GM in Trouble
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Case Code: BSTR320 Case Length: 20 Pages Period: 2008-2009 Pub Date: 2009 Teaching Note: Not Available |
Price: Rs.400 Organization: General Motors Industry: Automobiles Countries: US Themes: Managing in Tough Times, Slowdown in Global Automobile Industry |
Abstract Case Intro 1 Case Intro 2 Excerpts
"Even if GM succeeds in averting a bankruptcy, we believe that the company's future path is likely to be bankruptcy-like."
- Analyst at Deutsche Bank, in November 2008.
"GM has been in trouble for years. It is just pure fiction to say that the reason why the auto industry is now in trouble is because of the financial crisis....If you start spending on General Motors it will be a black hole."
- Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance, University of Chicago Booth School of Business, in November 2008.
GM Asks for Financial Aid
On December 02, 2008, General Motors Corporation (GM), the second largest automaker in the world, sought financial help from the United States (US) government, to run its operations. The company asked for financial aid amounting to US$ 18 billion - US$ 4 billion before the end of 2008, US$ 8 billion in the first quarter of 2009 and another US$ 6 billion in credit line if the car market did not improve. Frederick Henderson (Henderson), the President and Chief Operating Officer (COO) of GM, said, "Without support, frankly, the company can't fund its obligations."
Analysts were of the view that one of the major reasons for GM's poor financial condition was the company not being able to quickly bring out vehicles that met changing customer needs.
Analysts opined that in addition to a poor business strategy, GM was also burdened with high costs associated with the healthcare and pensions benefits that it offered its employees. Between 1993 and 2007, GM had spent US$ 103 billion in funding healthcare and pension benefits. In 2008, like other automobile companies, GM faced problems including rising oil prices and a global financial crisis and economic slowdown which adversely affected its sales. The company sold 1.7 million vehicles worldwide in the fourth quarter of 2008, a decline of 26 percent compared to the fourth quarter of 2007. For the calendar year 2008, GM sold more than 8.35 million vehicles, a decline of 11 percent compared to the vehicle sales in 2007.
On December 19, 2008, George W. Bush (Bush), the then President of the US, announced a financial package for GM. GM got the first US$ 4 billion of a series of federal loans amounting to US$ 13.4 billion on December 31, 2008. By March 31, 2009, GM was required to fulfill some 'targets' including a two-thirds reduction in debt via a debt for equity exchange with current bondholders, and a renegotiation of employee contract terms with the United Auto Workers (UAW). In case it failed to meet these targets by the stipulated time, GM had to repay the loan amount with interest within 30 days. GM submitted a 'Restructuring Plan' on February 17, 2009. The company stated that it would require more financial assistance from the US government to continue its operations after March 2009...
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