GM Deathwatch Continues
The news from GM is either grim or encouraging depending upon your point of view regarding the efficacy of bankruptcy. If you till cling to the vision of GM’s importance and value to the overall US economy then its impending demise and re-emergence as a much diminished business will be grim indeed. If you are like me, however, and view GM as a dinosaur or a mere illusion of a going concern, then the prospect of cleaning it up and saving what can be salvaged can only bring a sigh of relief. Enough already: this is a dead company. Years of folly, bad design, declining engineering, and weak management have reduced it to a sham.
There was a time when GM stood both as a model of US manufacturing and as an exemplar of blue collar wage potential. Largely insulated from world conditions it built a business model around relatively high wages and, for the times, lavish benefits. Coupled with a massive domestic market that provided enormous scale advantages, GM became iconic as a symbol of American post World War II economic dominance.
But the model was deeply flawed. When confronted by lower cost competition, less rigid labor practices, more flexible production methods, and designs more appealing to a global market rather than a uniquely American one it was exposed suddenly as a blundering and inept business. We are well rid of it.
The demise of GM says as much about the cost burdens of the US health care system as it does about the ineffectiveness of its basic post-war manufacturing model.
I find it ironic that amongst all the factors contributing to GM’s demise its health care burden is one of the most urgent. It has become a much quoted quip to say that GM is a health care company that happens to make cars. This irony is especially delicious for those of us who have argued for a universal health care system in the US to replace its current extraordinarily fragmented and expensive semi-private system. It was GM that worked tirelessly in the aftermath of World War II to prevent the establishment of a more consolidated health care system. It was GM that devised the notion that health care was a ‘benefit’ to be supplied by employers, rather than a ‘basic service’ supplied by the community itself. GM’s original intent was to stymie the UAW by taking on the cost of the health care benefits and preventing employees being able to carry those benefits from to other employers. The objective was to build loyalty in its workforce, and to penalize those who switched to other car makers.
Build loyalty it did. In spades. Now it is sinking under the weight of all those early retirees who add no value and make no cars, but must be paid for. All those loyal retirees are deadweight being carried by today’s workforce and being paid for from today’s cash flow. Meanwhile Honda, Toyota, and Fiat all flourish with lower manufacturing costs precisely because they don’t pay the tab for those benefits.
The demise of GM says as much about the cost burdens of the US health care system as it does about the ineffectiveness of its basic post-war manufacturing model.
Meanwhile the death spiral continues.
Today’s news that the company’s creditors have rejected its final credit-for-equity swap is no surprise. The creditors long ago signaled their distaste for the fact they would end up with less ownership in the post-bankruptcy company than the UAW’s healthcare fund would. One or two of them have walked away from the negotiations, presumably in anticipation of a court fight.
As things shape up now the government will have to add even more direct aid to fund the re-emergence of GM. As a result the UAW fund will now only have about a 17.5% stake in the ‘new GM’, while the US government will own a full 70%. The rest is set aside for the creditors. Current shareholders will disappear. The UAW looks to be a key player in the future: not only will it have its 17.5% stake, but it will have warrants for a further 2.5%, it will lend about $6.5 billion as preferred stock, and a further $2.5 billion as a senior creditor of the new company.
That’s loyalty for you.
The creditors are balking at the amount of ownership the UAW comes away with. They argue, correctly, that US bankruptcy law places their claims higher in liquidation and so they should be offered a better deal. In a perverse way the cost of health care is hurting them too. Had we a universal health care system the government would not be trying to force this deal through. All those retirees would be taken care of anyway. The fate of their health, and the fate of GM would not be intertwined. So the company could fail without taking its retirees into consideration. But by tethering its retirees to its own financial well-being GM has undermined its creditors.
There will be a court fight over the bankruptcy when it is announced. The creditors have the law on their side. I doubt that will get them far. The administration has made it clear that the health care of the UAW retirees is a public priority. Even if that means flouting normal bankruptcy procedure.
Adding spice to all this is the fight that looms in Europe. The German government has taken a hard line on the future of Opel, GM’s major European subsidiary. Other European governments are reacting to what they see as heavy handed and undue bias in the way the Germans are handling the sale of Opel. The UK, in particular, is miffed because the future of Vauxhall, based in England and GM’s other large European subsidiary, is seemingly being ignored in all the fuss about Opel.
GM’s death seems more of a convulsion than a smooth transition through bankruptcy. Its directors are rumored to be meeting tomorrow or Friday to discuss ‘next steps’. In view of the looming government deadline – June 1st – and today’s collapse of talks with the creditors, there cannot be much to discuss. Bankruptcy is the only way forward.
About time too. I just wish they could have managed it better. But this is GM after all.
Addendum, May 28th 1:25 p.m.:
And right on cue: a group representing about 20% of GM’s bondholders reached an agreement today [Thursday] and thus have settled on a new deal. The creditors will end up with 10% of the ‘New GM’ with an option to buy another 15%. I doubt this will stop a bankruptcy filing, but it should help ease the way through: the court will look at the holdouts and ask why they don’t sign on for this deal too.
