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How did GM go bust?

How did GM, until recently the world largest motor vehicle manufacturer, go bust? Jeffry Babb reports.

General Motors, until it was knocked off its pedestal recently by Toyota, was the world’s largest motor vehicle manufacturer. GM was once the biggest company in the world and the largest industrial employer in the US.

How did it lose its pre-eminent position, to the point where it is now officially bankrupt? GM’s bankruptcy was predicted in News Weekly (July 19, 2008) in a story on health care in the United States, where it was noted that each vehicle manufactured in the US by GM carried US$2,000 in health care costs. That is now more like US$3,000 – or around A$4,000.

How can GM be competitive with this burden? The short answer is that it can’t. GM has tried various stratagems to lighten this millstone, but as the article on US health care noted, GM will have to dump these liabilities to be viable in the long run. GM is supporting the escalating health care costs of hundreds of thousands of retirees – it supports far more retirees than current employees. Now, the union health care fund is a major shareholder in GM.


Bankruptcy in the US is unlike that in Australia. In Australia, bankruptcy is “all over, Red Rover”, pay off the employees and the government, and the creditors get what’s left, if anything – most likely, cents in the dollar.

In the US, a company can be protected from its creditors and reorganise under a procedure controlled by the courts. Thus, GM is attempting to restructure under bankruptcy protection and re-emerge as a viable business. GM’s overseas businesses, including in Australia, are important to the reorganisation. A deal has been struck for the Opel business in Germany for German, Canadian and Russian interests to control the new company with GM retaining a stake.

GM’s British-based business, Vauxhall, which has been part of the GM empire since the 1920s, is caught up in the storm. Although Vauxhall has been reasonably successful, it is part of the European deal, which is mainly aimed at saving German jobs ahead of the forthcoming German elections. One of GM’s UK plants is likely to be shuttered.

How did the US business become the least viable element of this global giant? First, it has to do with the nature of the way the business is run. Second, the union contracts to which GM has acquiesced in good times mean it cannot break even now. Third, the nature of the US political system has burdened businesses disproportionately with costs that elsewhere in the developed world are carried by taxpayers. And fourth is the changing nature of the American and global economies – in a word, globalisation.

This might sound stupid to anyone not versed in current management fads – let’s not dignify it with the word “theory”. But engineers, designers and financiers no longer run GM; the marketing department does. Every new vehicle has to be tested by focus groups of consumers, meaning that designs are totally reactive. The company that for decades had a reputation for leading the US market with visionary insight into what buyers wanted now turns out stodgy, inefficient vehicles that no-one wants to buy.

The union that dominates GM, the United Auto Workers, has killed its cash cow. The UAW is said, with some truth, to be more like a religion than an industrial organisation. Under the leadership of the legendary Walter Reuther, once dubbed “the most dangerous man in Detroit”, the UAW achieved such power that it could dictate terms to the auto companies.

New entrants to the US market, such as Toyota, set up plants in the South, where unions are excluded by “right to work” legislation. The “Dixie Detroits” thrived while Midwestern “union shop” plants expired. The AFL-CIO – the US equivalent of the ACTU – says with a pride that some would consider misplaced, that unionised workers in the US earn 28 per cent more than their non-unionised counterparts. The union plants can’t compete under current contracts.

If one thing is killing GM, it’s the retirees’ health costs. Health cover is considered a public responsibility in almost all developed nations apart from the US. In the US it is provided by employers – if you are lucky. Public health cover will boost taxes but it will spread the load. GM didn’t support government-provided health cover in the past. Now it is paying the price.

The US was once autarchic: in other words, it was a self-sufficient economy. Trade and government budgets were balanced.

That’s all changed and won’t be reversed. Ron Gettelfinger, current UAW president, says the new GM deal “will stop the imports coming in from China”.

Sorry Ron, it’s not that easy. The UAW – and Australian workers – will have to live with the new realities. Current betting is that GM won’t thrive without a change of mindset.

– Jeffry Babb



About steveblizard

Steve Blizard commenced his financial planning career in 1988 from a background of life insurance broking, a field in which he still works. He is a member of the Financial Planning Association and the Responsible Investment Association. His experience ranges from administration of Superannuation to advice regarding insurance, retirement, remuneration and investment planning. Steve is an accredited Remuneration Consultant, specialising in salary packaging. He is a columnist for the Swan Magazine and the WA Business News


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