Rescuing Gm

According to House Speaker Nancy Pelosi, bailing out America’s Big Three automakers should not be considered “as life-support to sustain a dying industry, but a jump start for an industry that is essential to our country’s economic health.” Really, Madam Speaker? America, let’s face it, the proposed bailout isn’t about rescuing GM, it’s about preserving the UAW, its toxic contracts, and its political ties with the Democratic Party. A bailout of the Big Three is a mistake of monumental proportions as it subsidizes a failed business model and supports continued mismanagement. Jack Kemp, former United States Representative and founder and co-director of Empower America, a public policy and advocacy organization, stated it best:

“If you tax something, you get less of it. If you subsidize something, you get more of it. The problem in America today is that we are taxing work, saving, investment, and productivity; and we’re subsidizing debt, welfare, consumption, leisure, and mediocrity.”

According to conservative industry estimates, GM alone is bleeding $1 billion of cash per month. If you give GM a $10 billion lifeline, they’ll burn through it in 10 months! 

A bailout clearly is not the answer. GM’s primary foreign rivals (BMW, Honda, Hyundai, Kia, Nissan, and Toyota) all build vehicles in the USA using American labor. The key difference is they maintain leaner and more adaptable organizational structures than GM, and can perform the same operations better, faster, and with fewer resources. In the current business environment of global competition, rapid technological change, and uncertainty, this is unacceptable. GM’s multi-layered, bureaucratic organizational structure is crippling its ability to compete effectively in a global marketplace.

If a bailout is not the answer, what can GM do?

o GMAC must stop originating, securitizing, and servicing insurance and mortgage products and focus on automotive financing.

GMAC lost $2.3 billion in 2007; unfortunately, it will be difficult for GM to force any changes at GMAC. (Cerberus acquired a controlling 51% stake in 2006.) In order to return GMAC to profitability, the subsidiary must reduce exposure to the foreclosed assets, impaired loans, loan commitments, and reserve requirements inherent in their insurance and mortgage product portfolio. The business of GMAC is borrowing and lending money, and that’s not GM’s business.

o Alternatively, GM could swap a portion of its remaining 49% equity stake in GMAC to Cerberus for ownership of Chrysler. 

According to its 2007 Form 10-K, GM has 184 directly or indirectly owned subsidiaries. As a result, there’s plenty of room for asset sales and internal consolidations to generate cash and to enhance operational efficiencies. Ownership of Chrysler would enable additional asset sales and consolidations beyond what GM already can do on its own. In particular, GM and Chrysler can consolidate or dispose of assembly plants, automotive retailers, brands, duplicative corporate assets, employees and layers of management, and parts suppliers. For instance, the All-American Chevrolet and Dodge brands can be merged, as can the iconic Hummer and Jeep brands. The Chrysler nameplate can be sold to generate cash, as can Global Electric Motors. GM can swap Mopar to Delphi for forgiveness of GM’s remaining financial (including pension) and other obligations and expedite Delphi’s emergence from bankruptcy. Finally, Chrysler Financial can either be left with Cerberus or sold after the swap.

Not only is GMAC not as critical to GM’s operations as it once was, “GMAC’s business requires substantial capital”1 GM doesn’t have and cannot get. Additionally, it draws management attention away from the firm’s core operations and its reason for existence. This is something Sears discovered long ago, leading to their decision in late 1992 to divest their capital intensive non-core financial services network (i.e., Allstate, Coldwell Banker, and Dean Witter/Discover.)  Please refer to Outsourcing the American Dream by Christopher M. England for additional information related to Sears’ failed venture into retail financial services.

1General Motors Corp 2007 Form 10-K

o GM must invest heavily in intellectual property and research and development.  

In my July 2008 article, “Rescue the American Dream from the Tyranny of Foreign Oil,” I outlined several initiatives that are essential to the survival of America’s Big Three automakers, including investments in breakthrough automotive technologies and commercially-viable alternative-fuel sources. For example, GM can drive up Corporate Average Fuel Economy (CAFE) thresholds in a couple of ways. One is by substituting the same lighter-weight carbon-fiber composite body panels used by our military for steel. Another is by harnessing kinetic energy from the natural motion, rotation, and vibration of the vehicle and its parts as a supplemental power source. GM also must replace current “flex-fuel” (a.k.a. E85) vehicles with “multi flex-fuel” vehicles capable of using any pure or blended fuel source. Alternative-fuel sources can include ammonia, bio-diesel/bio-fuels, compressed natural gas, gas/electric hybrids, plug-in electrics, etc.

While hydrogen is the most abundant element in the universe, most of it remains locked up in more complex compounds such as ammonia, methane (natural gas or propane), or water. Not only does it require tremendous amounts of energy to separate the hydrogen from its natural compounds, it requires tremendous amounts of energy to liquefy and condense hydrogen; however, scientists are experimenting with electrolyzers, genetically-engineered bacteria, and various reactive metals that might one day lead to an abundant alternative-fuel source. According to Kevin Mayhood in a June 30, 2008 article in The Columbus Dispatch, Gerardine Botte, director of Ohio University’s Electrochemical Engineering Research Laboratory, is working on a method to pull hydrogen from the ammonia in animal and human urine. This is important for several reasons. First, we already have the infrastructure in place to distribute ammonia to retail gas station pumps, as it’s been used to make fertilizer for decades. Second, separating hydrogen from ammonia does not produce “greenhouse gases” as long as the required electricity comes from a source which produces no greenhouse gases. (The same can be said for gas/electric hybrids and plug-in electrics.) Third, ammonia is more easily liquefied and condensed than hydrogen.

o GM should consider Chapter 11.

Filing for bankruptcy under Chapter 11 of the United States Bankruptcy Code should present GM with an enhanced opportunity to restructure its business model and dump its burdensome union agreements. GM can enter and re-emerge from Chapter 11 without enormous job losses, something the UAW and the pro-bailout Democrats chose to ignore. We’re not talking about Chapter 7 here. We’re talking about an opportunity to reign in the massive healthcare, pension, and other legacy costs that are draining GM of value and leaving it at a competitive disadvantage. Chapter 11 should be considered even if it means freezing defined benefit pension funds to new employee participation, beefing up 401(k) plans, and increasing cost sharing with employees and retirees. If GM leaves legacy costs untouched, employees and retirees ultimately will be the ones who suffer. That being said, GM also must redesign performance management and reward systems to ensure workers are compensated in the most appropriate ways. Despite suffering a net loss of $38.7 billion in 2007, Richard Wagoner, Jr., Chairman and CEO of GM, earned $15.7 million in total compensation. Something’s definitely wrong with this picture. 

If a bailout is not the answer, what can the Federal Government do?

o Put an end to America’s unilateral free-trade policies.

We should practice free-trade only with nations who practice it with us. Why do we allow Japan full access to the American economy, when Japan puts up barriers to American ownership of Japanese corporations or restricts the number of automobiles GM or Ford can sell in Japan? If Japan puts up barriers, we need to do the same. If China implements a 25% import tariff making our automobiles more expensive in Chinese markets, we need to do the same making Chinese automobiles more expensive in American markets. This isn’t protectionism; it’s good economic sense. 

o Rescue the American Dream from the Tyranny of Foreign Oil

In my July 2008 article, “Rescue the American Dream from the Tyranny of Foreign Oil,” I not only outlined several initiatives that are essential to the survival of America’s Big Three automakers, I also outlined numerous initiatives we must undertake to simultaneously diversify sources of oil supplies, dramatically slash oil consumption, and increase production of alternative-energy sources to clean up the environment, increase our energy efficiency, protect national security interests, reduce the military and political leverage of OPEC oil, revitalize the U.S. economy, and shrink trade deficits.

www.christophermengland.com