By Truman Lewis
ConsumerAffairs.com
June 1, 2009
General Motors has filed the largest-ever industrial Chapter 11 bankruptcy petition as it begins the painful transition to becoming a ward of the state — what industry insiders are calling Government Motors. As GM was entering bankruptcy, Chrysler rolled closer to existing bankruptcy protection.
Federal bankruptcy court Judge Arthur Gonzalez approved the $2 billion sale of Chrysler to a new company that will be 68 percent controlled by a United Auto Workers union heath care trust. Fiat will control 20 percent, the U.S. and Canadian governments will control the other 12 percent.
GM's new advertising tag line might be: "GM. Yes we can," joked Bob Lutz, GM's vice-chairman last week. He said GM will launch new ad campaigns this week to assure customers the company is still in business and warranties are still valid.
President Barack Obama and GM CEO Fritz Henderson are expected to hold nearly simultaneous news conferences, Obama in Washington and Henderson in New York, as the federal government takes a two-thirds interest in GM in exchange for tens of billions of dollars in federal assistance.
The Chrysler deal creates a "New Chrysler" but critics include debtholders and nearly 800 dealers who were abruptly terminated by Chrysler.
Even Lee Iacocca, the cigar-chomping high-roller credited with saving Chrysler from oblivion in the 1980s, is getting the bum's rush. If the company's bankruptcy plan is approved, Iacocca will lose a big chunk of his pension and a life-long company car. Iacocca and other former executives are being asked to return their company-issued cars or pay for them.
Chrysler's creditors might get little sympathy from GM stockholders, who will be wiped out by the GM deal. GM bondholders will see only a few cents for each dollar they're owed. What value U.S. taxpayers and consumers realize remains to be seen.
U.S. puts up $30 billion
In a statement Sunday night, the White House said the United States would put up $30.1 billion in bankruptcy financing to take GM through a Chapter 11 reorganization.
The government will have the right to name all but two of the GM board of directors. The Canadian government and a UAW retiree health care trust will name the other two. For the $30 billion, U.S. taxpayers will get a 60 percent stake in a reorganized GM, with another 12 percent going to Canada.
The White House vowed to exercise its ownership stake in GM "in a hands-off, commercial manner." It said it would expect GM to operate as a car company, not a government agency.
What about the buyers?
The stark fact is that General Motors' market share through April has been a dismal 19.2 percent, meaning that four out of five Americans have bought their cars and trucks elsewhere. Chrysler has not exactly been a market-leader either.
No one has yet explained in any detail how the taxpayer-financed recovery plan will lure consumers — who have developed quite a taste for Asian cars — back into the showrooms of the remaining U.S. brands' dealers. While there will still be Chevrolet, Cadillac and Buick dealers, there will be far fewer of them. And as for Saturn, Pontiac, Saab and Hummer — well, they're no longer in the picture.
While the federal government is, at least for now, guaranteeing U.S. automakers' warranties, there are thousands of consumers who will soon be driving a vehicle that is effectively an orphan. Ask anyone who's owned a Daewoo, Peugeot, Alfa Romeo or, to go a little farther back in history, Studebaker or Nash how it feels to be stuck with a car that is no longer sold or serviced by a network of U.S. dealers.
But there's no time to think about the consumer right now, or so it seems. GM and its government overseers have been busy trying to cut deals that will clear the way for today's bankruptcy. Besides short-changing bondholders who have $27.2 billion at stake, the car czars have been brokering a new contract with the United Auto Workers and spinning off GM's Opel brand to Canada's Magna International, with backing from the German government.
Washington has made it clear it wants the automakers to build little fuel-sippers rather than the goliathan SUVs and pick-up trucks that have been its mainstay in recent years. But whether U.S. consumers will buy smaller and, quite likely, more expensive domestic cars, remains to be seen.
The Mini Cooper, made by BMW, has commanded a premium price but consumers generally expect smaller cars to be less expensive. Changing that expectation may not be easy.
No surprise
The crisis is hardly a surprise. GM's fortunes have been eroding since 1962, when it commanded more than 51 percent of U.S. sales. Previous administrations have propped up the automakers in various ways, usually by exempting them from the more onerous safety, pollution and fuel-efficiency standards sought by activist groups but the Obama administration, already faced with a collapsing financial industry and a severely weakened economy, didn't see many options.
"My preference would have been to stay out of it completely," Obama said in a broadcast interview over the weekend.
More dealers to be axed
While much of the auto industry's pain is centered in the Midwest, the dealer bloodbath is affecting cities and towns across America. Both Chrysler and GM have cut thousands of dealers and GM, which axed 1,124 on May 15, is set to cut loose another 450, the trade magazine Automotive News reported.
Company sources said the dealers will be told they won't be offered a chance to renew their franchise agreements when they expire in October 2010. The affected dealers have "specific issues," a company insider said. Still to be terminated are about 500 Hummer, Saab and Saturn dealers.
While dealers who lose their franchise don't have to go out of business, many have little chance of making it on their own. The terminated dealers are generally small and have relatively poor sales records, GM and Chrysler claim. While they could theoretically survive as used car dealers, that's not a market that is offering much growth at the moment.
Many dealers will be stuck with huge amounts of inventory — unsold cars — as well as taxes, leases and obligations to employees. Many dealers signed personal guarantees as part of their financing arrangements with Chrysler Financial and GMAC and could be forced into bankruptcy themselves if the finance companies enforce the guarantees.
