General Motors And The Great Recession Business Essay

The 2008 economic crisis not only tore apart banking systems around the world and meant bankruptcy to many small and medium businesses in every country, it also marked the end of an era. Right in the high times of the crisis, when governments tried to find a way of

both rescuing national companies from bankruptcy and establishing tighter regulations for

banks, the formerly biggest car manufacturer in the world had to declare itself insolvent.

Some might see the bankruptcy of General Motors as collateral damage of the worst

economic crisis of our time; one could also mention the decline in car sales for the Big Three

(Chrysler, Ford and GM) over the past decade. Since the oil price skyrocketed above $140 a

barrel (in June 2008), consumers started to switch to smaller, more fuel-efficient cars, mostly

from Europe or Asia, and cold-shouldered the leading three US car manufacturers who had so

long depended on SUVs and pickup trucks to boost their margins.

Picture1:Developmentof theoilpricebetween2006 and20101

Taking the already existing struggles of the automotive industry into account and

adding to them the Great Recession, the worst financial crisis since the Great Depression in

1929, it was only a matter of time that General Motors had to go into insolvency; the GM’s

own crisis had begun decades ago. It was the result of many factors, but a major one was the

reliance on products that were neither outstanding nor trendy.

1 http://www.finanzen.net/rohstoffe/oelpreis/Chart, last accessed February 10, 2011

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General Motors Doomed to Fail?

The Development of General Motors

From Detroit to the World

In September 1908, General Motors was founded by William C. Durant in Flint, MI.

Primarily established as a holding company for his brand Buick, Durant soon acquired more

and more car manufacturers, among them Cadillac and Pontiac. With his acquisitions and

purchases, Durant established the first car conglomerate in the world with several brands

beneath one roof. In 1910 he lost control of GM to a banker s trust due to an overwhelming

amount of debt he had accumulated through the acquisitions. Durant left and co-founded the

Chevrolet Motor Company in 1911. He returned to GM a few years later, but did not stay for

long. When he left General Motors in 1920, the company was on its way to become the

biggest car manufacturer in the world, a title which it was to keep from 1931 through to 2008!2

After the founder had left, Alfred P. Sloan took over the management of General

Motors and paved the way for the company s global post-war dominance. Sloan had a proven

talent to manage a complex worldwide organization, and at the same time pay special

attention to consumer s demands. In the Golden Twenties the people wanted a car which did

not look like a coffin on wheels, but was a stylish, powerful and prestigious vehicle. One factor

that allowed GM to dominate the American and the global market was clearly its depth of

wide-ranging divisions: starting with a Chevrolet (entry-level budget), going through to the

brands GMC, Pontiac, Buick and ultimately to the Cadillac. With the British Vauxhall Motors

(part of the corporation since 1925) and the German Adam Opel AG (since 1929) General

Motors had a significant influence also on the European market, and as of 1931 it had become

the biggest car manufacturer in the world.3

2 Hintergrund: H hen und Tiefen der GM Geschichte;

http://www.drs.ch/www/de/drs/nachrichten/wirtschaft/223901.hintergrund-hoehen-und-tiefen-der-gmgeschichte.

html, last accessed January 19, 2011

3 http://www.drs.ch/www/de/drs/nachrichten/wirtschaft/223901.hintergrund-hoehen-und-tiefen-der-gmgeschichte.

html, last accessed February 11, 2011

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Post-War Growth

After World War II, GM not only had become the biggest corporation registered in

the United States, in terms of its revenues; but was also one of the largest employers in the

world.4 In 1955, it became the first American corporation to pay over $1 billion of taxes.

During this time car sales boomed; after the war there was a significant shortage of civilian cars

among the population. General Motors had supported the Allies by building tanks and other

military vehicles, allocating very little production capacity for normal citizens and their

demands. They had to regain a lot of time, and so the production of all GM product lines was

increased during this period. In the end, the total sales of $12.4bn included not only cars, but

also household appliances and diesel engines. Since it was a year of record production, the

factories were operating on an overtime basis with an average of 42.5 hours per week. GM

workers got a weekly pay of approximately $102.41, which was high above average in the

industry. The company also started to provide money for pensions, health- and

unemployment insurances.5

Picture 2: Statistic and text taken from the GM Annual Report 1955

4 The History of General Motors; http://en.wikipedia.org/wiki/History_of_General_Motors#Post-war_growth,

February 14, 2011

5 GM s annual report of 1955; http://www.carofthecentury.com/gm’s_annual_report_1955.htm, February 14, 2011

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Even though the growth was significant, the management of General Motors started

to make decisions, which were, on the long run, counterproductive for the development of the

brand. One example is the production of high-engine cars in the lower priced divisions, like

Chevrolet by the end of the 50s. This led to confusion among the consumers and made them

buy the cheaper version, instead of the higher-class brands, like the Cadillac.

In the 1960s, General Motors started to produce more compact and intermediate cars,

since its competitors were really successful with their product lines. Especially cars like the

Volkswagen Beetle and the Ford Mustang had to be matched, because they were extremely

popular among the American people. GM s answer to the Beetle was the Chevrolet Corvair

and the Chevrolet Camaro was the counteraction to the Mustang.

VW Beetle Chevrolet Corvair Ford Mustang Chevrolet Camaro

From this decade through to the 1980s General Motors, maintained its dominance in

revenue and market share; however, there were issues concerning the fabrication and the

overall quality of the products because every major line was launched with defects. This was

really bad for the reputation of the cars, and even though the following versions of the

products were often much better, consumers had lost faith in the cars and turned towards

competitor s vehicles.

After the rise comes the fall Toyota and the 1973 Oil Crisis

Following the recession late 70s and early 80s in the U.S., General Motors started to

struggle. Indeed, it was still the biggest car manufacturer in the world, with revenue of up to

$60bn (1981) and 657,000 employees worldwide, but they clearly missed the signs.

In 1973, the world was hit by the oil crisis, which started in October 1973 when the

Organization of Arab Petroleum Exporting Countries (OAPEC6) announced an oil embargo

6 OAPEC = the Arab members of OPEC, plus Egypt, Syria and Tunisia;

http://en.wikipedia.org/wiki/Organization_of_Arab_Petroleum_Exporting_Countries, February 14, 2011

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in response to the U.S. decision to re-supply the Israeli military during the Yom Kippur war .7

The embargo also included other countries that supported Israel in this war, e.g. Germany and

the UK. The American car industry was hit hard by the fuel shortage and had to realize that a

Japanese competitor now had a once in a lifetime opportunity to succeed over the big

Americans. Toyota had the advantage to offer small, fuel-efficient cars of very high quality.8

American manufacturers had offered midsize cars since the 60s but they were always regarded

as the entry level cars, which were built of low quality so the prices could be kept low as well.

During this time, General Motors lost a significant amount of market share. However, when

the crisis ended in 1974, consumer s demands for larger vehicles increased again and so did the

sales figures.

Recent Years Hard Times for General Motors

During the following decade, GM downsized its product line and invested in

automated manufacturing. It recovered from the decline and won back customers. After the

breakdown of the Soviet Union, General Motors hoped for new markets for their products,

but at first they suffered from another economic recession.

As a result, GM was radically restructured: The management structure was reorganized,

in addition to deep cost cutting and the introduction of significantly improved vehicles was

decided. Even though the decade had not started well for General Motors, the years until 2000

were rather successful. Especially since the end of the first Gulf War in 1988, it slowly but

steadily gained market share with the SUV- and pick-up truck lines. By 2000, General Motors

stock had reached over $80 a share.

The Noughties 9 started with the worst terroristic attack on American soil ever: 9/11.

More than 2,900 people were killed in the attack that caused the world economy to stop for a

few days. The stock exchanges around the world closed for several days, trades between the

countries dropped, and the aviation industry was hit hard by the disaster. 2001 already had

been a tough year because the world economy was experiencing its first global recession in 25

years with a global growth rate of only 1.4% (for the world an annual growth of less than 2% is

7 OPEC Oil Embargo, 1973-1974; http://history.state.gov/milestones/1969-1976/OPEC, February 14, 2011

8 http://www.toyota.com/about/our_business/our_history/u.s._history/1970s_&_1980s.html, February 14, 2011

9 The name of the years 2000-2009; http://www.allwords.com/details-noughties-2837407.html, February 14, 2011

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regarded a recession). In the aftermath of 9/11, economic forecasts dropped even more,

especially in Q4 2001. A year later, in August 2002, most major economies were on the rise

again, however, they were still below the growth rate performed before September 11.10

Picture 3: September 2001 and the economic forecast for 2002

(Makinen, 2002, p. 18)

After September 2001, the United States economy was paralyzed with shock, and so it

did not come as a big surprise that there was a slow down in consumer demand. General

Motors as well as all other car manufacturers were hit hard not only by declining sales, but also

by the lack of subcontracted supplying. For many days, the air space above the U.S. was closed

and so shipments from and to the USA could not be performed by plane. Production in many

facilities had to be slowed down because they were running out of material.

Another issue for GM was the pension and benefits obligations towards its workers.

With the retiree health care costs and Other Post Employment Benefits (OPEB) rising and

creating a huge funding deficit, the company decided to establish a restructuring plan.

In the United States, different from Germany, many private employers pay health care

and pensions for retired workers. Since the 1950s, General Motors had offered its workers

private funding plans. These costs are called legacy costs, which add up to $2000 per car. Now,

every car that is produced by GM carries those legacy costs and an article states, for every GM

10 Makinen, G., (2002), The Economic Effects of 9/11: A Retrospective Assessment , Congressional Research

Service,pp.17-22, http://www.fas.org/irp/crs/RL31617.pdf, February 14, 2011

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worker, there are about ten dependants who are defined as retired workers and their families .11

The $2000 basically had to be built into the car and the price of the cars. Foreign

competitors like Toyota did not have these problems because their labor costs were not as high.

Before the restructuring of the company, GM s per hour labor rate for car assembly was about

$75 per hour, compared to approx. $45 for other car companies.12

Picture4:Averagesalariesof workersatGeneralMotorsinUS$ in201113

According to The New York Times14, GM s liability for 2004 was $89bn and two years

later its pension plan was $6bn overdrawn. In 2006, General Motors decided to reform its

retirement plans and shifted from defined-benefit plans to less-expensive retirement

programs. These changes did not have any impact on benefits of already retired salaried

workers or on plans of active and retired members of the United Auto Workers labor union

(UAW). By the time, GM already had made the attempt to reduce health care plans for retired

salaried employees, because health care costs had gone up 150% since 2001.

In September 2008, the Big Three asked the American government for $50bn to pay

for health care expenses and avoid bankruptcy. The Congress approved a $25bn loan. Despite

the injection of cash, neither GM nor Chrysler could be saved.

11 Webster, L., (2008), GM in Crisis 5 Reasons why America s Largest Car Company Teeters on the Edge ,

Popular Mechanics, http://www.popularmechanics.com/cars/news/industry/4292379, February 14, 2011

12 Webster, 2008, http://www.popularmechanics.com/cars/news/industry/4292379, February 14, 2011

13 General Motors Salaries, http://www.glassdoor.com/GD/Salary/General-Motors-SalariesE279.

htm?filter.jobTitleFTS=worker, February 15, 2011

14 Maynard, M., (2006), G.M. toFreezePensionPlanfor SalariedWorkers , The New York Times,

http://www.nytimes.com/2006/03/07/business/07cnd-auto.html?_r=2, February 15, 2011

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The 2008 Crisis

How could General Motors fail?

In 2007, GM had a quarterly loss of $39bn, until then the largest deficit in the

company s history; since 2004 they had not made a profit. On February 12, 2008 they

announced that the operating loss was $2bn. In the same year, the Detroit carmaker sold only

8.35m cars and trucks, compared to almost 17m in previous years. Again, sky rocketing gas

prices pushed people towards smaller, fuel-efficient cars, mainly from Asia. However, this time

there was no way out for GM it was literally the last nail in its coffin. By the end of 2008,

General Motors (and Chrysler) received loans from American and Canadian governments to

overcome their problems.

Picture 5: A clear decline in car sales in 2009 (with a tendency to rise since GM made profit in 2010)15

But this was all to no avail: On June 1, 2009 General Motors became the largest

industrial corporation ever to go bankrupt in U.S. history.16 They filed for Chapter 11

protection against creditor s demands. Chapter 11 is part of the US Bankruptcy Code and

allows the reorganization of a company under the bankruptcy laws of the United States.

According to the Chapter 11 blog, General Motors Corp. s petition lists approximately

15 A tendency inU.S.car sales, http://www.atkearney.com/index.php/Publications/caution-rough-road-ahead-eaxii1.

html?q=general+motors, February 15, 2011

16 Clark, A., (2009), General Motors declares bankruptcy the biggest manufacturing collapse in US history , The

Guardian,http://www.guardian.co.uk/business/2009/jun/01/general-motors-bankruptcy-chapter-11, February 15,

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$82.3bn in assets and $172.8bn in liabilities, including about $26.3bn in unsecured debt

securities.17

Company officials also announced the closure of 17 factories and parts centers, as well

as the lay off of more than 30,000 people just leaving 200,000 jobs until the end of 2011. In

addition, it was decided to retire the brands Pontiac, Saturn, Hummer and Saab. (Saab was

later saved through the acquisition by Spyker Cars) The German brand Opel was also on the

brink of being discontinued or sold to a new owner. However, after long negotiations, GM

announced in November 2009 that it would keep the German brand.18

Governments have to help

To support General Motors, the Obama administration took over 60% of the

company s equity; the Canadian government got 12.5%, the unions and bondholders received

the rest. On Monday June 2, for the first time in 84 years, GM ceased to be part of the Dow

Jones Industrial Average. The costs for American taxpayers will be enormous, probably being

close to $100bn.

By mid-July, just 40 days after it filed for Chapter 11 protection, General Motors was

already in a position to leave insolvency. The New GM emerged from bankruptcy with four

brands Chevrolet, Buick, GMC and Cadillac. The company is still under public ownership:

Canada and the United States hold about three quarter of all shares; in return GM received

almost $60bn. Since the $20bn of governmental support from before the insolvency was not

enough, the car manufacturer had to be supported with further $30bn (from the U.S.) and

$9.5 (Canada). According to General Motors, all public aid had been paid back to both Canada

and the USA by April 2010. Up to this day, the US Treasury Department owns 60% of the

GM common stock shares.19

17 Chapter 11 Blog General Motors Corp. files for Chapter 11,

http://www.chapter11blog.com/chapter11/2009/06/general-motors-corporation-files-for-chapter-11.html,

February 15, 2011

18 ZahlenundHintergr ndezur US Autoindustrie,

http://www.drs.ch/www/de/drs/nachrichten/wirtschaft/112130.zahlen-und-hintergruende-zur-usautoindustrie.

html, February 15, 2011

19 http://www.drs.ch/www/de/drs/nachrichten/wirtschaft/112130.zahlen-und-hintergruende-zur-usautoindustrie.

html, February 15, 2011

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The issue about Opel

As early as November 2008, Opel AG had to ask for a bailout from the German

government to overcome its crisis it was the first automotive company to do so in

Germany. Before, a special loan guarantee had been approved to support companies that faced

bankruptcy in course of the economic crisis.

In the media, the bankruptcy of General Motors was overshadowed by the lowering

insolvency of the traditional brand Opel. Being the year of the election to the Bundestag

2009, the end of the car manufacturer came to a particularly bad time for the German

government. The grand coalition of CDU/CSU and SPD did not fully agree on terms of how

they would try to rescue Opel, but they had all found a perfect topic for their election

campaigns. To all members of the cabinet it was clear that Opel had to be saved at all costs.

Malicious tongues said that Chancellor Merkel only spoke for the brand because she was afraid

of losing votes.

After some negotiations with the parent company, it was decided to look for new

investors for Opel. For a while, Magna – a Canadian-Austrian auto parts company – had bright

prospects to be the new investor for the German traditional brand. During the negotiations

with General Motors, German leaders made clear that they wanted to be sure that European

assets would be protected from a bankruptcy filling in the U.S. (This happened in May 2009,

before GM filed for Chapter 11). In addition, they requested that German money would just

be used for Opel.20

In the middle of the negotiations, economy minister Karl-Theodor zu Guttenberg

(CSU) created sensation among the German population when he proposed that the best

solution would be to lead Opel into a self-administered insolvency plan. Keeping in mind that

to most people insolvency is the same thing like closing down a company , Angela Merkel

distanced herself from the statement and said that an insolvency of Opel was politically not

justifiable.21 This made it clear that she was primarily trying to keep her reputation among the

German voters, because many experts agree that economically, Guttenberg s proposal was the

20 Dougherty C. & Schwartz N.D., (2009) Talks Fail to Secure Deal on Loan for GM s European Unit , The New

York Times, http://www.nytimes.com/2009/05/28/business/28auto.html?_r=1&ref=business, February 16, 2011

21 Guttenberg spaltet die Union , Focus Online, http://www.focus.de/finanzen/boerse/finanzkrise/opel-rettungguttenberg-

spaltet-die-union_aid_404099.html, February 16, 2011

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wiser one. In the end, none of this really matters because in November 2009, General Motors

decided not to sell Opel, but rather reorganize the European subsidiaries.

General Motors in 2010

An I.P.O. that will go down in history

On November 18, 2010 the New General Motors made its initial public offering

(I.P.O.) at Wall Street in New York City. It showed that the car manufacturer was not only

able to produce the biggest bankruptcy, but also the biggest I.P.O. in U.S. history. The stock

offering was potentially worth $23bn of which $13.6bn went to the American government.

478m common shares were sold for $33 each raising about $16bn, while $4.35bn in preferred

shares were turned around.

This successful I.P.O. can clearly be seen as a sign of confidence towards General

Motors after the harsh years of debts and bankruptcy. In the months before it went public, the

Detroit car manufacturer earned $5bn and had the first full-year profit since 2004.22 The U.S.

Treasury will remain GM s largest shareholder, and it will probably take several years until all

stakes are unloaded. According to Baldwin and Kim (2010, Reuters) the stock prices will need

to rise by 47% to $48.58 for the U.S. government to break even on its follow-on stock sales.

At $48 per share, General Motors would have a market value of more than $90bn.

However, it is still questionable if GM will get off the whole issue just with a slap on

the wrist. There is still the deeply underfunded pension plan. The problem is that 70,000 GM

workers in the U.S. now have to produce enough profit to provide benefits to 688,000 GM

retirees. Looking at the company s pension plan in 2009, it was underfunded by $17.1; today,

counting in overseas obligations, the pension plan is underfunded by approximately $30bn.23

22 Baldwin C. & Kim S., (2010), GM IPO raises $20.1 billion , Reuters,

http://www.reuters.com/article/2010/11/17/us-gm-ipo-idUSTRE6AB43H20101117, February 15, 2011

23 GM gives stock to its deeply underfunded pension plan, http://autoinformed.com/2011/01/14/gm-gives-stockto-

its-deeply-underfunded-pension-plan/, February 15, 2010

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Are they back for good or will they fail again?

Looking at General Motors turbulent history of rising up to be the biggest car manufacturer in

the world and falling down to be the largest corporate bankruptcy in U.S. history, I get feeling

that this company just works with superlatives. It was an American icon and it failed. Why?

Some reasons were mentioned in this paper, some might be invisible to outsiders but one

thing is for sure, the new General Motors has to learn from its past. It must realize that the

future of cars does not lie with gas guzzlers like SUVs and trucks (not as long as these vehicles

depend on fuel, anyway), but with fuel-efficient cars, which Volkswagen and Toyota have

already proven for years now. I think a step into the right direction was made when GM

introduced the Chevrolet Volt, its first hybrid vehicle, which runs on battery for 40 miles

before switching to the fuel tank. The Volt was unveiled at the 2007 Auto Show in Detroit,

and it is planned to be available in most of the U.S. by the end of 2011. According to the

company, the demand is strong and about 50,000 people have signed up on waiting lists for

the Volt. The cars are being assembled in Detroit, MI.24

Lets hope that General Motors and Detroit get another chance to get back on the track

again. GM is not the first one to introduce hybrid cars, and time will tell if they have learned

from there mistakes in the 60s when they introduced product lines with defects. Toyota was

the first one to introduce a hybrid car under its premium brand Lexus. In the last two years,

more and more manufacturers from Audi (Audi e-tron) and Volkswagen to Mercedes have

introduced their versions of hybrid vehicles some of them are already available, some of

them are still just concepts. None of their cars run more than 50 miles on battery before

switching to fuel. General Motors does not make a difference here, and maybe they are again

just a step behind the others to come up with the almost perfect fuel-less car. But who knows,

maybe its employees in Research & Development are already working on a full-electric SUV.

Calling General Motors a failed company would be far from the truth. Yes, it had and

still has its problems. Ever-present debts, underfunded pension plans, miscarried product lines

and mis-management all these are factors that could see GM struggle again. But this could

24 GM: Volts to be in dealerships nationwide by end of 2011,

http://www.freep.com/article/20110127/BUSINESS0101/110127025/GM-Volts-dealerships-nationwide-by-end-

2011?odyssey=tab|topnews|text|FRONTPAGE, February 16, 2011

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happen to any company of this size. Somehow, the bankruptcy of General Motors appeared to

be worse than any other insolvency during the crisis. Many companies just vanished from the

market without even being noticed, while the media had set their focus on the biggest of The

Big Three . When General Motors fell, many small and medium businesses not only in the

Detroit area, but in the whole country fell with them. Many suppliers ran out of money and

closed down when General Motors was forced to cut down its production. Driving through

the Detroit area in 2009 was like driving through a dead city closed shops and factories

everywhere. General Motors was Detroit. Detroit was the automotive industry. Another term

paper could be written about the Motor City, but there are some things that can be said in

relation to General Motors: There has probably never been a big city which depended so much

on just one industry, like Detroit. For many years it must have been a blessing to work in the

auto industry, since it meant money and prestige. With the collapse of General Motors came

the rude awakening: people lost their jobs, companies closed down – even businesses which did

not have a direct connection to the auto industry. But people without a job do not spend

money.

I think the bankruptcy was a great chance for both General Motors and Detroit. The

company was able to restructure itself, get rid of brands that were not profitable anymore and

emerge from the crisis as a reborn star (see the successful I.P.O.). For Detroit, the important

factor was that GM stayed in the city. Known as America s Motor City, most car

manufacturers have their subsidiaries and suppliers in Michigan. But then came the crisis and

many of them, e.g. Volkswagen, left Michigan to build new plants in the southern States.

Now, with a new General Motors, factories reopen and new industries find their way to

Detroit; especially companies that specialized on hybrid cars in conjunction with the

production of the Chevy Volt. The residents of Motown are hoping for a sort of technological

renaissance. The government is offering large tax subsidies to companies to bring their talent

to Michigan in order to put the Big Three back on top… Time will tell if they will return to

their former days of glory.

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