Is GM finished?

[Francesca R]

As yet, I've not seen anything that looks like evidence that that might be the case.

I was questioning the idea that GM might be, "the corner stone holding back the avalanche of another Great Depression." I'm not saying they aren't. I'd just like to see something in the way of evidence.

Have you looked for any? This is one of the most cited pieces of analysis, from the Center for Automotive Research. A 50% reduction in "Detroit Three" operations (one or more of Ford, GM, Chrysler failing) with downstream losses to suppliers and other firms indirectly affected costs 2.5m jobs in year 1, and a loss due to tax receipts and transfer payments of USD108 billion. It's also noted by other analysts that Chapter 11 "doesn't work" for auto makers.

I'm sorry, but I don't feel the slightest bit responsible for this problem, and I vehemently disagree with anyone who suggests that so much as a dime of my taxes be used to bail them out. Let them die; I'm quite happy to continue driving my American-made Honda.

It's not really the issue of whether you are to blame. The cost to you in tax or otherwise reduced income could be higher with a failure than a bailout. Do you discount that consideration on the basis of some doctrinaire persuasion of "no bailouts", or have you not actually thought about it?

 

[drkitten]

Because their primary market isn't NA. Their primary markets have a more centralized populous that demands smaller=more fuel efficient cars. Let's be honest, Toyota and Honda just brought to the US market what they were already making. Had they designed cars specifically for the NA market (please see "Tundra") they would have failed.

In other words, Detroit was looking at a niche market. That's one easy bad management decision to make.

And don't forget these Japanese manufacturers benefited from years of development in Detroit. Had they started with the Model T and moved forward from there I think they would be in as bad a shape as the Big 3. Speculation on my part, but I think its sound.

Why? Sunk costs are sunk costs. It costs Detroit exactly the same amount of money to build and staff a new plant in Ohio as it would cost Honda --- unless Detroit can't build and staff as cheaply, which is another bad management decision.

A few years ago Toyota projected a loss in NA beginning in 2013 due to an aging workforce (pensions,benefits etc.).

Which implies that they knew the NA market was a lost cause and started to deemphasize it. Presumably GM had access to the same projections, but somehow decided that buggy whip manufacturing was a good idea?

NA made the automotive market what it is for the rest or the World by its own blood, sweat and tears.

... and lost it through its own stupidity, ignorance, and short-sightedness.



EVERY car that Toyota sold, worldwide, could have been a GM car. Why wasn't it? There's nothing that Toyota did -- except hiring competent people -- that GM couldn't have done. And damn little that Toyota did that GM did do, which is why GM is in such dire straits.

 

[Francesca R]

EVERY car that Toyota sold, worldwide, could have been a GM car. Why wasn't it? There's nothing that Toyota did -- except hiring competent people -- that GM couldn't have done. And damn little that Toyota did that GM did do, which is why GM is in such dire straits.

As far as I know, GM is in decent shape outside the US (in India, Brazil and China), pursuing a rather different business model of course.

 

[Drewbot]

It costs Detroit exactly the same amount of money to build and staff a new plant in Ohio as it would cost Honda --- unless Detroit can't build and staff as cheaply, which is another bad management decision.

The Big three could try building a Non-Union plant like Honda, but then their other plants would strike in support of the Union at the new plant. Thus the Big-Three costs are much higher than Honda's.

 

[drkitten]

The Big three could try building a Non-Union plant like Honda, but then their other plants would strike in support of the Union at the new plant. Thus the Big-Three costs are much higher than Honda's.

And what part of that was supposed to be a good management decision?

I think you've just proven my point for me.

 

[Drewbot]

And what part of that was supposed to be a good management decision?

I think you've just proven my point for me.

I think I was trying to prove your point Doctor.

 

[balrog666]

K. So, yur solution then please? Quick, this boat is sinking...

Bankruptcy. Receivership. Or reorganization with new management if they can get a loan.

Perform or die.

 

[Roadtoad]

It's been said time and again, Chapter 11 might actually be good for GM. It would force them to confront the very issues they've been avoiding. Once they begin to do that, they might have a shot at survival.

In the meantime, it's time the unions quit protecting laggards, slackers, and slugs. Either the company produces, or they go under. That simple. Anyone not helping that process along at this stage of the game is not your friend, much less your Union Brother.

 

[Francesca R]

The risk with Ch11 (not a certainty) is that the value of cars produced by a company "that might not be around much longer" drops rapidly to zero.

 

[drkitten]

Bankruptcy. Receivership. Or reorganization with new management if they can get a loan.

Perform or die.

Basically, yes.

I think it would be appropriate for the Fed to step in at the point where "if they can get a loan" becomes an issue; if GM can't get debtor-in-possession financing due to an unwillingness on the part of the credit market to extend them such credit, then the Fed can step in as part of the "make credit available" program.

But, of course, the flip side is that the newly reorganized management should then be in a position to reverse previous bad management. As Francesca pointed out, GM is not in bad shape internationally, and the capital of the world-wide GM plants is worth a hell of a lot (and worth preserving). But I don't see any reason why the management that couldn't predict what rising oil prices would do to the Hummer brand should get any sort of financial benefit.

 

[drkitten]

The risk with Ch11 (not a certainty) is that the value of cars produced by a company "that might not be around much longer" drops rapidly to zero.

The value of cars might drop to zero, but the value of the machinery will not --- and the cars will recover quickly if/when it becomes obvious that the Fed has deep pockets and is willing to keep the machinery running.

 

[Francesca R]

Eh? That sounds like a bailout or forced marriage (with who?)

 

[drkitten]

Eh? That sounds like a bailout or forced marriage (with who?)

Not quite. Yes, it's a bailout -- but only under the supervision of the appropriate US Trustee, and only after chapter 11 has had the ability to work its magic by a) forcing GM to come up with an appropriate business plan that can be confirmed to make sense, and b) giving GM the leverage to suspend the union contracts that prevent it from being able to make affordable cars, but at the same time c) giving the trustee the authority to suspend the incompetent management that put it into this situation in the first place.

One of the issues with the AIG bailout, for example, is that it just gave AIG management more money to waste, but didn't seem to create any changes in policy or management. So we reverse the order. Instead of us giving you money and you promising to make changes, you make the changes first and then we decide if it's worth giving you money.

 

[Francesca R]

OK I thought you had a "stand back and let them fail, then let the vultures pick over the carcass" position (pun serendipitous).

PS--I am pretty sure AIG's management was switched. Policy changes are longer in formulation since they are financial-system-wide, not just about flaws in AIG's business model in isolation. Recall it took a couple of years preparation for Bretton Woods.

 

[drkitten]

OK I thought you had a "stand back and let them fail, then let the vultures pick over the carcass" position (pun serendipitous).

That's more or less exactly what I want to prevent. I want to keep the machinery running if possible, which involves keeping the operators of the machinery around and employed.

Basically, if your job involves safety goggles, nothing should change (immediately). If your job involves a clipboard, I want the court to decide whether or not you're necessary to the operation. And if your job involves a desk, start cleaning it out.

Because I do believe that the machinery is necessary to the smooth functioning of the economy, and there will be too many people who want to buy cars in 2010 to let the machinery fall into piles of rust today. But I don't think the world is lining up to support junior associate veeps of product development or union-mandated third assistant safety supervisors.

ETA. Oh, and as to the widows and orphans who lined up to by GM stock? **** 'em. If you can't afford to lose your investment, don't invest in the first place. It's not like the flawed business model hasn't been obvious for a decade.

 

[Francesca R]

Widows and orphans have one legitimate gripe--they were prevented from shorting the stock and bolstering their retirement until very recently.

 

[Francesca R]

I want to keep the machinery running if possible, which involves keeping the operators of the machinery around and employed.

Just to be clear--this is not a viable prospect without several billion off the taxpayer. Right? (Which she might get back)

 

[drkitten]

Have you looked for any? This is one of the most cited pieces of analysis, from the Center for Automotive Research. A 50% reduction in "Detroit Three" operations (one or more of Ford, GM, Chrysler failing) with downstream losses to suppliers and other firms indirectly affected costs 2.5m jobs in year 1, and a loss due to tax receipts and transfer payments of USD108 billion. It's also noted by other analysts that Chapter 11 "doesn't work" for auto makers.

The problem with this analysis is that I don't see a useful benchmark for comparison.

I.e. what can we do at this point that would prevent a 50% reduction in Detroit Three operations? If Warren Buffett signed the wrong piece of paper and gave a billion dollars to GM, would that actually make their cars more saleable? Or would that simply give GM another billion to burn through in the process of achieving a 50% reduction?

If I'm worried about my car being stolen, buying a new custom paint job and chrome wheels will only make my loss worse, not better. If the wiring in my house is bad and I'm worried that it's going to burn down, that's not the time for me to invest in new paint.....

 

[Francesca R]

You can doubt the study. I would not expect an industry think-tank to underestimate downside risks. The remark made was that there was no evidence (analysis actually) around.

 

[drkitten]

Just to be clear--this is not a viable prospect without several billion off the taxpayer. Right? (Which she might get back)

Dunno. (Taps crystal ball impatiently.) If there's a suitor out there that would like to offer DIP financing but is worried about the risk, a mere word from Treasury that "we've got your back" might be sufficient. I thought --- and I appear to have been misinformed --- that that was part of the plan behind the financial sector bailout. If that were the case, a forced-marriage might be arranged without a dime of public money.

If that doesn't work, then the US Trustee may be forced to take direct control of GM, but GM still has cash coming in. If he can slash-and-burn enough layers of middle management and put the fear of God into enough union stewards, he may be able to get cash flow under control again using the court-given chapter 11 authority. Again, cost may be minimal.

Or he may just have to deliver trainloads of money. Or he may look at the proposed reorganization, say "the hell with it," and phone the auctioneer.

So it's not a viable prospect without the prospect of multiple billions waiting in the wings. Whether or not it gets tapped,.... well, there's that whole "crystal ball" thing again.