, because they simply don’t manufacture them. Impala and Lacrosse are as done as burnt toast; the last Impala was assembled about a month ago, can’t remember when a real Regal was last made, it was years ago; the latest Regal is just the gussied up Chevrolet Malibu made by Opel/PSA as the Insignia, and is being cancelled, quelle surprise. The Buick LaCrosse which had an updated chassis compared to the Impala from the 2017 model year on and a new V6, died last year and is only made in China. Cadillac has the CT4, 5 and 6 saloons which are as popular as athlete’s foot.

    GM is all SUVs and pickup trucks besides Malibu, Spark, those Cadillacs and Corvette and they flog a million a year of the latter. There are, off the top of my head, 9 distinct and different SUVs/crossovers available. I can’t be bothered trolling the websites to count them up.

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