GM bankrupt; Lutz supports Obama team
Two events once unthinkable have taken place. General Motors filed for Chapter 11 bankruptcy this morning, before Wall Street opened for business; the company has already selected Al Koch of AlixPartners LLP to be its chief restructuring officer. The GM filing is the third-largest ever by a U.S. company and the largest by an American manufacturer.
Armed with more than $30 billion in promised government financing, the plan is for a new, smaller General Motors to emerge in 60-90 days, able to break even in a total U.S. light vehicle market of 10 million annual sales, down substantially from the 16 million level GM required previously.
President Barack Obama will address the nation about the state of the auto industry shortly before noon today (EDT). The President’s speech will be followed by a news conference with GM CEO Fritz Henderson.
Bob Lutz, the tough ex-Marine who once led Chrysler’s resurgence and who helped turn around GM’s product line, supported Obama’s moves:
I think that another important, new reason for optimism is the existence of the President’s automotive task force. Finally, for the first time in our history, we have direct access to a high-ranking government body that is vitally interested in our success! Other countries have “Automotive Ministries,” or similar “industrial ministries.” We had no single point of contact, and our well-being was way down on almost every elected official’s priority list. Now, we finally have a sympathetic ear in Washington. I cannot emphasize to what extent this levels the playing field vis-a-vis the Asians and the Europeans, whose car companies are actively nurtured by their governments. So, a point of optimism would really be that we have, through this crisis, been able to establish a constructive relationship with our federal government.
Lutz also wrote:
It’s important to remember that this industry melt-down has been a long time coming, for a number of reasons, including an exchange rate that heavily favored the Japanese, enormous legacy costs, excessive leasing at hugely subsidized rates and lop-sided balance sheets. On health care and benefits costs alone, our company has spent $103 billion over the past 15 years. Meanwhile, we demonstrated continually improving operating excellence in terms of product, manufacturing and purchasing. But, given the leveraged nature of the U.S. economy, it was an accident waiting to happen. The sub-prime melt-down, combined with the fuel price spike, finally did us in. But we will pass through the “cleansing fire” of whatever happens next, and we will come out of it for the better.
GM will emerge with an essentially debt-free balance sheet, a new and more competitive labor situation, a solution we can live with on the UAW VEBA, and a reasonably low dollar vs. the yen. The “new” GM, in my view, will be a powerhouse. It will have good variable margins, which we’ve always had, by the way, but which were overpowered by massive fixed costs.
GM issued this statement, signed by Kent Kresa, Chairman of the Board:
The General Motors Board of Directors authorized the filing of a chapter 11 case with regret that this path proved necessary despite the best efforts of so many. Today marks a new beginning for General Motors. A court-supervised process and transfer of assets will enable a New GM to emerge as a stronger, healthier, more focused and nimbler company with a determination not to just survive but to excel. The Board concluded that the proposed transformation will maximize the value of the enterprise, and the return to the many stakeholders who have been involved with GM over the years.
We are appreciative of the support from the U.S. Treasury, the President’s Task Force on Autos, the UAW and its members, salaried employees and retirees, concurring bondholders, and very importantly, the American taxpayers. The Board is confident that this New GM can operate successfully in the intensely competitive U.S. market and around the world. The Board stands behind the people of GM in embracing this unique opportunity to create value and a new company that will design, engineer, build and market the best cars and trucks in world.”
After nearly 84 years as a component of the Dow Jones Industrial Average, General Motors was dropped this morning after filing for Chapter 11 bankruptcy in New York. Citigroup was also dropped. Cisco Systems and The Travelers Group replaced GM and Citigroup in the Dow index.
GM was the last of the American car companies to be a member of the group of 30 stocks that make up the Dow. It also had the second-longest tenure, having been added to the index on August 31, 1925 (GM made a earlier appearance on the Dow, beginning on March 6, 1915, but it was replaced by Goodrich on October 4, 1916). Only General Electric, which become a Dow stock on November 7, 1907, has seniority. Chrysler, which was added October 1, 1928, has not been a Dow component since June 29, 1979, and Ford was never one of the Dow stocks.
“A bankruptcy filing immediately disqualifies a stock regardless of a company’s history or its role as a cultural icon,” said Robert Thomson, managing editor of The Wall Street Journal and editor-in-chief for all of Dow Jones.
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