THE AUTOEXTREMIST

February 16, 2009

Publisher's Note (updated at 8:00PM, 2/17): With the annual sales rate for the U.S. auto industry plunging to its lowest level in decades, GM proposed an accelerated downsizing program to the Treasury Department late today that goes much further than the plans it discussed in December in Washington. The dramatic moves include eliminating 47,000 hourly and salaried jobs globally in 2009, closing 14 factories by 2012 (the previous number discussed was nine), and deleting its Hummer truck brand from its divisional portfolio. And if Saturn isn't able to be revived, it will be eliminated in 2011. GM could need as much as $16.6 billion in additional loans from the U.S. government and could run out of money in March if it doesn't receive at least some of that funding. GM also insisted that bankruptcy was not an option and that it would cost as much as $100 billion in lost revenue. The biggest news by far was that the GM was unable to reach an agreement with the UAW in terms of accepting debt equity for half of GM's VEBA obligations. GM was also unable to cut a deal with its bondholders in order to cut its massive debt obligation. As I've said several times previously, this date was never going to be about coming up with a hard and fast deal, because there are just too many loose ends in play. So now the real work begins, and it will be one tough slog from here on out. - PMD

Two scenarios emerge for GM’s future. Is it time for Precision Motors?

By Peter M. De Lorenzo

Detroit. Those waiting for some voila! moment tomorrow (Tuesday, Feb. 17)) when GM brings its “Plan” for survival to Washington shouldn’t hold their breath, because the plan will be incomplete pending many factors, including critical negotiations with bondholders and the UAW. Even if GM arrives at some sort of tentative agreement with these factions in the next 24 hours, there will be simply too many loose ends pending for GM to walk in and say, “Here it is, we’re good.”

It’s common knowledge that GM is working on two plans to present to the government, however. The first one would involve taking more money from the government to continue its ongoing restructuring and contraction efforts, and a second one that involves a bankruptcy-type arrangement – without calling it as such – which would have the government contribute funds to help GM pay-off obligations and unwind existing entanglements in order to start over as a new company.

The first scenario is clearly the preferable one with many GM insiders because it allows for the gradual reduction of dealers, divisions and employees over time (projecting out to 2013), which would be the least painful in terms of impact to its people and its dealers. It hinges on a lot of “ifs,” however, and judging by the acrimonious dealings between GM and its bondholders, not to mention the continued recalcitrance by the UAW to disband its longstanding existing agreements - in particular the so-called “supplemental unemployment benefit,” or “SUB” pay, which gives laid-off workers 95 percent of their net wages - reaching the goal is not going to be easy. And some would argue that achieving it is nothing more than a pipe dream at this juncture, which is why a second scenario has emerged as a viable option worth considering, at least within some corners of GM.

Now, how the government and GM would position such an arrangement – this “phantom” bankruptcy – so the consumer public wouldn’t view it as such remains to be seen, because using the “B-word” in conjunction with an auto company and unleashing the subsequent negative consumer attitudes that it would be sure to trigger is a scenario that no one wants to see play out. Especially considering that the negativity associated with GM (and Chrysler) since the debacle in Washington last December has already wreaked havoc on consumer attitudes toward these two companies and contributed dramatically to their precarious swoon in sales over the last three months.

Which is why some GM insiders are suggesting that the second option - a “government-assisted reconfiguration” or whatever they’d call it - would give them a much greater chance at survival over the long term, because it would allow the company to get out from under the cloud of negativity that is hovering over everything GM is trying to achieve and accomplish.

It would also have some other indirect consequences, too, and that is that it would mean the end of the United Auto Workers union for all intents and purposes, as most of its existing agreements with GM would become untenable and obsolete. This would obviously present some awkward challenges for President Obama, but no matter how noble and well-intended (and unrealistic) his administration is about things, reality has a way of rearing its ugly head even to the most touchy-feely of endeavors. If the ultimate goal is really to save the domestic automobile industry and shore-up America’s manufacturing base, then the biggest casualty may in fact have to be the UAW.

We already know one thing for certain, and that is that whatever scenario plays out for GM, a new company will emerge consisting of just four of its divisions - Chevrolet, Cadillac, Buick and GMC. Pontiac will retain two and at the most three models to be sold at select GMC dealers, while Saturn, Saab and Hummer will cease to exist in the GM solar system (that’s not to say that Hummer and Saab won’t find new owners somewhere out there because that remains a possibility eventually, but Saturn is in fact done). This also means that the reduction to the numbers of GM dealers all across the country will not only continue, it will accelerate. Not good economic news under any scenario.

After writing since Day One of this publication that GM had too many models, too many divisions and too many dealers, it pains me to see that after almost ten years GM is still grappling with this perennial problem. And the fact that they’re now being forced to confront this issue once and for all – when they could have been reducing their redundancies for years – doesn’t make it any easier.

However GM gets there, whether it’s by the government allowing them more time - and money - to reorganize, or if it’s by executing and funding some sort of a prepackaged reorganization that allows GM to terminate agreements and contracts without ever uttering the “B” word, then the GM that will survive should hopefully be a leaner, healthier and more competitive company.

And after all is said and done, if GM is able to emerge from all of this with a strengthening pulse, then I have a recommendation. Substitute the word “Precision” for “General” in the company title and then move on, burying the old company name – and the associated negativity - once and for all.

Thanks for listening.

Editor's Note: Look for more coverage/updates on the developments in Washington in "On The Table." - WG