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Who isn't sickened by the government takeover of General Motors? Shortly after celebrating 100 years of building cars and trucks, GM has been reduced to Government Motors. At one time the prevalent saying in the USA was: “If it’s good for GM, its good for the US.” How could such a magnificent company fall so fast and so hard?

Did GM build bad cars and trucks and lose the market because of poor quality? Maybe billions of dollars was wasted on bad overseas ventures? Was Japan just too good at building cars and trucks and GM wouldn’t compete? The answers to these questions are “NO!” So what happened? GM was caught in a perfect storm of economic, government and labor factors that combined to bring the company to its knees.

The Facts

GM’s quality ratings were at all time highs and some brands were pulling even with European and Japanese luxury cars. As a result, GM trucks and SUVs were selling very well and gaining market share. At the same time, GM’s overseas ventures, especially in China, were yielding record profits. Toyota was starting to have some early problems with engine control systems and was still settling a large class action suit over sludging engines. GM products and its competition were not the problems as 2007 was winding down. All product lines were making money, some more than others of course.

As 2008 began, the indicators became obvious that oil prices were on the rise and the fear set in that $200-a-barrel was imminent. Gas and Diesel prices began to escalate, causing ripples throughout the economy. The real estate bubble began to burst and Wall Street teetered on collapse. The economic downturn was not caused by GM but it was starting to impact sales, especially the large SUV’s and trucks. As gas passed $4.00 per gallon and diesel hit $5.00 per gallon, vehicles that could not get 35 miles per gallon were of little use to the buying public.

GM’s very lucrative SUV and truck market all but evaporated in a matter of months.

$15 Billion: Petty Cash

At the time, GM had over $15 billion in cash reserves but how long could that last if the vehicle sales did not return? Union contracts required GM to pay workers they no longer needed, so laying off workers would do little to stop the losses. Temporary factory shutdowns would only give some relief since the Union contracts would again prevent layoffs. If the plant were shutdown for good, then the workers were out of a job and some savings could be gained. GM carries the greatest legacy cost of any company in the world; the slang around is that GM is the world’s largest health maintenance company with a hobby of building cars.

At this point, GM should have declared bankruptcy. They eventually did declare bankruptcy but it was a controlled bankruptcy. This was a new process where the government directed the judge on how they wanted to fund GM after the bankruptcy. In a legal bankruptcy, the Union contracts would have been nullified and the primary bond holders would have priority on the assets of the company. In this strange process (probably unconstitutional) the Union was made whole, being guaranteed pension protection and literally owning a portion of GM where the primary bond holders received nothing. The government supplied billions in loans; as a result the US government owned over fifty percent – spelled c-o-n-t-r-o-l – of GM.

A Not-for-Profit Company

Now that the government had such an interest in GM, a czar was assigned to oversee the company and make sure those cars and trucks would be built to government plans. This resulted in the CEO of GM being fired by the President of the United States. This seems like a story from communist Russia or China but it happened right here in the U.S. of A.

GM had been on track to produce a new four cylinder turbo diesel and new 4.7L Duramax diesel for 2011 models. These of course were cancelled and orders were given to concentrate on hybrids. It is always amusing but tragic to see decisions made by government bureaucrats that have agendas quite different from building what’s-best-for-the-environment cars.

Don’t build the fuel efficient diesels, build the hybrids: ignorant nonsense!

The 2010 green car of the year is the VW TDI (turbo diesel) that gets over 50 miles per gallon and is nearly pollution free. There are no hybrids that are as fuel efficient as the VW TDI. GM was on the right track and now the fuel efficient diesels will be delayed years because of an – at best – ignorant decision from a government bureaucrat.

I recently traveled to Israel. The mix of vehicles there included more than fifty percent small diesels. Many of these little diesels were Renault’s from France and I can’t understand why we don’t see a flood of small diesels on US roads. To be honest, I do understand: such common sense does not line up with the thinking of ignorant bureaucrats in Washington. The sooner GM can buy back the government interest in the company, the sooner they will resemble a for-profit car company again.

Imagine a hybrid trying to pull a heavy trailer or boat? It can’t, but a fuel efficient diesel can. The 4.7L Duramax would have replaced the less fuel efficient gas engines in SUV’s and half-ton pickups and would have been a good option in 2500 pickups and all classes of vans. Today smaller diesels in the 4.7L Duramax range are making inroads in vehicles like the Sprinter vans: thanks to the US government, it is a European diesel, not America-made.

Could G M’s slide into becoming “Government Motors” have been prevented? There are scenarios that GM could have taken to avoid such intrusive government control but the pain for the Union workers both present and retired was more than the political system could bear. The heavy hand of government was clearly designed to protect the Union contracts and benefit packages for current and retired workers. Looking at how the preferred bond holders were treated and how the Union was protected in the unprecedented bankruptcy, reveals the ulterior motive of the government rescuing GM. Additionally, how GM management was held in contempt by the new government overseers reveals a disdain for business by the US administration.

GM is on record as being determined to pay the government back and regain its independence as a private company. As the economy begins to improve, let’s hope the return to private enterprise is sooner rather than later. In doing so, may GM be a positive example to the United States and Canada that private ownership better than government control. As the saying goes, "If its good for GM, it is good for the country."

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argo said:

Not quite... While I am not any particular fan of this current administration, and while I was even less of a fan of the last administration (what can I say? I'm a political malcontent!), I would be remiss if I were to let this go without bringing up the truth about GM's decline. That truth has a whole lot to look at than rising fuel costs and "evil" Union workers and retirees. When did GM's downward spiral begin? I'd peg that one at 1977, with the introduction of the Oldsmobile 350 diesel. When Harley Earl was at the helm of GM, he made one thing abundantly clear. His business philosophy was this: "F%&@ the shareholders!" He authorized the spending of enormous sums of money to innovate and improve the design elements of every facet of GM.s entire product line. This innovation is why other car companies (prestigious names such as Rolls Royce, Mercedes Benz, BMW, etc) purchased transmissions, electrical components, and other materials from GM for their own cars. It was why these same companies would try to reverse engineer GM's products. This spirit of innovation made GM a titan. Harley Earl knew that. There were then (as now) shareholders that complained that he spent too much, that he could cut corners and produce bigger dividends for the shareholders etc, but Harley knew that the reason GM stock was worth owning, and why the company was so profitable was because he spent so much money on innovation. GM didn't release half-baked products. They released products that were on the mark and built right from day one. So fast forward to 1976. Oldsmobile engineers were in the 3rd year of developing and testing a diesel engine prototype that would allow the American motoring public to get small car economy in a large car. Innovation. The hitch in this plan was that the engine wasn't finished yet. They had running mules but they were blowing up at an alarming rate. GM corporate brass found out about Oldsmobile's diesel, and they wanted it across the lineup and they wanted it now. The engineers were clear that the engine wasn't ready yet, but the management wanted to sell it right away, because they were greedy and short sighted. The shareholders found out about the engine and demanded it be produced. GM forced Oldsmobile's hand and released an engine that was not going to make it because they wanted to rake in the profits that they were able to glean from the second oil embargo. This is where it all began, because this is where the short sighted business model took root. GM went from being the most respected and revered auto maker in the world to being the laughing stock that singularly destroyed the diesel passenger car market in the USA in just 3 years time. GM eventually got it right; by the time the DX engines came out, most of the bugs were fixed, but the damage was already done. The V6 diesel had none of the problems that it's V8 cousin did, but that's because the engineers got to finish working on it before releasing it. Ring in 1978,79,80, etc on the way up to 2008. More short sighted decisions for immediate gratification and short term profits, all aimed at making the shareholders happy (that and the CEO). The senior management managed to ruin the Oldsmobile brand, by changing the division's course so many times it lost it's identity. They killed their second most profitable division (behind only Chevrolet) in 12 years. Oldsmobile was so lost by 1994 when the Aurora debuted, nobody knew what Oldsmobile was anymore. This is not your father's Oldsmobile? The Rocket went away for some goofy looking symbol that resembles a chrome plated coffee stain? Saturn was introduced and run into the ground in 18 years. They had promise when they started out, but GM bungled that too. All to keep the shareholders happy. The cars also were also skimpy and not well designed. They were eclipsed by the companies that used to follow their lead. I am sorry, but Union employees and retirees did not do this. This was wrought by irresponsible senior management and poor business practices. GM is a blue chip company and it needs to start acting like one again. They need to have a long term prospectus on their business strategy, and stop with the knee-jerking short sighted reactionary way they do things and tell the shareholders to go f%#@ themselves, like Harley Earl would have. Speaking of which... do you remember those Harley Earl commercials a few years back? If he could see the horrendous crap that GM tried to peddle to the public in order to sell their garbage, he'd spin so fast in his grave that electric cars would be the most efficient things to drive, because we could wrap his corpse in permanent magnets and build a stator around his casket and harness the electrical energy to charge each and every electric car in the world for free! It's hard for me to see Union employees and pensioners who have contributed to the company's well being and profits being called evil or a burden, whereas the CEO, fired or not, gets millions of dollars a year and contributes nothing of value to the company; one for whom a severance package (A.K.A. "golden parachute) is given which contains millions of dollars and perks. After you cut every one of those bumbling morons' pay and positions then maybe I'll be a little more sympathetic when you tell me that the middle class workers need to suffer for the good of the company. Until then, I'm not buying it!

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June 10, 2011
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