June 14, 2009

General Motors Let Us Rest in Peace

After a long process, GM is officially under bankruptcy protection.

The CEO has been turfed, dealers slashed, lay-offs happening (with more planned) and business recovery plans iterating back and forth with Government hoping to land on a version that is believable and will not place an undue burden on the taxpayer.

Lets see… about $180 billion in debt and around $80 billion in assets. Certainly one of the ugliest balance sheets I have seen in quite some time. In addition I am advised that taxpayers are contributing approximately $2 million for each GM employee to keep this company going….. (for now at least).

The irony is that the very reasons people wanted GM saved (avoid slashing dealers, not laying off people to mention just two) are indeed the things that the Company is relying on to turn it around. In previous blog I suggested that they had to do some serious Cutting of CRAP which they intend to do by way of rationalizing their product line. Good stuff, just decades too late! So, if the benefits of saving them are illusional why are we trying to save them? Is there some grand national purpose at play here?

GM has a demand challenge. How can they convince prospective buyers to buy a GM vehicle with the attendant risks involved. Like they might not be here for neither a long time nor for a good time. People can buy Ford or Honda or Hyundai with little or no risk. So what is GM’s value proposition? Lower prices? It won’t work. Price competition never does unless the provider has sufficient economies of scale and scope, both of which GM’s restructuring plan diminishes.

GM’s market share has plummeted. They have no customer loyalty. They are in a downward spiral. They are approaching death. Taxpayers should not be asked to (try to) save them; let natural market forces play out. We will be asked to contribute more money and more money and more money under the illusion that the Company can be salvaged.

My mind goes back to the days of the opening up of the long distance (LD) market to competition. Historically LD cross subsidized basic local local service. Local service was underpriced relative to its cost in order to provide it to remote high cost areas of North America. The introduction of competition in LD service meant that LD prices would have to be reduced and brought closer to their economic costs; the price of local service, on the other hand, would have to be increased to its costs. Prices were Rebalanced; the revenue impact was neutral and that the shareholder was kept whole.

In this case taxpayers are being asked to subsidize GM even tough there is no economic proposition that suggests they will be able to make a comeback. National deficits and hence the debt ill rise with what recourse to prevent a return to debt levels (at least in Canada) of bygone years? What’s the Government’s Rebalancing Plan to prevent a burden being placed on the Country’s shareholders i.e. the taxpayers?

There isn’t one. I know I am cynical, but this is the likely outcome:
- the chances are that GM won’t be financially healthy for a long time (if ever) because the required BE DiFFERENT position will elude them.
- the subsidy of $2 million per GM employee by the taxpayer will increase
- deficits and debt will escalate
- either taxes will rise or government services will be cut back (a political nightmare)
- taxpayers get it in the ear either way, AND FOR WHAT BENEFIT?

Deafening silence ensues…..

Cheers, Roy Osing

Related Blogs
GM Introduction
GM Part 1
GM Part 2

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Posted 6.14.09 at 11:24 am by Roy Osing | Read Comments (0) | Leave a Comment