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GM seeks refuge in bankruptcy filing

GM seeks refuge in bankruptcy filing
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First Published: Tue, Jun 02 2009. 12 40 AM IST

High expectations: GM president and CEO Fritz Henderson. Paul Sancya / AP
High expectations: GM president and CEO Fritz Henderson. Paul Sancya / AP
Updated: Tue, Jun 02 2009. 12 40 AM IST
Detroit: General Motors Corp. (GM) filed for Chapter 11 bankruptcy early on Monday, marking the humbling of an American icon that once dominated the global car industry and setting up a high-stakes gamble for US taxpayers.
The bankruptcy filing, made in the US bankruptcy court in Manhattan, marks the climax of a lengthy debate over the auto maker’s future after it sought a bailout from the US government in December to stay alive. In the end, GM couldn’t complete its restructuring out of court and filed for bankruptcy-court protection to get billions more in aid from US taxpayers.
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The question now facing 56,000 auto workers, 3,600 GM dealers and the Obama administration: Will it work?
The US government has agreed to provide GM with another $30 billion (Rs1.4 trillion) in aid, in addition to the $20 billion the auto maker has already borrowed, to see it through its restructuring and exit from bankruptcy protection. In return, the government will get a controlling stake in the company. The Canadian and Ontario governments are putting in $9.5 billion for a 12.5% stake.
The reorganization faces myriad risks, ranging from legal challenges to the uncertainty of when consumer demand for new cars will rebound. In becoming GM’s new owner, the government is also entering a largely unexplored terrain filled with political minefields, notably the possibility of meddling by Congress in the company’s daily operations and business plans.
In bankruptcy, the auto maker will split apart into two companies: a leaner new GM and a so-called old GM, which will include the pieces that will be wound down. GM intends to accomplish the split through a Section 363 sale, which would transfer the new GM assets to an entity owned by the US and Canadian governments, the United Auto Workers (UAW) union and the company’s unsecured creditors.
High expectations: GM president and CEO Fritz Henderson. Paul Sancya / AP
Even if a new GM emerges swiftly from bankruptcy, the administration will face a thicket of challenges, including closing nearly a dozen factories and shedding the Pontiac, Saturn, Saab and Hummer brands. Shepherding these unwanted parts of GM—the so-called old GM—through liquidation in court could take years, with potential extra costs to taxpayers if the process bogs down.
GM’s restructuring has been carefully planned by the company itself and the treasury department, but it faces some uncertainty now that its fate is in the hands of a bankruptcy judge. The judge chosen to handle the case will have a major impact on the outcome of the case, especially if dissident bondholders mount a legal challenge to the restructuring. There’s also the risk that consumers will be scared off by the company’s Chapter 11 filing, causing sales to fall even further.
And unknown is how the cost of restructuring both GM and Chrysler Llc. would have compared with the cost of letting both companies fail in terms of lost wages, disruptions among car parts makers and the broader economic fallout. Chrysler, which was expected to emerge from bankruptcy later on Monday, will be controlled by Italy’s Fiat Automobiles SpA under its own risky revamping.
Bankruptcy should allow GM to pull off one of the most expedient downsizings in the industry’s 120-year history. Long hampered by laws, union strife and management practices that kept it from fast action to fix problems, GM plans to eliminate almost all of its debt, halve its US brands, shutter 2,600 dealers and rewrite labour contracts almost overnight.
Emerging sometime this summer would be a GM with a cleaner balance sheet and slimmer operations than the company that has posted deep losses since 2005. GM has burned through $33.6 billion in cash in the past four years. Under its restructuring plan, GM will shed nearly $79 billion in debt, gain workforce savings worth billions of dollars a year, close unneeded facilities and reduce its dealer network by 40%.
The Barack Obama administration, for its part, has navigated the GM rescue so far with notable speed, clearing away many of the biggest obstacles in just months with less drama than many expected. In 6-18 months, GM could be a publicly traded company again, administration officials said.
Over the weekend, owners of a majority of $27 billion in GM unsecured bonds agreed to a sweetened offer to trade their investment for stock. Days earlier, UAW signed off on a range of concessions.
GM at the last minute also found buyers for some unwanted subsidiaries, including German-based Opel, which is being acquired by a consortium led by Canadian auto parts supplier Magna International Inc., and the Hummer brand, whose buyer remained undisclosed.
Long-term success for the company depends on a critical question: When will consumer demand for new cars rebound, and with what force? New-vehicle sales in the US have dropped nearly 40% since January, to an annual rate of fewer than 9.5 million a year. At that level, even Toyota Motor Corp., the world’s biggest car maker, is losing money.
Fraught future: General Motors vehicles at an auto dealership in Greenville, North Carolina, US. Jim R. Bounds / Bloomberg
Under the restructuring plan, the surviving new GM would break even when the rate of all new vehicle sales in the US reaches 10 million a year. In the view of many analysts, economic recovery should unleash pent-up demand, pushing US sales far past GM’s break-even point, though probably not within reach of the historic peak of nearly 17 million sales, back in 2000.
Yet, some worry the new GM will emerge under the same management as its predecessor, minus long-time chief executive Rick Wagoner. After pushing out Wagoner in March, the Obama car task force gave the top job at GM to Frederick “Fritz” Henderson, a 25-year veteran whose father worked at the company.
In an interview on Thursday, Henderson said he understands that federal officials want results. “They’re expecting that we’ll get the job done,” he said.
GM won’t prosper without halting the lengthy slide in its US market share, to 22% in 2008 from 45% in 1980. It faces the old perception of poor quality that turned swaths of the American market towards foreign-brand models.
“I won’t buy another GM,” said Dennis Brown, a banker in Cypress, California, whose 1980s-vintage Pontiac Fiero and Chevrolet Chevette suffered a litany of mechanical problems. Current GM models have fared better in quality rankings.
Beyond quality, trendsetters typically shun Detroit-brand cars, a problem that is especially prevalent among highly educated buyers, who also tend to purchase higher-margin vehicles. Car buyers who are college graduates account for 70% of European-brand car sales in the US and 55% of Asian brands—but only 39% of Detroit-brand car sales, according to JD Power and Associates.
GM hopes to counter its image as a maker of gas guzzlers with the 2010 introduction of the electric-powered ChevroletVolt. Administration officials have played down the market potential of the Volt because of its expected $40,000 price tag, compared with less than $25,000 for the Toyota Prius, a hybrid gas-electric. Even at $40,000, the Volt will struggle to break even because of the cost of its technology.
GM’s new deal with UAW, meantime, promises to deliver considerable cash savings, and has been billed as capable of putting GM’s labour costs on a level playing field with key rivals such as Toyota and Honda Motor Co. GM cut hourly costs, such as overtime provisions, supplemental unemployment and entry-level pay rates, by at least $1.5 billion annually.
But the car maker won’t be entirely out of the woods. It faces heavy retiree-related costs that will cut into profits on every car and truck it builds.
Because of the way the UAW healthcare agreement is set up, GM will still be sending about $600 million to the union annually in the form of preferred stock dividends. Even if GM builds two million vehicles a year in the US, a stretch in the current 10-million annual market, it will spend $300 in retiree healthcare costs per vehicle it builds in the US.
GM faces another challenge related to pension obligations. Once flush thanks to strong investments, the auto maker’s pension funds, covering nearly 500,000 Americans, have been drained by the decline in the stock market and by a move by the company to increase pension payments to offset falling healthcare benefits and entice older workers to retire early.
As of 31 December, GM estimated its US pension funds were underfunded by $12-13 billion, and would need “significant contributions” as early as 2013.
Marie Beaudette, Sharon Terlep and Eric Morath contributed to this story.
wsj@livemint.com
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First Published: Tue, Jun 02 2009. 12 40 AM IST
More Topics: GM | General Motors | Auto | Barack Obama | US |