Bankruptcy puts GM at rock bottom
“For years I thought what was good for our country was good for General Motors and vice versa. The difference did not exist. Our company is too big. It goes with the welfare of the country.”GM President Charles E. Wilson, 1953
More than a half century later, the auto industry certainly has turned upside-down.
The final flip will come on Monday, when GM is expected to file for bankruptcy protection.
GM has come full-circle from the days of “Engine” Charlie Wilson. No longer is it a matter of what’s good for GM is good for the nation. With the U. S. Treasury poised to own a 72.5 percent stake in a reorganized GM, mainly because no private lenders are willing to finance such a mammoth restructuring in these tight-money times, what’s good for GM now is what the federal government says is good for GM.
It’s also GM’s best chance to finally whip itself into shape by slashing labor costs, shedding uncompetitive brands, paring its dealer network and easing its debt burden.
“They have a new opportunity now,” says Arthur Wheaton, the director of labor studies at Cornell University’s School of Industrial and Labor Relations in Buffalo. “This is a good chance for them.”
GM’s been trying to right itself for the better part of two decades, but it’s only managed to take a few baby steps in that direction, even as its market share shriveled and its losses piled up. Last week, with the threat of bankruptcy looming, GM’s unions and bondholders agreed to last-minute deals that included further concessions, rather than risk an even worse fate at the hands of a bankruptcy judge.
Through it all, GM now is a shadow of what it once was. The company, which had 618,000 U. S. employees 30 years ago, has slashed its American work force by 85 percent to just 88,000.
The decline is apparent at its engine plant in the Town of Tonawanda. The plant, which has survived previous rounds of closings, now employs about 1,140 people, with about a third of its roughly 1,000 union workers currently on layoff. As recently as late 2005, the engine plant had 2,500 unionized workers.
And more cuts are coming. GM is expected to identify 14 additional plants on Monday that it plans to close. Local analysts are generally confident that the Tonawanda Engine Plant will survive because of its relatively strong productivity levels.
Behind it all, of course, is GM’s failure over the decades to bring its costs under control—until now. United Auto Workers union members last week approved a new labor deal that gives the UAW a 17.5 percent stake in GM that could grow to 20 percent. But the deal also freezes wages, ends bonuses and bars a strike through 2015.
Part of the fault also lies with GM’s management, which agreed to contracts with the UAW that bought labor peace, but at a cost that restricted management’s ability to adjust its work force to market conditions. The jobs bank program for idled workers and provisions that allowed UAW workers to collect up to 95 percent of their pay while on layoff deprived the company of the flexibility other firms have when times get tough.
Even GM’s bondholders decided to go along at the last minute, with many agreeing to swap their debt for a 10 percent stake in the new company, plus warrants that could increase that stake to 25 percent if GM hits certain performance targets.
By bringing bondholders on board, analysts believe GM could be poised to emerge from bankruptcy quickly, possibly within two to three months. A long bankruptcy could scare away car buyers, while eliminating dealers will make it harder for consumers to play one Chevy dealer off against another 15 minutes down the road, Wheaton says.
It all means huge changes for GM. But that’s exactly what it needs.
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