Paul Rahier: December 2012

Collapse of GM

Paul Rahier 2A

General Motors (GM) was founded in September of 1908. It was the world's largest automaker, by vehicle unit sales, in 2011, and did business in some 157 countries. General Motors produces cars and trucks in 31 countries. GM employs approximately 202,000 people around the world. The GM automotive brands today are Vauxhall, Daewoo, Buick, Cadillac, Chevrolet, GMC, Holden, Opel, and Wuling. Former GM automotive brands include Oakland, Oldsmobile, Pontiac, Hummer, Saab, and Saturn. All this may seem good, but eventually GM went bankrupt. Throughout a series of years GM’s bad financial policies, uncompetitive vehicles, ignoring competition, failure to innovate, their poor managing led to bankruptcy.
General Motors can be thankful to the $19.4 billion in loans and $30.1 billion more in debtor-in-possession financing to bail them out of bankruptcy. The U.S. will own 60 percent of the new GM, which will include Chevy, Buick, GMC and Cadillac. Canada will have 12 percent after lending GM $9.5 billion, the UAW will have 17.5 percent (as payment for $9.4 billion of its $20 billion in health care obligations) with warrants to buy 2.5 percent more, the bondholders 10 percent to as high as 25 percent through warrants, and old GM common shareholders roughly zero. Twelve to 20 more GM factories will close, 21,000 union workers will be fired, and 2,400 GM dealers will shut down (Cohan).
GM has been bankrupt since 2006 because of bad financial policies, and has been avoiding filing for years thanks to the graces of the banks and bondholders. GM has been a finance company who just happened to sell cars. GM limited its $6 billion in vehicle operating losses due to the $2.2 billion it made financing those vehicles in 2005. Rick Wagoner and Fritz Henderson both drove GM to bankruptcy, these two ironically came from their finance division. They have put GM’s liabilities in front of their assets. This condition has gotten worse every year, with a negative net worth of $5.4 billion in 2006, to a negative $91 billion net worth in 2009 (Cohan). GM was so worried about their employees, they have given the union huge benefits. Such as, they provide healthcare and pensions to all of retired workers, which cost GM millions of dollars every single year. These benefits make out to be about $2,000 per car, and that $2,000 has to be passed along to the consumer if GM wants to turn a significant profit (Detroitosaurus Wrecks).
For the longest time GM has been producing uncompetitive vehicles. Compared to companies like Toyota, GM’s cars were poorly built and designed, took too long to manufacture at costs that were too high, and as a result fewer people bought them. In a recent study, more people were willing to pay higher prices for Ford or Toyota then GM. Ford and Toyota vehicle’s were better designed and built so they had higher quality, cost less to own, and lasted longer. Toyota was able to charge 14 percent more for their vehicles then GM. GM resorted to cutting prices on their inferior vehicles, such as commuter cars, and slightly hired priced on their more profitable vehicles such as SUVs and trucks. Toyota was also able to produce cars 7 percent more efficient than GM. This all led to Toyota having a $300-500 per vehicle advantage over GM, and while GM paid $2,000 in health care per car, Toyota enjoyed little to no health care cost because they manufactured in countries where the government paid for the bill. Since Toyota earned a profit of $1,500 per vehicle while GM lost $2,300, thus led to Toyota taking over the North American market (Cohan).
From uncompetitive vehicles, GM also ignored competition. Once owning more than half of the motor vehicle market in the 1960s, has now plummeted to less than 20 percent in modern day. This gave room for Toyota, Ford, etc. to take over the market. GM’s former CEO, Roger Smith, bought Saturn in the 1980’s. Saturn back in its day competed with Toyota/Lexus, and actually beat them in total overall vehicle owner experience. But this one right thing, a light at the end of the tunnel, soon faded as Roger left the CEO role, and his successor failed to sustain the same leadership and responsibilities. So basically, if CEO post Roger Smith were to maintain and infuse GM with the Saturn experience, they would still be at the top.
GM had the failure to innovate. They were so focused on profiting from finances, that they didn’t focus or really even care about the quality of their vehicles. From their stellar cars such as the Corvette, Pontiac GTO, Camaro, and Trans AM, they then led to the Chevy Vega, the Citation, and the Chevette. Dave Thomas of Car.com stated "many cars had a design and interiors that were not stellar and performance that wasn't the best." Peter Cohan said in his book Riding the Value Cycle, that “companies can only survive if they continually push themselves forward in three management processes: value creation (offering products to a customer that satisfies their needs in ways of beating competition), value capture (able to earn a profit on products beating out competition), and value renewal (refers to how a firm that's achieved success forces itself to change so it can adapt to evolving customer needs, upstart competitors, and new technologies). GM just isn’t willing to innovate.
Finally, General Motors poor managing comes into the mix. The CEO’s of GM basically acted as a dictator. They ran the company the old way, by financing and making a product they liked and made people want their product instead of innovating and going with the flow to produce product that the consumer wanted. The current disaster in which GM finds itself makes one wonder, how could it have been so incredibly stupid? All other manufacturers look at GM and laugh at its stupidity and their poorly made cars, while GM executives are high off of what they believe to be the “way to run a business.” GM rewarded those who did things the old way and those who started to be creative and think about ways to innovate were basically cast out and lost any sort of possible promotion. Roger Smith, the ex CEO stepped down from his position because he was looked down upon for believing Toyota and other manufacturers as a threat. An example of the old way to do things is, they pulled their only electric car and a few smaller economy cars off the line to produce more gas hogs such as Hummers (went completely bankrupt and isn’t manufacturing anymore), Escalades, and other over the top trucks and SUVs, as they believed that is where the money is.
All-in-all General Motors was a poorly run company and tried to live up the the American dream, bigger, better, and more money. That all came to a loss in 2006 when they had to be pulled from the toilet and saved by bonds. Their financial policies and managing were poor, they ignored competition and weren’t competitive, and all that led to them unable to innovate and go with the flow in producing better quality car and more fuel efficient. All they wanted was money and to make their employees stay with them and be happy through lots of benefits. GM, a poorly run company.

Works Cited

“A Giant Falls.” The Economists. The Economist Newspaper, 04 June 2009. web. 28 Nov.2012.
Cohan, Peter. "After 101 Years, Why GM Failed." DailyFinance.com. N.p., 31 May 2009. Web. 02
Dec. 2012.
“Detroitosaurus Wrecks.” The Economist. The Economist Newspaper, 04 June 2009. Web. 28 Nov.
2012.
"Going Back To The GM Story." Business World 15 Aug. 2011. Infotrac Newsstand. Web. 29 Nov.
2012.
Ortolani, Alex, and Mike Ramsey. “Top Financial News.” Top Financial News. Bloomberg, 14 Nov.
2008. Web. 28 Nov. 2012.

The fiscal cliff is the $500 billion in tax increases and the spending cuts scheduled to take effect after Jan. 1. The chairman of the Federal Reserve, Ben Bernanke, came up with the term "fiscal cliff" to warn of the dangerous yet avoidable drop-off ahead in the nation’s fiscal path. No matter who you are, we all should be worried about the fiscal cliff. We should be worried about this cliff because if we, the U.S., were to go over the cliff, taxes would increase for the taxpayer and businesses.

This would all lead to much government spending to be cut. One of such spending cuts would be medicare. They would cut medicare spending by 27 percent, about $11 billion. In December 2010, Obama reached a deal with Republicans that extended the tax cuts at all income levels through the end of 2012, that would expire Jan.1, 2013.

The AMT (alternative minimum tax) will put taxes on upper level income citizens, in addition to the tax increases that all citizens will be exposed to. Another negative effect that the Fiscal Cliff would bring to the U.S. is the sequester. The sequester is a number of spending cuts that will take place in 2013 if Obama and the house cannot agree on an alternate solution. The Fiscal Cliff would give the government less money to work with while increasing taxes on American citizens. The Fiscal Cliff should be avoided if possible. It will lose the money because of spending cuts and increase the tax on many citizens.

Paul Rahier

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