GM's Mounting Woes Point Toward A Second Chapter 11 (with a Second Bailout)

"As long as the unwritten rule stands that the best way to achieve success at GM is  to be a good finance man, the bad habit of juggling numbers in order to present the picture people want to see cannot be broken." -- "Rude Awakening" by Maryann Keller

Whether in a comedy or in real life, many readers will be familiar with the scene where doves are released at a wedding, of some other wild creature has been nursed back to health, and upon release some predator immediately gobbles up the hapless prey. GM isn’t like that. At one time the largest corporation in the U.S., when President Eisenhower named Charles WIlson, GM’s president to be Secretary of Defense, his confirmation testimony revealed that he believed GM’s interests and America’s interests to be inextricably identical--and a lot of Americans inside and outside the government likely nodded in agreement. GM’s founder Alfred Sloan pioneered separate division badges geared to appeal to market segments as well as in-house financing (through GMAC) for the automotive industry. By the 1960’s, GM was a behemoth with an empire stretching from Europe to Australia, and in the 1980s they even moved into China, making Buick an iconic brand there.

So large is GM that many Americans still equate GM’s health with the health of the nation. So the June, 2009 Chapter 11 filing by GM, though widely telegraphed beforehand, came as a huge symbolic blow to the nation’s pride. In years prior, GM had canceled Oldsmobile, sold off Allison Transmission, divested fully what had once been a near-50% stake in Japan’s Isuzu as well as a 3% stake in Suzuki; and in the bankruptcy the Saturn, Hummer, and Pontiac divisions were shut down, while Saab was divested to Konigsegg (and later Spyker) of Holland. GMAC shed its mortgage unit and was transformed into Ally financial, and other businesses were shed or shut down, although GM clung stubbornly to Germany’s Opel, from which many car models sold stateside have been sourced.

The GM that emerged from Chapter 11 was said to be ready to take on the world, and in fact it shone for a brief time as the world’s number one automaker once again. But its stock, which needed to soar for the federal government’s investment to be recouped has instead drifted lower. Rather than hapless prey, the relaunched GM has instead been a multiple-organ recipient whose bad lifestyle habits have re-emerged, and so the emphysema, the cirrhosis and other maladies are all back and the patient is once again circling the drain. Don’t believe it? I submit the following:

For some months the website Zerohedge has noted that GM is engaging in the practice of “channel stuffing” or shipping unwanted product to dealers and counting the sales well ahead of delivery to an actual paying customer. A closely-related practice is Ally financial’s subprime lending, which cranked up after GM spent $3.5 billion to acquire AmeriCredit, a subprime auto lender. There are tales now of 72 month 150% loans at 2.9% to individuals with 520 credit scores. In the trade, it’s referred to as “brain dead” paper. It moves the metal, but then the metal comes back as bargain basement repos to compete with your new models, and the repos’ poor maintenance records tarnish your reputation for quality.

Recently we learned that Opel was once again unprofitable, and would have to boost its sales and cut its costs. GM could have sold it to a Magna-led consortium at the time of its bankruptcy and avoided this headache. But that’s not GM’s only european problem: Spyker, Saab’s unfortunate purchaser is suing GM for $3.5 billion. It seems that during Spyker’s unsuccessful efforts to woo additional investors or sell Saab outright, GM played the role of dog-in-the-manger, claiming that certain technology agreements meant that Saab could not be sold to the Russians, or the Chinese, or the Indians. The last time GM was sued for billions on the continent, FIAT walked away with $2 billion that it used to modernize its platforms and engines, ultimately recovering its health to the point where it has now purchased GM’s domestic competitor Chrysler. With Europe in dire financial straits, it’s quite possible that the court won’t give GM a fair shake, which would bounce the resulting judgment awkwardly into the realm of diplomacy, perhaps contributing to a looming trade war.

Back at home, the Chevy Volt is proving to be an embarrassing failure, whatever its technical merits. Dealers are selling them to each other in circles and gaming the federal $7500 tax credit, although the only way that it’s coming close to actually making its numbers is a gigantic GE fleet purchase. “Fleet-friendly” is an industry epithet for a barely-profitable model that consumers show little interest in. Despite the Volt’s public drubbing as a poor seller and post-crash-test roman candle, the head of the Volt program has now been recruited over to Fisker, which has troubles of its own. As Toyota extends the successful Prius hybrids to a multiple-model franchise, the American pioneers have more than a few arrows in their backs.

But the gigantic elephant in the room for GM is the overall weakness of its product line. While Cadillac has been introducing some attractive models, its volume is a fraction of Chevrolet’s, and Forbes Magazine says Chevy is dying in the “D Segment.” We’re talking midsize sedans like Toyota Camry, Honda Accord, Ford Fusion and the suddenly-emerging VW Passat. When Bob Lutz (a real car guy) was running GM, Chevy was competitive there in 2008, but their new Malibu (presided over by Dan Akerson, an executive with a telecom industry background) has a shorter wheelbase (and hence less rear legroom) and a less-advanced engine, which has had it coming dead last in comparative reviews. Meanwhile the VW earns top marks, even though in terms of styling and creature comforts (except rear legroom), the Passat has been heavily “de-contented.” VW wisely created a flashy “four-door coupe” to sell alongside the Passat, and made the latter utterly quotidian--chrome strips have vanished, there is no longer anything swoopy about its shape, and it is now priced accordingly. Over the decades, VW has proven itself adept at making hard choices to maintain its market position, for instance introducing the hair-shirt-on-wheels Fox imported from Brazil to counter the early Hyundais and the Yugo.

By contrast, GM has had repeated bouts of ineptitude, including the dangerous Corvair, the Chevy Vega with a 10,000 mile engine, the sad late-’70s X-Car, and the early ‘80s “J-Car,” a reverse-engineered first-generation Honda Accord prone to all sorts of problems, not the least of which was an insane decision to try to sell it as a Cadillac. Although these are all ancient history now, GM continues to fall short while arriving late--and when among more nimble competitors that is referred to having them “inside your product cycle.” No matter what else is going on, having competitors inside your product cycle is an absolute killer.

Articles attempting to refute Forbes’s charges against GM have been posted quite swiftly, but the Forbes article only mentioned the Malibu’s woes and problems at Opel. The U.S. seems poised to tip back into recession, and China (where GM is heavily dependent on the health of its partners SAIC and Wuling) is slowing down too. The decision to bail out GM may have been a good one at the time, but since then it’s becoming clear that the Fourteenth Floor has squandered its second lease on life.