For GM, it's been 4 years of restructuring ... and then bankruptcy

ERJ staff report (AN)

Jamie Lareau, Automotive News

Detroit, Michigan -- GM has battled overseas rivals, legacy costs, government rules and fluctuating gasoline prices since its U.S. market share peaked in 1962 at 51.1 percent.

But its slide to bankruptcy filing began in 2005, when a streak of 12 straight years of profit ended.

In April of that year, GM posted a first-quarter net loss of $1.25 billion. In May, its debt rating was cut to junk status. It stepped up efforts to sell assets and cut ties to overseas partners to raise cash. In October, former parts unit Delphi Corp. filed for bankruptcy, saying it couldn't obtain sufficient aid from GM and concessions from the UAW to keep going without court protection.

GM lost $10.4 billion for the year, despite industry-wide U.S. sales of just under 17 million cars and light trucks, the third highest total ever.

Billionaire investor Kirk Kerkorian -- who had billed his initial, 2005 stock purchases as passive -- began pressuring for change. In January 2006, while GM paraded its new vehicles at the Detroit auto show, Kerkorian adviser Jerry York went public with his campaign for GM to treat its problems more urgently. He called for GM's dividend to be slashed, for executive pay to be cut, and for "distraction" brands such as Saab and Hummer to be shed.

Pressure mounts

The pressure intensified six months later. York was now a GM director. Kerkorian pushed CEO Rick Wagoner to forge an alliance with Carlos Ghosn, who had saved Nissan Motor Co. from near bankruptcy in 1999 after Japan's Nissan and France's Renault SA formed an alliance.

Wagoner and the GM board studied the issue for three months and concluded GM would be better off alone. York resigned from GM's board, and Kerkorian unloaded his shares.

Instead of pursuing an alliance, Wagoner turned to selling a majority stake in General Motors Acceptance Corp. to a group led by Capital Management LP, thus raising $7.4 billion. Much of the cash was earmarked for restructuring GM's money-losing North American operations. From the start of 2005 through the first quarter of this year, GM has cut 44,000 hourly jobs and 9,000 salaried jobs in the United States.

GM cut labor costs even further with its historic contract agreement with the UAW in 2007, which slashed pay and benefits for new hires and put much of GM's health care obligations into a union-controlled trust. The efforts were hailed -- along with gains in Asia, improved manufacturing efficiency in North America, and a global product renaissance under Vice-chairman Bob Lutz -- as a sign of good things to come.

GM shares topped $42 as workers approved the labor pact. The stock price, now trading for less than $1, hasn't been that high since.

Enter the recession

The U.S. recession, now entering its 19th month, started in December 2007. Gasoline prices soared above $4 to record highs last summer, choking sales of high-margin pickups and SUVs. As fuel prices ebbed, the global credit crisis gripped the industry. GM's U.S. sales fell 22.7 percent last year, and its U.S. share eroded by another 1.4 points, to 22.3 percent.

At the start of October, Standard & Poor's analysts said GM might not be able to avoid bankruptcy. GM, as it had so many times over the previous years, issued a stark response, saying bankruptcy would "not be in the interests of our employees, stockholders, suppliers or customers."

A month later, GM warned it would be out of cash by early 2009. Two months later, after Wagoner and his Detroit 3 peers were humiliated while seeking aid from Congress, President Bush granted GM $13.4 billion in U.S. loans; GM has so far collected $19.4 billion. The loan came with the stipulation that GM had to prove it could be a viable company by the end of March.

In January, GM warned it expects overall U.S. auto sales to drop to the lowest levels in 27 years. It began slashing production in an effort to keep dealer inventories under control, but that cut deeply into GM's revenues and cash flow. Even with the cuts in vehicle output, GM had a 111-day supply of inventory as of May, almost double the level considered healthy.

At the end of March, President Obama's automotive task force concluded that the revised restructuring plan that Wagoner presented was insufficient. On March 29, President Obama ousted Wagoner as CEO, and set June 1 as the deadline for a new, more stringent restructuring plan.

A first-quarter net loss of $5.98 billion brought GM's cumulative losses since 2004 to $88 billion.

Wagoner's successor, Fritz Henderson was once GM's CFO. He has publicly warmed to the idea of bankruptcy, most recently calling it "probable." The concessions given GM in last week's deals with the UAW and bondholders were less about keeping GM out of Chapter 11 than speeding its way through court protection.

From Automotive News (A Crain publication)