Economics

Abstract
U.S.A General Motor Company (GMC) bankruptcy case is one of the most critical decisions the executives took. Such affected not only the American auto market but also the worldwide auto market.  GMC bankruptcy case has different causes, effects, advantages and drawbacks.  This posed as a major challenge to economists and decision-makers to handle and resolve. This paper discusses the GMC bankruptcy case in terms of bankruptcy filing history, its causes and effects, GMCs future and evaluation of the outcome of the GMC bankruptcy process and the short-term resolution plans for such.

Company Background
General Motors Company (GMC), a globally recognized US based automaker, was founded in September 16, 1908. From inception, it continued to be aggressive in its industry and acquired a number of small automobile companies, which include Oldsmobile and Reliance Motor Truck Company, to name a few. Last 2008, GMC ranks the third highest in terms of global revenues among automakers on the Fortune Global 500. GMC, in its flourishing years, pioneered automotive innovation and defined a new breed of a massive Multinational Corporation. GMCs portfolio includes products that are widely distributed in one hundred forty (140) countries which include but are not limited to US, China, Brazil, the United Kingdom, Canada, Russia and Germany. It manufactures and distributes automobiles known for its quality and reliability such as Buick, Cadillac, Chevrolet, GMC, GM Daewoo, Holden, HUMMER, Opel, Pontiac, Saab, Saturn, Vauxhall and Wuling. It employs about two hundred thirty five thousand (235,000) employees.
Last June 1, 2009, it filed for bankruptcy which emerged in reorganization and wherein a new entity acquired its most valuable asset.

Description of the Problem

GMCs financial struggle started even before the onset of the automotive crisis in 20082009.

In 1991, GMC experienced a profit loss of US4.45 billion which led to cost cutting measures and management reorganizations. Such strategy restored GMCs profitability for the next decade. After such time, GMC again experienced a profit loss of US10.6 billion in 2005 and US38.7 billion in 2007. On November 2008, GMC declared their threatened financial standing which led to GMCs top management representatives to testify about such at a congressional hearing in Washington D.C. Moreover, GMC submitted a Restructuring Plan for Long-term viability in December 2008 which sought for a loan approval or financial aid from the U.S. government. The request, however, was turned down by the US government and was asked to submit a new action plan for sustainability of the industry.

In March 2009, GMC was granted the loan with the condition that the company should produce credible plans stating that the companys proposal have avoided tough decisions, and chapter 11 bankruptcy appeared the most promising way to reduce its debts, by allowing the courts to compel bondholders and trade unions into settlements. The U.S. government offer was rejected by GMC bondholders. As a result, several efforts were made and implemented to try to salvage the distress being experienced by the company. One effort was an attempt to sell GMC European operations. The endeavor and the process, however, were unsuccessful.

As a suggestion, the U.S government proposed that GMC may be granted financial aid if the company submits a satisfactory restructuring plan and they assume at least a 50  equity stake and reserve the right to name board members.  In May 2009, the U.S government declared that it desires to be the largest shareholder of the reorganized GMC following a bankruptcy filing and re-emergence from bankruptcy through the realization of a new entity. The new entity intends to invest  50 billion, own 60 of the new GMC and restore the success of GMC.

After exploratory discussions, GMC gave in to the requests of the U.S. government after which, the latter agreed to fund a government guarantee of GMC warranty liabilities, amounting to at most US 36.6 million and provide a secured loan of US360.6 million to GMC.

In 30 May 2009 a deal had been made to  transfer new GMC Europe (Opel plus Vauxhall, minus Saab) assets into a standalone company majority-owned by a consortium led by Sberbank of Russia (35), Magna International of Canada (20), and Opel employees and car dealers (10).  In November 2009, GMC announced that it will keep Opel.  In June 2009, Chevrolet-Saturn of Harlem, a dealership in Manhattan that is owned by GM, GMs subsidiary Saturn LLC and Saturn LLC, and Saturn LLCs subsidiary Sarurn Distribution Cooperation, filed for a bankruptcy protection.

In July 2009, NGMCO Inc, a new entity, purchased the ongoing operations of GMC. The purchasing company changed the name of GMC to NGMCO, Inc., marking the birth of a company from the pre-packaged Chapter 11 Reorganization.

Analysis of the Problem

GMC bankruptcy had been caused by a number of reasons  both internally and externally triggered.

A. Investment in Hybrid SUVs and Trucks vis--vis Increasing Gasoline Prices

In 2006 GMC started to produce new hybrid s SUVs and trucks which require high gasoline consumption. GMC instigated the introduction of full sized hybrid pickups, the Opel Astra diesel Hybrid concept vehicle, Saturn Vue Green Line which was introduced to provide drivers with higher speeds in freeway driving.  The following are all type of hybrid cars produced by GMC.
Saturn Vue Green Line Hybrid

As gasoline prices escalated, the sales of SUVs, which is considered GMCs most profitable product, dropped by 30  in 2008. Revenues dropped by P18.8 billion in the first six months, as well as, production by 70 in the same time frame. This scenario led to the cancellation of investment programs for GMC. Table 1 shows GMC s sales figures in the U.S.A.

Calendar YearTotal U.S Sales (U.S )Chgyr19984,603,99119995,017,1509.020004,953,1631.320014,904,0151.020024,858,7050.920034,756,4032.120044,707,4161.020054,517,7304.020064,124,6458.720073,866,6206.320082,980,68822.0
Table 1U.S. GM sale figures 10, 11,12

As a repercussion, in December 2008, a number of manufacturing plants of GMC s products which include Janesville, Wisconsin plant, the Suburban, and the GMC Yukon, and the Moraine, Ohio plant which produces the Chevrolet Blazer and the GMC Envoy, closed permanently. Only one factory which manufactures SUVs was left for General Motors to operate  Arlington, Texas production plant.

B. Annual Operating Margin

The following table shows the dramatic drop in the operation margin of GM.

YearAverage Annual Operating Margin1960s8.7 1970s5.51980s3.01990s1.32000s-0.5 Table 2 GM annual operating margin figures 13

C. 2008-2009 Automotive Crisis
The 2008-2009 economic crisis affected most of the worlds automobile manufacturers. The heaviest impact, however, was experienced by the USA automobile manufactures.  Such began during the 2003-2008 energy crisis which led to the increase in automotive fuels prices.  As a result the sales of sport vehicles, and pickup trucks which have low fuel economy had dropped down. Furthermore, other automakers from Asia, Europe, and North America employed a marketing strategy and developed products that are more price-efficient.  

The automaker crisis in U.S.A is government bailouts that affect GM and Ford.   This affects the automaker industry in terms of product quality, high labor wages, job bank programs, and healthcare retirement benefits.

As consequences to this crisis, GM transferred many of its employees in certain divisions into independent companies such as American Axle and Visteon. Also, GM funded the health insurance premiums of its employees in order to improve its profit.
As things getting more difficult to GM, the company boards announced the sale of the Hummer brand of off-road vehicles to Sichuan Tengzhong Heavy Industrial Machinery Company Ltd.

Effects to Bankruptcy to GMC and Efforts Made to Address Said Issue

All the above mentioned causes had a huge impact into customers, suppliers, Pensioners and Employees and investors.

Customers
At the customers level, GM bankruptcy doesnt free customers from the payment of their car loans.  In addition, customers can make use of the great deals from GM dealers to buy cars with much lower prices.

For prospective buyers, application for a car loan became easier than before. In addition, more incentives were also being offered. This is one of GMCs strategy to increase their sales velocity.  For example, if customers are not able to negotiate on the price of a GM vehicle, they still have the opportunity to secure up to 2,500 worth of incentives.  Car buyers can also take advantage of GMs Total Confidence package at selected dealers which includes up to 5,000 for a trade in, extended warranties, one year free servicing and for those who lose their job, GM can cover payments of up to 500 a month for up to nine months.  In the warranty issues, the Treasury Department announced that it will stand behind warranties for cars purchased during the restructuring period for both G.M. and Chrysler. GM on the other hand announced that it would honor existing warranties.

Suppliers
GMC Suppliers according to the White House announcement that supplier contracts would remain valid and it has created a program to provide federal help to parts makers. But in bankruptcy, supplier contracts can be cancelled. Economist believe that G.M. is likely to tell the court which suppliers it wants to keep doing business with and which contracts it wants to reject. Suppliers can challenge the rejection of their contract, but most likely they will have to reach a settlement with G.M.

Existing Workforce
GMs Employee was highly affected by GMs bankruptcy case which leads to lay-off of huge number of employee. The company uses its right to ask a judge for an immediate pay cut for its salaried employees, and can announce job cuts and close offices, just as it can outside bankruptcy.  Contracts covering members of the HYPERLINK httptopics.nytimes.comtopreferencetimestopicsorganizationsuunited_automobile_workersindex.htmlinlinenyt-org o More articles about United Automobile WorkersUnited Automobile Workers union and other unions will remain in force, unless the company asks a judge to void them. But U.A.W. members approved changes last week, and the new G.M. is expected to honor that contract14.   In addition, The White House said Sunday that, assuming the sale went forward G.M. workers pensions and health care benefits would transfer to the new company and remain in force.

Recommendations (Ongoing Efforts and Proposed Strategies)
While it is a notion that an announcement of bankruptcy entails a disadvantageous status for GMC, such is advantageous as it will give opportunity for GMC to go back to square one and start anew.

Review of Market Strategy
The management can wipe away decades of outsized retiree and labor costs and brand marketing strategy, which will lead to less debt and reworked labor contract that will get costs closer to foreign owned auto plants in the U.S.  

The company may also consider launching a branding strategy, for them to have flexibility in designing products. It is proposed that they offer products in three (3) brands. One brand that will cater to the low-end market, which will offer products that are priced low, another brands that will cater to the mid-market and the last brand to cater to the high-end market and offer luxury cars. As such, GMC will have the plasticity to produce new products, albeit the opportunity to capture a large chunk of the market.

Launch of a new Product Portfolio
The can redesign their product portfolio and slash off weak brands such as Hummer, Saab, Saturn, and Pontiac. After which, GMC may launch a new product portfolio which will feature strong differentiated products.

Review of Operations and Expenses
The company may also be given a chance to revisit its financial statements and dispose andor liquidate unwanted assets such as factories. Furthermore, GMC shall be given an opportunity to standardize its operations in order to accurately calculate the necessary costs it may incur and provide sufficient buffer for its costs.

There may also be a prospect to review current manpower and reorganize such. Whitacre said Sometimes being big is not a weapon, Sometimes it just means youre big. This is one of the trigger for GMC to explore the possibility of employing a lean organization, to retrench a portion of its manpower to free up some a part of its overhead expenses and to ensure a competitive labor force. Furthermore, there is also an opportunity to visit its operating structure and close down a number of facilities. Currently, GMC is thinking of reviewing the efficiency of its Asia, Europe and South America business units.

Foregone Liabilities
Given the US government will hold 60  of the new companys stock, there is an opportunity to forgo the current liabilities of GMC and increase the stock value of GMC.

Revisit of Existing Partnerships
GMC may also wasnt to revisit its current partnerships, and retain contract with reliable suppliers and dealers.

Company Relaunch
GMC may also consider a company relaunch which will emphasize and feature the strengths of the company. Should they succeed in a product branding, they may also feature the strength of their new product portfolio, as well as, the companys compliance with the various regulations pertaining to automotives and breakthroughs.

Conclusion
In conclusion, bankruptcy is considered the safest mechanism that the market has to reallocate scarce resources toward their most productive use in order to help save productive ventures and guide the orderly exit of unproductive and failing firms.  In the case of GM Company, the outcome of the bankruptcy filing result into a new company called Motors Liquidation Company.  The new company bought many of the assets and the trademark from the old company.  The new company has most of GM old employees and sells many of the same brands which led to a smaller, restructured version of the former GMC.  Moreover, filing for bankruptcy allow the companys resources including capital and labors that being wasted to be released and shifted to productive sectors of the economy.  In my opinion, GM bankruptcy filing helped the company in terms that the government gave it  19.4 billion fund operations that made the total helped exceed 50 billion.  As the government will hold  2.5 billion shares of GM, GM should pay back only  8 billion which considered as a loan not a debt. GM bankruptcy filing allow new auto maker Company either local or international to take the lead in the American auto industry.  In addition the Detroit middle class worker who works in the auto market wills either loss their job or they will be affected in terms of health insurance, salary and working hours. In terms of customers I believe that most of customer will lose interest in GM brands which is very clear in the sale rate drop during last year.  Finally I believed that GM filing for bankruptcy considers the beginning of a big failure for American auto industry.   I recommend that this International recognized bankruptcy case should be carefully analyzed and studied by economists so that other big companies can benefit from this experience.  The most challenging thing in doing this paper were references as it was difficult to find text book that tackle this case, I believed that there will be many text book that analysis this case in the future due to its huge impact in the worldwide auto market.