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Time Magazine: Is General Motors Worth Saving?

Rob

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Is General Motors Worth Saving?

By Bill Saporito Thursday, Nov. 13, 2008

For months, General Motors had been telling everyone who would listen that bankruptcy was not an option. It had a $30 billion cash pile and plans to restructure the company as the economy rebounded and 2007 U.S. auto sales topped 16 million units.

Then came October. Sales plummeted an astounding 45% over the same period last year, a result of a slowing economy and a dearth of financing for would-be car buyers. Total U.S. car and light-truck sales this year could come in at 13.5 million, 2.6 million fewer than last year. "That's in nobody's business plan," says Kimberly Rodriguez, an automotive specialist with Grant Thornton. "The best planning in the world cannot survive that fluctuation." It's now clear that GM can't survive as an ongoing entity without massive federal assistance. The company is burning through more than $2 billion each month. It has $16 billion left. As if they were aboard a dirigible losing altitude, GM's bosses have been frantically throwing all manner of stuff overboard — retiree health-care benefits, people, assets, new car design — to conserve $5 billion. That will get it through the year. (Click here for a gallery on the 50 worst cars of all time.)

But 2009 is the year of reckoning for GM and the rest of the domestic auto industry, if not the economy as a whole. The GM crisis is raising once again the issue of how far the government should go in rescuing banks, insurance companies, mortgage holders, credit-card issuers and now carmakers. GM has no doubts about it. "Immediate federal funding is essential in order for the U.S. automotive industry to weather this downturn," GM president Fritz Henderson admitted to investors during a conference call in which GM announced a third-quarter loss of $2.5 billion.

No one is more aware of that need than Barack Obama, who carried Michigan by a huge margin. The President-elect is committed to helping the Detroit Three, and House Speaker Nancy Pelosi is leading a rescue party that plans to get a bailout bill in front of President Bush before Thanksgiving. So far, the President has offered only to speed through Congress an already approved $25 billion loan to help Detroit create new fuel-efficient models. But GM needs an additional $10 billion simply to pay its bills next year and $15 billion more to close plants, compensate redundant workers and dump some of its lesser-performing brands.

The issue boils down to a historic proposition: Is what's good for GM still good for the country?

"If GM were to go into a free-fall bankruptcy and didn't pay its trade debts, then the entire domestic auto industry shuts down," says Rodriguez. The system — the domestic auto plants and their interconnected group of suppliers — is far bigger than GM. It includes 54 North American manufacturing plants and at least 4,000 so-called Tier 1 suppliers — firms that feed parts and subassemblies directly to those plants. That includes mom-and-pop outfits but also a dozen or so large companies such as Lear, Johnson Controls and GM's former captive Delphi. Beyond those are thousands of the suppliers' suppliers.

Although the Detroit Three directly employed about 240,000 people last year, according to the industry-allied Center for Automotive Research (CAR) in Ann Arbor, Mich., the multiplier effect is large, which is typical in manufacturing. Throw in the partsmakers and other suppliers, and you have an additional 974,000 jobs. Together, says CAR, these 1.2 million workers spend enough to keep 1.7 million more people employed. That gets you to 2.9 million jobs tied to the Detroit Three, and even if you discount the figures because of CAR's allegiance, it's a big number. Shut down Detroit, and the national unemployment rate heads toward 10% in a hurry. (Click here for Pictures of the Week.)

Even if just one of the Detroit Three — and GM is the most likely, as Ford is in better shape and Chrysler is much smaller — spiraled into a free-fall bankruptcy, the systemic effects, at least initially, would be huge. The whole industry would not be able to build cars in the U.S., because of the lack of parts. "Unlike the airlines or steel, when you look at the automobile industry and the fact that the whole supplier base is connected — to Ford, Chrysler, Toyota — it will have a ripple effect on the entire industry," says Nicole Y. Lamb-Hale, a bankruptcy expert at the Detroit office of Foley & Lardner, a law firm that represents some GM suppliers.

A carefully planned, prepackaged bankruptcy would still be troublesome, she says. Throwing 479,000 GM retirees onto the rolls of the Pension Benefit Guaranty Corp., for instance, could overwhelm it. And GM's agreement to fund the United Auto Workers' voluntary employee beneficiary association (VEBA) — thus getting a $50 billion unfunded liability off its books — might then be in jeopardy, as would the union's health benefits. The VEBA has already saved GM nearly $5 billion in the past quarter, and still greater benefits lie ahead.

A bailout won't spare GM or its workers pain. Assuming the government bridges GM to the future — or provides debtor-in-possession financing in a bankruptcy — there is still a ton of restructuring to do. The company operates 21 plants in North America and has three more that are scheduled to close. But Grant Thornton's Rodriguez says that still leaves five to go to match demand. "They still need to take structural steps: reduce suppliers, reduce the number of plants, reduce the cost structure and get rid of excessive debt." Most analysts say GM has to dump underperforming brands too.

Shutting down plants and cutting labor are costly — it's one of the ironies of the auto business. Deutsche Bank estimates that GM would have to spend $12 billion to chop labor costs and compensate dealers who lose their franchises. That would lower GM's North American operating costs from the current $31 billion to $25 billion annually, says Deutsche Bank. (Click here for pictures of the global financial crisis.)

None of this can happen without the cooperation of the UAW, which is probably feeling better knowing that Obama is on his way to Washington. Although it hasn't shown its hand, the UAW may try to mitigate job losses in the U.S. by pushing GM and Ford to build fewer vehicles in Mexico, according to Sean McAlinden, chief economist at CAR. Obama might be sympathetic to that argument; he said during the campaign that NAFTA needed to be re-examined. The carrot for GM is that any new workers it hires in the U.S. will make $13 to $14 an hour and collect limited benefits rather than work for $29 an hour and get full benefits — the old UAW wage.

There's also a legitimate question as to who would do the restructuring. GM CEO Rick Wagoner has made the case that his crew is best placed to run the turnaround since it knows where the cost buttons are. But critics like Jim Schrager at the University of Chicago Booth School of Business say the wrong people are in charge: "I think you would only put money in GM if you had a complete change in the board and the current management. They are diligent. They worked very hard, but it just hasn't worked." In Schrager's view, GM is a strategic failure. It can manufacture high-quality cars, but it neither makes the right kind nor markets them effectively. He'd bust the company up into three independent firms: Chevy, Buick-Pontiac-GMC and Cadillac-Saab-Saturn.

If that's ultimately where Detroit ends up, is it worth the price to get there? Put another way, does GM deserve to be bailed out or left at the mercy of the market and almost certain death? "The University of Chicago training in me says the market should prevail," says Schrager. "But the Chrysler bailout was a success, and, gosh, I'd love to save it." That sentiment is not shared by everyone, and it goes to the heart of the central economic debate facing the country — between hard-nosed capitalists, who believe the market should decide, and public-policy types who view the economy as something far more organic than a balance sheet. But ultimately, whether GM is dead or alive, the taxpayers are on the hook for billions, for everything from lost tax revenues to higher unemployment costs to taking over GM's pension obligations. The decision that Washington has to make is whether we pay for GM's survival or for its funeral.

— With reporting by Joseph R. Szczesny/Detroit
 
M

mswaim

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I'm not convinced the entire industry will collapse if GM is allowed to freefall into bankruptcy. No doubt it will have significant impact on the economy, much like the implosion in the housing market - but at the end of the day others will pick up the pieces and turn a profit. That is the beauty of our system. If the government steps in and provides funding (our money, folks) our country will take yet another irreversible step towards Socialism.
 

PassionDiva5150

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This has been coming for years, why hasn't GM stopped production on several slow selling lines (Buick, Olds, Pontiac, etc) and focused on Chevy, Cadillac, and a truck line????? Years ago, Ford talked about ending the Mercury line, I am wondering now if they wish they had??? Mark and I only buy domestic,:patriot::patriot::patriot: but I do have to say Toyota builds a great product, which sells for less (because production costs are lower) than the domestics, with fewer problems.
 

First Robin

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PD is so correct ! This has been coming for years, certain people in power have wanted a one world government. That wish has crossed party lines and has been going on for a long time. Free Market, NAFT, large corporations gobbling up the competition, Banks getting bigger and bigger, insurance companies going into banking and vice versa. So now we are reaping what has been sown, Germany is in a deep resession as are we and many more countries on the brink. This is what we get for letting lawyers sit in the congress which is unconstitutional. The Constitution list seperate branches of government. Lawyers are in the judical when they pass the Bar and should not be allowed to sit in the Legislative Branch. No one listens to me so we all suffer and pay. Little leason in Civics. First Robin:patriot:
 
M

mswaim

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I find it laughable that the UAW wishes to dictate terms to GM and Ford, demanding they build fewer cars in Mexico. Are their members willing to work for less money at this point? Afterall, the savings GM enjoys from Mexican-built products goes into the bank accounts now being plundered by idled union members and retirees. At some point the UAW needs to pull its very large head out of its very tight a$$ and realize the gravy train has de-railed!!
 

PassionDiva5150

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I hate to admit it, but I do agree with Mark. I watched Ford for years, throw great parties, Big $$$ to top executives, trips to any place you can think of, cruises, and the gifts, OMG, the gifts, GM did the same thing. These things all have to be paid for, one way or another, along with their high production costs. I really don't feel that the taxpayers should be the ones to pay. But, then again, I didn't feel we should bail out AIG and some of the others. How do we save for OUR retirement when the goverment wants more and more of OUR money to save these companies?????
 

Lola's Mom

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I needed to put my $$ where my mouth was.
Today I bought some GM stock ..... In order to buy it I had to agree that I was buying a "speculative" stock ..... I probably should have bought cans of tuna and bottled water to prepare for the worst of the recession to come - but, I just have to keep the faith in America. How can there never be another Cadillac :patriot:, Corvette :patriot: or Chevy :patriot:? There, now you all know that I surely am certifiable! :willy_nilly: It's okay if you to :bash: me openly .... I'm a big girl.... I think it would be great to hear your opinions! :blinzel:
 

b_pappy

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Obviously this is a deep matter that affects all of us in many different ways. My dad grew up in the depression and always taught me to look out for myself, live within my means and save for a rainy day. Sage advice from the old guy. And while I'm not as frugal as he was, I have lived within my means, and I have saved. Companies should abide by the same standard. At the same time, General Motors going under would be devastating to the US economy. We have loaned money to Chrysler and Harley Davidson in the past, with conditions and expectation of repayment. That worked, the companies got better. So now we have been asked to bail out AIG, banks, home owners, and mayors of cities are lining up. We have to draw a line somewhere. I would really like to see a leaner, more responsive GM in the future. I think a loan, with conditions and expectation of repayment would be best for the country. But maybe bankruptcy with debtor in possesion would effect more significant longer lasting change.
Bruce
Founder "Last National Bank of Bruce", now applying for government bailout.
two sayings come to mind:
The fish stinks from the head down, and if gravy is involved I got a pocket full of biscuit.
 

PassionDiva5150

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I needed to put my $$ where my mouth was.
Today I bought some GM stock ..... In order to buy it I had to agree that I was buying a "speculative" stock ..... I probably should have bought cans of tuna and bottled water to prepare for the worst of the recession to come - but, I just have to keep the faith in America. How can there never be another Cadillac :patriot:, Corvette :patriot: or Chevy :patriot:? There, now you all know that I surely am certifiable! :willy_nilly: It's okay if you to :bash: me openly .... I'm a big girl.... I think it would be great to hear your opinions! :blinzel:


I think you did a smart thing :rocker::rocker:, now is the perfect time to buy, I bought after 9/11, when stocks plummeted, and I have not been sorry.
 

First Robin

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I needed to put my $$ where my mouth was.
Today I bought some GM stock ..... In order to buy it I had to agree that I was buying a "speculative" stock ..... I probably should have bought cans of tuna and bottled water to prepare for the worst of the recession to come - but, I just have to keep the faith in America. How can there never be another Cadillac :patriot:, Corvette :patriot: or Chevy :patriot:? There, now you all know that I surely am certifiable! :willy_nilly: It's okay if you to :bash: me openly .... I'm a big girl.... I think it would be great to hear your opinions! :blinzel:

Well first of all I think you are very brave, secondly I would have waited due to the fact if they go into bankruptcy you will probably loose your investment or just get pennies on the dollar. I would have waited until after the bankruptcy and then jump in and buy however much I could afford. I don't think our government is going to really bail them out to the extent they need so it may just put off a few months the filling for bankruptcy. I don't have a magic ball, just my gut feelings and past experience as a financial advisor and estate planner. I would never :bash:you, I like angels. First Robin:patriot:
 

b_pappy

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I needed to put my $$ where my mouth was.
Today I bought some GM stock ..... l.... I think it would be great to hear your opinions! :blinzel:

(shakes magic 8-ball) You did well.
I'm glad you bought some. I watch it every day and wonder if I should pick up more. I'm waiting just a bit, but I applaud your decision. Hope it works out for you. I have a slight uphill climb before I feel good about my GM stock. I almost bought some on oneshare.com, where they print the certificate and frame it. It make a nice gift, and if GM goes kaput it would be a nice thing to have.
Bruce
 

Lola's Mom

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Ha-ha - thank you guys .... c'mon Mark .... where's my :bash: --- !!!

I actually made 2 cents per share today! :blinzel:

..... actually, sometimes I just get carried away :willy_nilly::willy_nilly::willy_nilly: Poor YYPDaddy! :reddevil
 

Little Woman

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Good job Madam. I think you made a good buy. :worship:
 

Jetboy

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If you look at all the problems with the Delphi BK that is still not done I don't think you can make a case for a GM BK that would be successful. Ruth Ann has the right idea. It will take tiem to pay off though.

We have been repossessing so many cars lately, one of the auctions here in town is entering buyers who buy one of our cars each Tuesday in November in a drawing for a free 2010 Camaro. Anyone want to buy a late model Hummer? Discounts if you buy a dozen :lol:
 
M

mswaim

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Ha-ha - thank you guys .... c'mon Mark .... where's my :bash: --- !!!

I actually made 2 cents per share today! :blinzel:

..... actually, sometimes I just get carried away :willy_nilly::willy_nilly::willy_nilly: Poor YYPDaddy! :reddevil

2 cents! WoW!! Somewhere in Detroit a UAW idled employee still collecting their pay salutes you!!!! ;)
 
M

mswaim

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Hey you can always count on me - for a ration of static!!!

Next week I will be doing a final head count with requests for favorite foods - and BOOZE!!!!!!!!! BTW - I will have a special package of Martha Stewart wine bottles for you to take home. Not the greatest wine; but the bottles will be highly collectable, especially since they are only for sale in a few states and have already been discountinued.

Pass the word
 

First Robin

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Hey you can always count on me - for a ration of static!!!

Next week I will be doing a final head count with requests for favorite foods - and BOOZE!!!!!!!!! BTW - I will have a special package of Martha Stewart wine bottles for you to take home. Not the greatest wine; but the bottles will be highly collectable, especially since they are only for sale in a few states and have already been discountinued.

Pass the word

Will they also be for sale in the Botique????? First Robin
 

PassionDiva5150

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If you look at all the problems with the Delphi BK that is still not done I don't think you can make a case for a GM BK that would be successful. Ruth Ann has the right idea. It will take tiem to pay off though.

We have been repossessing so many cars lately, one of the auctions here in town is entering buyers who buy one of our cars each Tuesday in November in a drawing for a free 2010 Camaro. Anyone want to buy a late model Hummer? Discounts if you buy a dozen :lol:


Hey, don't make fun of Hummer, I loved my, I'm just glad we leased it, and it went back before gas went up :laugh::laugh::laugh: We are the same way, we have several vehicles come in each month as voluntary repos. I don't think they understand its still a repo :pat::pat::pat:
 

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