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New General Motors CEO Expands Restructuring

Henderson implicitly accepts President Obama's harsh criticism, but what's next at the failing automaker?

by on Mar.30, 2009

tk

The party's over, now the real cutting, consolidation and closings begin at General Motors.

President and politician Obama went directly to the point during his auto industry announcement. The way the industry got to its latest crisis is because of management.

“The pain being felt in places that rely on our auto industry is not the fault of our workers, who labor tirelessly and desperately want to see their companies succeed. And it is not the fault of all the families and communities that supported manufacturing plants throughout the generations. Rather, it is a failure of leadership – from Washington to Detroit – that led our auto companies to this point,” he said.

In a reaction to the President’s explicit criticism, newly appointed GM CEO Fritz Henderson said, “Over the next 60 days, we will work around the clock, with all parties, to meet the aggressive requirements that have been set by the Task Force, and to make the fundamental and lasting changes necessary to reinvent GM for the long-term.”

What this means is that there are more, many more cuts coming at GM. More brands will have to go. More operations will have to be eliminated in the U.S.

GM faces similar challenges and the same solutions in Canada and Europe, where skeptical national governments and the European Community central government have not committed to helping it. In fact, they have been  just as publicly critical of the ailing maker. Fritz Henderson was recently thrown out of a meeting with the patrician German economic minister Karl-Theodor zu Guttenberg and told not to come back until he had a better plan for Opel.

And within minutes of the of the President’s speech, Canada mirrored his position.

“The plans submitted by General Motors and Chrysler to the government of Canada, do not go far enough to ensure the long-term viability of these companies,” said Tony Clement, Canada’s industry minister. Like the U.S., Canada will provide some short-term financing until a better plan is arrived at.

The question is what can GM do to make its already heavily reworked plan better?

During the last three years GM has reduced structural costs by 23%, reduced production capacity by 24% and workers by 47% — all to no avail. GM has closed 12 manufacturing facilities in the U.S. between 2000 and 2008; an additional 14 facilities are due to go by 2012. The United Auto Workers union has already agreed to major wage reductions and relieved the company of paying cash for 50% of retiree health care liabilities.

The Saab, Hummer and Saturn brands have no future at GM, and Pontiac is relegated to a small niche. All told, nameplates are due to be reduced to 36, down 25% from last year. GM’s dealer count is also projected to be further reduced, from 6,246 in 2008 to 4,700 by 2012, and to 4,100 by 2014.

Well, enter plan B, as in bigger cuts.

It looks like the company will have no choice but to eliminate more brands and consolidate its sales and marketing operations further. Does GM really need Chevy and GMC truck lines? And you have to look at the two broad distribution channels it wanted to retain in the U.S. Does the Buick-Pontiac-GMC channel and its overhead make sense any longer? A streamlined product lineup comprised of Chevrolet, Cadillac and say Buick could work. I fully realize how difficult this would be, with more factory and dealership closings as a result, and more, many more white collar job loses.

How is GM Europe going to maintain its Chevrolet, Vauxhall and Opel brands and 300,000 jobs? Fritz Henderson said last month that only a government bailout could save it? “There is no “Plan B,” he said at the Geneva Motor show. The answer is — it can’t any longer. Sales, marketing and brands need to be consolidated there, and in Asia-Pacific as well.

Then there’s the toughest one of all — the bondholders. As originally outlined in the GM viability plan, approximately $27 billion in unsecured public liabilities currently on the company’s balance sheet would be converted to a combination of new debt and equity, for a net debt reduction of at least $18 billion. This swap was supposed to happen by late March, but the bondholders have rejected — and continue to reject — swapping debt for equity in GM. Thus far, the President’s threat of bankruptcy, where the bondholders would lose all, hasn’t made them blink, let alone tender the financial instruments.

“GM will address the tough issues to improve the long-term viability of the company,” Henderson insists, “including the restructuring of the financial obligations to the bond holders, unions and other stakeholders.”

Then he repeated the President’s threat with his own 180-degree reversal of his previous position: “Our strong preference is to complete this restructuring out of court. However, GM will take whatever steps are necessary to successfully restructure the company, which could include a court-supervised process,” Henderson concluded.

Well, fasten your safety belts; this isn’t going to be a pretty ride along the highway to a new era of prosperity at GM. First, the road is going  to get lot rougher.

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4 Responses to “New General Motors CEO Expands Restructuring”

  1. autobill says:

    I prefer to look at the events that have unfolded today with optimism: what doesn’t kill GM, makes it stronger. And GM will emerge from this stronger. Wouldn’t that be something?

  2. Bryan Morris says:

    Sounds like the bond holders are the ones holding all this up. Wall Street strikes again.

    • tdb says:

      Interesting that you picked that up, Bryan. I was listening closely to the President’s speech, yesterday, to see where he’d use the cudgel and where he’d wear the velvet gloves. He certainly wasn’t kind to corporate management — though he did accept that Washington was part of the problem, even if only somewhat abstractly. (There was no clear mention, for example, of the way lawmakers have helped create the industry’s crisis with legislation that arguably adds huge cost burdens to domestic makers.) Labor took some hits, as it was clear from Obama’s comments that workers will need shoulder more concessions, but this was said almost apologetically. No one seemed to take a more direct hit than the bondholders who’ve been holding out on GM, hoping to get a better deal. The President told them bluntly that there is no more bail-out coming their way. They need to work out a settlement now. It’s a little difficult to hear them whine as, from what I understand, a significant share of GM’s debt is currently held by folks who’ve picked it up on the cheap from the original bondholders. Ironic that for all the talk about the invisible hand of the free market, it’s Wall Street that has pushed the nation closer than ever socialism. For the rich, that is.
      Paul A. Eisenstein
      Bureau Chief, TheDetroitBureau.com

  3. Bryan Morris says:

    The rest of the world has grown tired of Wall Street leading them around by the nose. I think the time is coming very soon when the U.S. is going to decide that it has had enough as well. One way to look at the way President Obama has stopped enabling Detroit and forced them into rehab is as a trial run for what he knows will eventually have to be done to the financial industrial complex. It seems to me and a lot of people that he’s bending over backwards to give the bankers every opportunity to get their act together and clean up their mess on their own before finally pointing out the obvious, that they are incapable of doing it. He can then have a freer hand politically to do what everyone knows needs to be done and declare the big players insolvent and put them under government receivership in order to work out the problems they’ve caused themselves and the rest of us. At least I hope that’s his plan. By the way, calling bailing out a few irresponsible rich bankers with taxpayer money Socialism is really insulting to the good name of Socialism. It’s actually kind of the complete opposite of Socialism.