What's Good For General Motors Is Good For America
Jay
June 1, 2009, 7:38 pm

Put today (6/1/09) down for the history books. General Motors, once the world's largest corporation, has filed for Chapter 11 bankruptcy. What was once the symbol of American industrial might is now reorganizing itself into a smaller, leaner enterprise. Gone is the title of "world's largest automaker" and with it the 200+ billion dollars of annual revenue.

GM's fall didn't come quietly nor quickly, and it was a very expensive fall. The US government spent 30 billion delaying the inevitable. It has immediate plans to spend 30 billion more to carry GM through its bankruptcy. In return, the government will receive a 60% stake in the new General Motors. GM has essentially become Government Motors considering the government's majority stake in the company.



In 1953, then GM CEO Charles Wilson testified before Congress and famously remarked "...what was good for the country was good for General Motors...". This phrase was then twisted into a more cynical "what's good for General Motors is good for the country". But are either phrases true? Yes, they are true. But the problem is that General Motors and America have both shot themselves in the foot, and that has hurt the country.

Time and again from the 50s to the present, GM's upper management decided to pay its unionized labor force above market wages while funding generous healthcare plans and pensions. It can be argued that in the 50s, the generosity of such a corporation enabled millions of Americans to enter the middle class. But what we do know is that in the post war period, consumer demand skyrocketed (having previously being suppressed to support the war effort), which created enormous demand for things such as houses, televisions, and cars. In the late 40s and early 50s, the United States was simply cashing in its enormous peace dividend after demobilizing and reducing the size and scope of the incredible military it had built up.

And that does not explain the incredible avarice of the autoworkers' unions during the 60s, 70s, 80s. 90s to today. In the face of increasingly expensive unskilled labor, GM built factories abroad and shrunk its domestic workforce. In an effort to prevent the expensive domestic labor from being completely squeezed out, the UAW lobbied Washington for pro-labor provisions in CAFE such as the "two fleets" rule.

The two fleets rule made it impossible for GM to concentrate its domestic operations on high margin high profit trucks and SUVs in the States while manufacturing less profitable cars abroad to sell in the United States. GM sell cheap, terrible cars at a loss to rental fleets while the consumers bought the profitable body-on-frame light trucks and SUVs that enabled GM to service their extraordinary labor, healthcare, and pension costs while remaining a profitable enterprise.



Of course, a complete reliance on fuel inefficient trucks and SUVs hit General Motors hard when gas prices started spiking in 2007 and 2008. With their most profitable models piling up on dealer lots, GM experienced a sharp decline in revenue and increasingly unprofitable operations.

Despite an aggressive turnaround effort beginning in 2005, which included buyout packages for its unionized workforce, cuts in production, decreased sales to rental fleets, and shutting down numerous factories, the company was unable to fight off both rising fuel costs, which redirected consumers to the high quality and fuel efficient sedans of its Japanese competition, and its legacy healthcare and pensions obligations.

That really was a shame, because GM started introducing high quality cars such as the Chevrolet Malibu and Camaro, Buick Enclave, Cadillac CTS. But these cars were too little too late for GM's dire finances, with the company hemorrhaging billions of dollars per month.



So now GM is in Chapter 11 reorganization bankruptcy. What's the prognosis? Well it hinges on two key variables:

1. Will the Federal government meddle in GM's internal affairs?

If politically connected interest groups (the UAW, the green lobby) have their way, GM will be building unprofitable automobiles for decades to come and remain in government receivership until the end of time. This will happen if politicians try to interfere with GM's management to appease their key constituents.

2. Will corporate management aggressively keep costs in check?

The UAW is an incredibly powerful political force on Capitol Hill. If the new GM is unable to contain labor costs, it will be no better than the old GM.

GM will be able to ditch its unprofitable brands (Pontiac, Saab, Hummer, and Saturn) and dealerships (GM has about 5000 more dealerships than it actually needs) regardless of the two key factors above, but a return to profitability can only happen if management is shielded from the incompetent micromanagement of the Federal government.

Here's to a recovery, because we're stuck with it whether we like it or not. Let's hope our elected officials are smart enough (or distracted enough) to not lend GM's management an incompetent hand.