The Case of General Motors

Transcription

1 The Case of General Motors Jiří Počarovský JEM 100 Summer semester 2012 Word count:

2 Content: 01 Historical Circumstances 02 Reasons of Failure 03 Bankruptcy, IPO and Recent Development 04 Conclusion 01 Historical Circumstances General Motors Company (commonly known as GM) is one of the biggest companies of current automotive industry. GM was founded by William Durand in 1908 (General Motors, 2012a), so it is a company with history longer than 100 years, which nowadays employs more than people in 158 facilities within all the continents except Antarctica. The head office is located in Renaissance Center in Detroit, Michigan, for more details about GM see General Motors (2012b). On June 1, 2009 General Motors Corporation (old GM) announced its bankruptcy under Chapter 11 and was subsequently reorganised into its descendant, officially named as General Motors Company (new GM). At this time, the portfolio of GM is not as wide as it was within its history, it must have been reduced after the bankruptcy. There are 6 core brands: Buick, Cadillac, GMC, Chevrolet, Opel and Vauxhall, some other brands were recently sold (as Swedish Saab in) or discontinued (as Oldsmobile, Pontiac or Hummer) during the process of restructuring and cutting off. 2

3 02 Reasons of Failure There are several reasons why General Motors went bankrupt in Some of them were caused by improper corporate governance rules set by GM, but the role of external influences that affected GM s production after 2000 must be taken into account as well. First of all it was the corporate culture as mentioned by Canis et al. (2010) or by Monks & Minow (2008):...the company was managed like an institution. It was highly risk-averse, chronically slow to change, endlessly bureaucratic, and contemptuous of competition. General Motors produced inefficient cars (in terms of requirements on consumption) that did not match to the demand of customers after year This was caused partly by the high self confidence of the top management 1 which was too ensured that the position of GM is everlasting (at least on the U.S. market). This assumption was proven as incorrect. The market position of General Motors before 2009 was dominant in many countries 2 (The New York Times, 2009), but after 2000 GM s vehicle production was stagnating globally. Together with the fact that the automotive market was stably growing it implies that General Motors was losing its positions on all important markets relatively to other automakers. In U.S., traditionally known as the core market, GM was selling less and less cars even since 2000 (The New York Times, 2009) and lost one third of its position, covering 28,1% share in 2000 and only 19,8% in 2009 (figures for cars and light trucks sales in U.S., Canis et al. 2010). From today s point of view it could be surprising that GM still holds its leading position in US market even after its bankruptcy (see Graph 1). 1 Famous is the Fourteenth Floor, in which the top management was placed was separated from the rest of the building by double glass doors, having private executive elevator, executive heated garages and private executive dining rooms (Monks & Minow (2008). 2 Five most important markets are US, China, Brazil, United Kingdom and Canada. 3

4 Graph 1: U.S. market shares, passenger cars, trucks and crossovers Source: United States Securities and Exchange Commission Second argument touches the element of labour costs and connected expenses as health care insurance and pension funds, motivation programmes and other benefits paid to employees. American employees of GM are joined under UAW (United Auto Workers), very strong labor union, which negotiated in the past for many of the benefits. As (Lucas & Furdek 2011) emphasize, the extent of these costs was unsustainable in long term, the estimated loss during years caused by lay of motivation could have reached $50 billion (which is more than the profit of GM during 90 s). A great example of the costly heavy-handedness of production process is what mentioned Pfeffer & others (1998); the average time it took to GM to assemble a car was 46 hours, Ford needed 38 hours, while Toyota only 29 hours. The extra costs connected with health and pension insurance added to the cost of every car made in U.S. are quantified to be around $1500 (Canis et al. 2010). In this light the backwardness of GM was just a natural development. GM was unable to rival neither the quality nor the efficiency of other market players, first of all Japanese Toyota. Other reasons of GM s failure are of an external character. One of them is connected with oil prices, in 2011 the price of gasoline was triple as high as it was in 2000 (1,25$ vs. 3,713$ per gallon of regular gasoline including tax, see dshort.com, 2009) and cars made by GM are traditionally not of those with low gasoline 4

5 consumption. This could be highlighted as another example of rigidity of GM and unwillingness to accept new trends and to respond to market needs. Furthermore the macroeconomic development after the crisis in 2008 squeezed the demand for new cars, so that not only GM was facing troubles with lowering sales. It was just a question of time when all of the above mentioned reasons will negatively appear in financial statements of GM. Annual Report about GM (United States Securities and Exchange Commission, 2012) provides a detailed look at the recent development since Profit and loss statement tells us that the total sales were lowering each year until the bankruptcy in 2009 (see Graph 2). Please note that GM was in troubles even before the crisis came, so lowering sales were not a consequence of it. What more, GM was not profitable since year 2004 (msn.com, 2011) and the period of continuing losses caused that GM was running at the end of 2008 out of cash (cnn.com, 2012). The only possibility how to solve this was declaring bankruptcy and bailout by U.S. Government via the TARP programme. A Too Big Too Fail principle was hugely employed in this contract. Graph 2: Total sales and Net income Source: United States Securities and Exchange Commission 5

6 03 Bankruptcy, IPO and Recent Development The day when the original General Motors Corporation finished its history came in On June 1, 2009 GM filed Chapter 11, declaring a debt of $172 bil. while having assets only of $82 bil. (Kerr 2011). Bankruptcy of GM was the fourth largest in U.S. history, following Lehman Brothers Holdings Inc., Washington Mutual and WorldCom Inc. measured by total assets, and the largest one of non-financial company (for more details see cnn.com, 2009). The formal process required restructuring of the company and protection from creditors. U.S. Government under Obama s presidency agreed on providing financial help, which in the end reached $50 bil. (Kerr 2011). The process of restructuring took only 39 days and on July 10, 2009 the final sale was closed (Brubaker & Tabb 2010). From today s point of view this legal action could be assessed as successful, at least according to the fact, that GM is (a) producing cars, (b) making a profit again and (c) trying to get rid of the features that (at least partly) caused its bankruptcy. A natural course of events required new General Motors Company to be relisted on stock exchange. This happened on November 18, 2010 when the initial public offering of new GM was made. Shares of GM were newly listed in New York and in Toronto. This IPO was the biggest in U.S. history and is considered to be successful, at least due to the fact that the price of shares was set at the top of the pricing range at $33 per share (Reuters, 2010). Major shareholders of new GM are U.S. and Canadian governments, and the UAW Retiree Medical Benefit Trust (General Motors, 2012c). Since the IPO, GM stocks lost approximately 20%, being nowadays traded around $26 per share, see Graph 3. 6

7 Graph 3: GM stock price, Source: An interesting issue discussed is that the U.S. government is now playing a double role in the relationship to GM - as a shareholder and as a main regulator, what can be obviously specified as conflict of interests: As GM is known for making large, fuel-inefficient vehicles, this situation could become problematic if the government forces GM either through regulations or by simply directly telling it to do so to manufacture cars that the government, and not GM, wants to manufacture (Kerr 2011). This is probably the reason why GM is sometimes named as Governmental Motors, not General Motors. Obama s Administration declared that the equity will be not held longer than necessary and as a common shareholder 3 only common governance issues (as establishing the board) will be solved (Canis et al. 2010). This happened immediately during the process of restructuring; 4 members of the board out of 11 were named by U.S. government 4. A Saab case, when GM vetoed selling the brand and all connected licences and technologies to Chinese counterpart should be also mentioned as another example of intervention of U.S. government. The board decided not to finish the deal although it implied Saab s bankruptcy (see e.g. theweek.com, 2011). After the bankruptcy of GM not only members of board have been replaced. More important for GM s future development was to reassess the approach to 3 U.S.Government is with 60% ownership share (Kerr 2011) apparently not a common shareholder. 4 Furthermore 1 director was nameb by Canadian government (holding 12% of shares) and 1 by UEW (17,5%), (Kerr 2011). 7

8 corporate governance. Aims that are declared by General Motors Company itself (see e.g. General Motors, 2012c) are to produce environmental more friendly cars (this is partly being completed by supplying Chevrolet Volt which uses power from the grid) and more fuel efficient cars and to reduce labour costs (in terms of having competitive labour agreements). During the process of reorganisation whole company was made leaner and smaller; employment was decreased from U.S. employees in 2008 to , health insurance costs were transferred to UAW, 13 out of 47 U.S. plants should have been closed by the end of 2010 (Canis et al. 2010), and as it was mentioned the portfolio was reduced to 6 core brands. 04 Conclusion We will see if the on-going procedures will be sufficient to get back the lost positions of General Motors Company. What we know is that the process of restructuring is not finished yet, but by now it can be labelled as successful, most important steps leading to eliminating inefficiencies were at least launched. Questionable is the position of U.S. government, which should fulfil its declaration and divest itself GM s shares as soon as possible. 8

9 Sources: Brubaker, R.E. & Tabb, C., Bankruptcy Reorganizations and the Troubling Legacy of Crysler and GM. University of Illinois Legal Working Paper Series, s.109. Canis, B., Webel, B. & Shorter, G., General Motors Initial Public Offering: Review of Issues and Implications for TARP. Kerr, J.E., The Financial Meltdown of 2008 and the Government s Intervention: Much Needed Relief or Major Erosion of American Corporate Law? The Continuing Story of Bank of America, Citigroup, and General Motors. St. John s L. Rev., 85, s Lucas, J.J. & Furdek, J.M., The Labor Agreements Between UAW And The Big Three Automakers-Good Economics Or Bad Economics? Journal of Business & Economics Research (JBER), 7(1). Monks, R.A.G. & Minow N., Corporate Governance. John Wiley and Sons, Pfeffer, J. & others, Six dangerous myths about pay. Harvard business review, 76, s Online sources: Cnn.com. GM posts record profit 2 years after bankruptcy [online]. 2012, February 16 [cit ]. Access from: < Cnn.com. The 10 largest U.S. bankruptcies bankruptcy [online] [cit ]. Access from: < es.fortune/4.html>. Dshort.com. Weekly U.S. Retail Gasoline Prices Since 2000 [online]. 2009, June 4 [cit ]. Access from: < CPI.html?gasoline-crude-since-2000>. General Motors. Company: History & Heritage, Creation [online]. 2012a [cit ]. Access from: < 9

10 General Motors. GM: Our Company [online]. 2012b [cit ]. Access from: < General Motors. Company: History & Heritage, rebirth [online]. 2012c [cit ]. Access from: < Msn.com. GM reports highest quarterly profit in over a decade [online]. 2011, May 5 [cit ]. Access from: < Reuters. GM IPO raises $20.1 billion [online]. 2010, 17 November [cit ]. Access from: < The New York Times. Going Global [online]. 2009, June 4 [cit ]. Access from: < ready.html>. TheWeek.co.uk. Saab files for bankruptcy as GM vetoes China sale. [online] December 19 [cit ]. Access: < United States Securities and Exchange Commission. Annual Report about GM [online] [cit ]. Access from: < 1110k.htm>. 10