General Motors Declares Chapter 11 Bankruptcy
General Motors Corporation, once the world’s largest automaker and (at least for the time being) the largest automaker in the US, filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court in Manhattan. (See a PDF of the document here.) Aside from the obviously humbling news for GM – a company that had been the world’s dominant automaker for much of the past century – the scope of the bankruptcy filing is enormous. It is the third-largest bankruptcy filing in terms of assets in U.S. history, and the largest industrial bankruptcy in U.S. history. Chrysler LLC’s bankruptcy filing also occurred in the same court in Manhattan a month earlier; interestingly, Chrysler is expected to emerge from Chapter 11 as early as today (not quite last Friday as Chrysler CEO Robert Nardelli had predicted) just as GM is beginning its bankruptcy reorganization journey.
The government’s plan to restore GM to health is to split the company into two pieces – a New GM and an Old GM. The New GM (with the name naturally subject to change) will shed a staggering $79 billion in debt, enjoy wage parity with non-UAW-represented transplants such as Honda, Toyota, and Nissan that will save billions per year, will have four fewer brands to feed (say goodbye to Saab, Saturn, Hummer, and Pontiac), and 40% fewer dealers. It goes without saying, of course, that 50% fewer brands and 40% fewer dealers (not to mention factory closures and employee layoffs) will mean that New GM, in spite of its healthier balance sheet, will be a far smaller company than GM is today. New GM will be a fraction of the size of the GM of decades past.
Meanwhile, Old GM (again, the name is subject to change) will consist of the remnants of the company that New GM does not need in order to move forward. Old GM, including assembly plants to be closed, brands to be closed (Saab, Hummer, Saturn, Pontiac), and other “toxic,” unneeded assets, will then be liquidated over the course of potentially several years (some bankruptcy experts have said that it could be between 2 and 10 years before Old GM is completely shuttered). The proceeds from those asset sales will go to creditors.
GM will be split into New GM and Old GM via a so-called Section 363 sale, which is what Chrysler’s bankruptcy judge approved late Sunday night. The desirable assets of Chrysler were sold to Fiat SpA, while GM’s desirable assets will be sold to a new entity controlled mostly by the U.S. government, Canadian government, the UAW, and unsecured bondholders.
While this is a dark day in GM’s long history, it also presents several opportunities, though also brings a lot of risks to the table. The opportunity to get out from under the lead blanket of $79 billion in liabilities, lower labor costs, and fewer dealers and brands to feed is a huge one. Many in GM have known for years that the company was too big for its market share and that it had too many brands and too many dealers, but tough state franchise laws (plus the expensive shutdown of Oldsmobile earlier in the decade) prevented GM from taking any decisive steps in that direction. The UAW, until 2007, was not in a concessionary mood at contract-negotiation time, and was inclined to ask for more each time, and certainly not to give back anything that it had fought for over the previous several decades.
There are legal risks; perhaps GM’s extremely complicated bankruptcy won’t proceed as briskly as Chrysler’s has. Separating New GM and Old GM will not be a simple task and there will be disagreements between the two companies as Old GM plants temporarily act as suppliers to New GM, and employee efforts have to be accounted for between Old GM and New GM carefully. A hollowed-out New GM needs to ensure that it has adequate talent in the employee population to continue the quality, engineering, and design gains of the past few years; otherwise, New GM will find itself in the same market share-sapping predicament that GM finds itself in today. Customers may turn away from a financially-unhealthy automaker, assuming that their warranty claims may not be paid (but they probably will be paid) and that their resale values will suffer (they will, and already have been suffering).
In other GM news, the company has apparently found a buyer for Hummer, although the buyer’s identity has not been disclosed. President Obama will be announcing GM’s bankruptcy shortly before noon EDT today, and GM CEO Fritz Henderson will hold a news conference immediately afterward to discuss the first day of the rest of GM’s life. Whether that’s a long life or a short life, however, is anyone’s guess.
