General Motors – Has It Lost Its Credibility?

The news is full of criticism of General Motors’ announcement that it has repaid the money it owes the United States government for bailing GM out with TARP money (Troubled Asset Relief Program).

General Motors' April 2010 announcement: “G.M. is able to repay the taxpayers in full, with interest, ahead of schedule, because more customers are buying vehicles like the Chevrolet Malibu and Buick LaCrosse.”

The facts:

General Motors' April 2010 repayment totaled $6.7 billion.

The United States government gave General Motors $49.5 billion in 2009 to finance its bankruptcy. Thus only 14% of the total aid GM received from the government has been repaid. Not a full repayment.

Further complicating the issue comes from Mr. Neil Barofsky, the Inspector General overseeing the troubled asset program, when he testified before the Senate Finance Committee on April 20, 2010 that G.M. was using taxpayer money to make the loan repayment – not General Motors’ earnings.

Apparently the $6.7 billion came from the $13.4 billion of the United States government’s TARP money that had been put in a General Motor’s escrow account when GM was in bankruptcy. Thus the company is using US government money--to pay back the US government loan.

Further complicating the issue is the General Accountability Office’s December 2009 report that: "The Treasury is unlikely to recover the entirety of its investment in Chrysler or GM, given that the companies' values would have to grow substantially more than they have in the past."

Also coloring GM’s financial condition is that:

● It has applied to the Department of Energy for a $10 billion loan to retool its plants.
● In 2009 it was unprofitable with deficit gross profits and operating losses.
● In the first months of 2010 its market share declined.

Is all of this true? If it is, the real issue is General Motors' loss of trust and credibility. Will consumers figure out that General Motor’s announcement is not true? That it was a misleading public relations ploy? If consumers do not trust a manufacturer, will they stop purchasing its product? For this short-term gain, will GM lose in the long run?

Sources:
New York Times.
Power Line.
Reason Foundation.

The GM & Chrysler Bankruptcies

“The General Motors Corp. Chapter 11 bankruptcy marks the humbling of an American icon that once dominated the global car industry and sets up a high-stakes gamble for USA taxpayers.”

Reportedly both General Motors and Chrysler will exit from Chapter 11 Bankruptcy Court in 60 to 90 days. This sounds like wishful thinking and may involve some public relations imagery. To “correctly” restructure a significantly less complex and smaller manufacturing company, would require at least one year. The rush may produce more problems for all involved.

Regardless, one of GM’s and Chrysler’s most significant problems is that hourly labor costs are reportedly $20 to $30 per hour higher than their USA based Japanese competitors. It doesn’t appear that this most fundamental weakness has been addressed in a serious manner.

Most of the Japanese competitors have non-union hourly labor in their USA manufacturing operations. As such, their labor costs will not significantly increase over time. In addition, for the past few years, the Japanese Automakers have made higher capital investments to improve productivity. The cash strapped Big Three have not been able to match its competition.

Recent GM and Chrysler plant closings and operational restructurings have reduced their overall costs by billions of dollars, as well as their hourly headcounts by the thousands. However, the overall impact is misleading. The hourly cost for direct labor employees has not been reduced. And will continue to prove to be a vivid Achilles’ heel for the legendary USA manufacturers.

While the total of manufactured GM and Chrysler automobiles have declined significantly, the actual cost of each automobile continues to be higher than its Japanese competition. The Automakers will continue to prove unable to compete with this inherit weakness. Besides overt Labor commitments, another higher cost factor to consider is unabsorbed manufacturing overhead, since production is lower in existing plants. This is not a healthy sign.

However, the most important factor remains, has the UAW agreed to reduce the total cost for hourly direct labor employees?

Regretfully, there is no evidence of a reduction in hourly labor rates...

It is doubtful any labor cost concession will be meaningful if this is true:
"The fear at the UAW was that ownership in GM could eventually be worth very little.”

Thus, as it stands, GM and Chrysler will continue to lose money and will probably be forced to return to bankruptcy protection. We will have to wait to see what structure the FIAT buyout of Chrysler will produce. But, if there is a next time for GM in bankruptcy, it may have to execute liquidation under the Chapter 7 bankruptcy code. That is, if the US Government, which now owns 70% of the company, will allow it.

In addition, salaried headcounts appear too high. While this can be dealt with outside of the bankruptcy process, GM and Chrysler should analyze their salaried organizations and adopt Toyota’s performance target of 10% improvements in salaried productivity every year.

Regardless, neither company should exit from bankruptcy protection until the operations are restructured to allow a competitive, best cost manufacturing operation to emerge. We shall see, both GM and Chrysler face enormous challenges for survival.

Have two of the Big Three suffered such a loss in reputation over the years, their brands are too damaged beyond repair for today’s marketplace?

No, quality management can turn anything around with the right strategy, capital, cost structure, and culture. But it requires the tools needed to compete. Anything is possible.