Bailout of General Motors
In the past several years, GM has been faced with increasingly poor sales figures and net earnings. In 2007 and 2008, the company reported a total loss of $50 billion. In the first quarter of 2007, the behemoth automaker was overtaken by Toyota as the number one automaker in terms of global sales. GM had held the number one spot for the previous 76 years.
The escalating losses in sales eventually led to drastic cash flow problems by the end of 2008. In September of 2008, GM reported a net worth of negative $60 billion. To assuage this problem, GM first considered merging with Chrysler, another ailing Detroit automaker. However, these talks were dissolved in early November 2008.
With further corporate loan opportunities no longer available, GM announced on December 12, 2008 that they might not have enough cash on hand to survive to see 2009. Facing such a catastrophic scenario, GM (along with Ford and Chrysler) reached out to the U.S. government for federal loan assistance. Though opposed by the U.S. senate, both President George W. Bush and President-Elect Barack Obama supported the government bailout. On December 19, 2008, President Bush officially approved government bailout assistance to GM and Chrysler. 9.4 billion dollars was loaned to GM through the TARP program under President Bush, while an additional 16.6 billion dollars was requested in February of 2009 in the form of a second bailout loan. In March of the same year, the U.S. government guaranteed that they would cover any outstanding warranties on current and newly sold GM vehicles, and on May 30 General Motors sold their majority stake in European car makers Opel and Vauxhall. The company also announced that they would be liquidating or selling off four other brands in an effort to remain solvent.
Bankruptcy and Reorganization of General Motors
By the end of May, 2009 it became clear that General Motors would not be able to successfully reorganize without declaring bankruptcy. On June 1 of that same year General Motors file for Chapter 11 bankruptcy protection. The company also announced that the Hummer brand had been sold to Sichuan Tengzhong Heavy Industrial Machinery Company, a Chinese organization. Later in the month, the sale of Saturn to the Penske Automotive Group and a tentative deal to sell Swedish division Saab to Koenigsegg were made public. GM also revealed that the Pontiac brand would be liquidated, with the majority of current models ceasing production.
General Motors was able to shed itself of many liabilities and debts during the course of their bankruptcy reorganization. On July 10, 2009 a new company emerged from bankruptcy protection, one which had purchased the remaining assets of the previous version of GM. The new General Motors is now owned jointly by the U.S. government (60% stake, 50 billion dollar investment), the Canadian government (11.7% stake, 9 billion dollar investment), the United Auto Workers union (17.5% stake) and the remaining GM shareholders (10% stake).
The reorganized GM is markedly different from the old. Only 4 brands remain in its vehicle lineup – Chevrolet, Buick, Cadillac and GMC. The company also plans to eliminate 27,000 jobs and reduce its number of dealerships from 6,000 to 3,600 by the end of 2009.
Reasons for the Decline of GM
In the 1960s, GM sold more than 50 percent of all vehicles in the United States. By 2006, their market share had dropped by 25 percent. The decline of GM's market share and dominance is likely the result of several different factors. Some of these factors include:
- Increased competition, particularly from Japanese automakers Honda and Toyota
- Lack of innovation: experts continue to reiterate GM's lag in innovation when compared to foreign automakers.
- Poor business decisions: a series of poor investments reduced brand image. An example is the GM EV1, an electric car released in 1998 that cost the company $1 billion and resulted in only about 1,500 production models.
- United Auto Workers Union Relations: GM (along with all domestic automakers) is tied to UAW Union requirements that result in higher wages and other expenses that reduce GM's ability to remain competitive on vehicle pricing. Up to 12,000 workers were paid at almost full salary and benefits to sit idle through GM’s “Jobs Bank” program.
- GM’s 8 brands were poorly differentiated and largely cannibalized sales from each other. The investment required to make each brand competitive was not met with a concomitant increase in sales or market share.
- Rising gas prices: until recently, SUVs remained one of the sole profitable markets for GM. As gas prices skyrocketed in 2007 and 2008, demand for SUVs declined considerably, resulting in a sharp decrease in sales.
- Economic recession: a global recession in 2008 resulted in declining vehicle sales across the entire auto industry. December 2008 sales for GM were down by 31 percent.
Early History of GM
The history of General Motors proper starts when William C. Durant organizes the General Motors Company in September 1908, incorporating the Buick Motor Company. In November 1908, the Olds Motor Works is acquired by GM. GM continued an aggressive acquisition campaign into 1909 by purchasing half of Oakland Motor Car Co. (the future Pontiac), purchasing Cadillac in July 1909, acquiring AC Spark Plug, acquiring the Rapid Motor Vehicle Company (predecessor of GMC) and almost acquired Ford the same year.
The acquisition strategy proved to be too aggressive, and in 1910 Durant was removed as the head of General Motors in exchange for funds to keep the company from collapsing. Later, Durant would be involved in the formation of Chevrolet and Durant would announce in 1916 that Chevrolet owned 54.5 percent of GM's outstanding shares and once again Durant would head up GM. The General Motors Corporation we know today would be formed later in the year when it acquired all the stock of the original General Motors Company.
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