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.
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.