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GM Bankruptcy Would Mark Milestone in Industrial America

May 27, 2009 at 11:07 AM EDT
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After the rejection of General Motors' offer to trade bond debt for company stock, analysts consider what a GM bankruptcy says about the company and the auto industry generally.

JEFFREY BROWN: And we begin with the latest developments. That comes from Micheline Maynard, a senior business writer for the New York Times and author of two books about G.M. and the auto industry, including “The End of Detroit.”

Well, developments on several fronts in the last 24 hours. One is that G.M.’s bondholders rejected a plan put forward by the company. Tell us about that first.

MICHELINE MAYNARD, The New York Times: That’s right. General Motors, about a month ago, proposed that bondholders exchange $27 billion in debt and, in return, get about a 10 percent stake in the company. That wasn’t at all to their liking, because they were looking at a proposal at the time that would have given the United Auto Workers union about 39 percent of the company in return for about $20 billion in debt.

And so the bondholders had a month to vote. General Motors needed 90 percent of them to go along with the plan. And they said today that they got substantially less than that. And the speculation is that they may have gotten even less than about 10 percent of bondholders to go along.

JEFFREY BROWN: And who are the bondholders now? We hear a lot about them. We talk about them. Who do we mean?

MICHELINE MAYNARD: When you hear the term “bondholders,” you think about, you know, big, wealthy banks and wealthy investors, but, in fact, there are a lot of individuals who purchased G.M. bonds over the years. You know, you have to remember that G.M. was not only the largest carmaker; it was the largest company in the United States. And it seemed to be a rock-solid investment.

So you have individuals who bought bonds maybe for their children’s college education or for their retirement, and they seem to be a very good investment. In fact, the bonds are still trading, and their collective value is more than General Motors common stock.

JEFFREY BROWN: Now, another development involves the UAW, which is voting on new concessions, and all of this could leave the U.S. government with a 70 percent share of the company?

MICHELINE MAYNARD: That’s right. The deal that the UAW is voting on is similar to concessions that were granted at Ford Motor Company and at Chrysler. And, essentially, it wipes out some of the benefits that UAW members have had for years.

For example, they’ve always gotten a cost-of-living adjustment on top of their hourly wage; that goes away. Some retiree benefits go away. There are a lot of work rules that go away, time off, tuition assistance that goes away. And they’re voting on that proposal today.

Now, as part of that proposal, there’s a big health care fund that will take care of retiree medical benefits. General Motors owes that fund about $20 billion. And as part of this deal, the UAW would get about 20 percent of General Motors once it goes through its restructuring, and they’re also get a note that’s worth — a note and warrants on stock and preferred stock that’s worth another $10 billion.

So it’s sort of a carrot and a stick approach. The stick is pretty painful, but the carrot is at least a piece of General Motors once it comes out of bankruptcy.

Government to take large share

Micheline Maynard
The New York Times
What's probably going to happen is it looks like the government will end up with up to 70 percent of General Motors. The union would get about 20 percent, and there would be about 10 percent left for stakeholders...

JEFFREY BROWN: But if the U.S. government ends up with 70 percent, that's significantly higher than I think people had expected. In that article you co-wrote today, you said G.M. could come to stand for "Government Motors," I think is the way you put it.

MICHELINE MAYNARD: That's right. You know, the old saying for General Motors and Detroit was "Generous Motors," because the benefits and the pay and the time off and all those things, free cars, it was all so wonderful. But what's probably going to happen is it looks like the government will end up with up to 70 percent of General Motors. The union would get about 20 percent, and there would be about 10 percent left for stakeholders, like shareholders and the bondholders.

JEFFREY BROWN: So as we look over the next couple of days, with a bankruptcy very much hanging as a possibility, who is actually making the decisions at this point? We keep talking about the company this or the company that. What strings does the government pull at this point?

MICHELINE MAYNARD: Well, the Treasury Department is really in the driver's seat, I guess you could say, here. There's an auto panel, the auto task force, that's made up of advisers from the White House and from different agencies. But, really, it's the Treasury Department and their advisers that is calling the shots here.

You know, we hear that they're the ones that told General Motors that they had to get 90 percent approval from the bondholders. And, essentially, they are helping to write General Motors' restructuring plan. There's certainly some input from the company, but a lot of this is being done with help from outside advisers.

JEFFREY BROWN: And, briefly, the hope here, I guess, if it does go into bankruptcy is that it would be a very structured one, so to speak, a very quick one, as Chrysler is trying to go through?

MICHELINE MAYNARD: Yes, the Chrysler bankruptcy case is moving apace, really. It's one of the fastest bankruptcies I've ever seen. And the hope is that General Motors, the creation of this new General Motors company would go quickly.

Now, nobody expects it to go as quickly as Chrysler, because Chrysler is a much smaller company and there's a savior for Chrysler in Fiat. General Motors and the Treasury have to do this themselves, and the thinking is that this new company might be formed by about the end of August.

JEFFREY BROWN: All right, Mickey Maynard, thanks for that.

I'm going to ask you to stand by now as we turn to a longer view of all this, because General Motors, of course, is not just another company. It was, in fact, a symbol of American industrial might, counting for as much as 60 percent of the U.S. car market by the early 1960s, the country's largest private employer in the 1970s, and perhaps the epitome of a uniquely American style, as seen here, for example, in a 1957 Cadillac ad.

AD NARRATOR: The place, the world-famous Surf Club in Miami Beach. The event, a photographic assignment for one of Cadillac's beautiful magazine advertisements featuring the glamorous gowns of I. Magnin. The star, the brilliant new 1957 Cadillac.

And what a star! Whether in a glamorous setting like the Surf Club or in action on the highway, the 1957 Cadillac is as thrilling to drive as it is to behold. Its great new engine is unbelievably powerful and eager and responsive. And the car is so smooth to ride and so easy to handle that it almost seems to know the road. This is, without any question, the greatest Cadillac car of all time.

GM's historical impact

Dan Neil
Los Angeles Times
It really was the first vast paternalistic corporation that people could rely on for insurance, health insurance, and retirement benefits.

JEFFREY BROWN: And to explore that part of the story, of the G.M. story, we're joined now by James Womack, who has long watched the auto industry. He's chairman and founder of the Lean Enterprise Institute and author of several books, including "The Machine that Changed the World."

Dan Neil is the Pulitzer Prize-winning automotive critic for the Los Angeles Times.

And still with us is Mickey Maynard of the New York Times.

Well, James Womack, fill in more for us this central place that G.M. held in American corporate life. How important a company was it, and why?

JAMES WOMACK, Lean Enterprise Institute: Well, I think it's fair to say that General Motors really invented the modern corporation. 1919, Alfred Sloan came in -- by the way, this was after G.M. went bust for the second time, the first time in 1910, second time in 1919 -- and wrote a series of memos about what a modern corporation would look like.

So he really invented modern management. And he stuck with it for a very long time. Sloan was chairman until 1955. And as long as Sloan was there, it really went at a quite brilliant way.

He also invented, as part of those memos, what he called the product for every person purpose, which you might call the aspirational elevator. You could begin life with a used Chevrolet and go to the cemetery in a Cadillac hearse. And so he had something for you all the way through life, and it started to find where you stood in the pecking order.

So what an amazing achievement to give people a social grounding while inventing the modern corporation. And then, of course, later, very reluctant -- Sloan didn't want to do it -- he also acquiesced to modern labor relations with the highly unionized company.

JEFFREY BROWN: Well, Dan Neil, let me bring you in here. You look at that advertisement we saw from 1957. What would you add to the company's place in American society?

DAN NEIL, Los Angeles Times: Well, it really was the first vast paternalistic corporation that people could rely on for insurance, health insurance, and retirement benefits. Remember, in the '50s, you know, skilled labor was something of a shortage. General Motors really needed to keep labor on board.

And so they conceded to these terms that later on would create the situation were they were really enthralled to the union's demands. But it was a central part of the country.

Remember, it sold mobility in a country that was obsessed with mobility, both real and social. And you couldn't ask for a more sort of symbolic company than G.M.

JEFFREY BROWN: And, Mickey Maynard, let me bring you back. You referred earlier to this notion of G.M. as "Generous Motors," but I understand from a personal aspect, you grew up in Michigan yourself. So you saw some of this and then, of course, you saw the decline.

MICHELINE MAYNARD: Well, I did. My father worked for the airlines, but the airlines depended on the car business. There used to be hourly flights, big jets from Detroit to New York, not the little commuter jets we have now.

And the whole point is that this was a cradle-to-grave thing not just for people buying cars, but I know personally people that I went to school with who went to work in car plants instead of going on to college. There are people whose fathers, grandfathers, uncles, brothers, cousins, grandparents all worked in the plants.

And it was the kind of thing that, if you sort of signed up, especially at General Motors, that you'd come in, say, at 18 and you could work there for 30 or 40 or even 50 years. You'd have a pension. You'd have retirement. You'd be able to own a home up north, and it really created this whole part of Michigan.

Tracing G.M.'s decline

Micheline Maynard
The New York Times
They had Saturn for a little while, and that was actually a great idea, but it was sort of like the rest of General Motors saw Saturn -- part of its own family -- as a threat and kind of pounced on Saturn. And now we will no longer have Saturn.

JEFFREY BROWN: Now, James Womack, when we get to the "What happened?" question, I know we could spend hours and hours there, but from your studies, from your writing, as you think about what happened and where we are now, trying to imagine what this company might become, what are the key lessons?

JAMES WOMACK: G.M. was a vertically integrated business with a very powerful union that had a monopoly on shop labor living in a tight oligopoly, G.M., Ford, Chrysler, the big three. And so some rules were put in place about what was permissible, what management could do, what kinds of costs were involved, that made it very difficult to manage once the rules were relaxed.

Once the transplant companies, not just from Asia, but from Europe, came in, in the 1980s, once they could not be organized by the union, once there was this tremendous global competition, all of the old context for what had been General Motors was gone. And so that left them adrift with regard to, "What do we do now?" And we are where you'd drift when you really can't figure out what to do next.

JEFFREY BROWN: Dan Neil, what's your "What happened?" answer?

DAN NEIL: General Motors came of age in a unipolar economic world. The United States after World War II was the only functioning economy. It was the biggest company in that economy. And it was -- and its infrastructure, its footprint was scaled to that.

And one thing the corporations don't do very well, they don't downsize gracefully. And as the rest of the world's economies rose, it became a multipolar world, and General Motors was not equipped for competition.

Actually, they really didn't know what competition looked like. You know, in the '70s, the company was more than willing to cede certain segments of the business, for instance, small cars to Asian manufacturers because they figured, eh, that's not where the money is. And so the series of unstrategic retreats left General Motors where they are now.

JEFFREY BROWN: And, Dan, that includes the models that they came out with, right? Because that's what a lot of consumers would say, and that's certainly no doubt the workers and union would say, that they were just -- they weren't building the right cars.

DAN NEIL: Yes, you know, at this juncture in history, it's awful to say, but, you know, this company made decades' worth of really, really terrible and uncompetitive cars. It's only now that General Motors is building some really wonderful cars, but it's so late in the game, it really isn't -- they really aren't able to save themselves with product anymore.

JEFFREY BROWN: And, Mickey Maynard, in the research you've done and the books you've done, how much awareness was this over this long decline of these kinds of bad decisions at the management level?

MICHELINE MAYNARD: General Motors is such a big company that it always reminds me of the Pentagon. And when you're inside General Motors and you look around, you know, everyone is the same style of person and you. It was such a big company that the outside never really penetrated.

So even though the decline was going on, people could always tell themselves, "We're still the world's biggest carmaker. We're still the biggest carmaker in the United States. We still run this auto industry."

And what was going on was that they were losing baby boomers. Back in 1990, I saw a number that said half of all people under age 45 did not own American cars. And as boomers aged, as they had their kids, as their kids started to grow up, they just migrated away from General Motors. It really didn't have anything to offer them.

They had Saturn for a little while, and that was actually a great idea, but it was sort of like the rest of General Motors saw Saturn -- part of its own family -- as a threat and kind of pounced on Saturn. And now we will no longer have Saturn.

So it was a company that was so big it didn't see it coming. By the time it saw it coming, as Dan said, it was really kind of too late to respond to what was going on in the rest of the world.

G.M.'s path forward

James Womack
Lean Enterprise Institute
So the question going forward, I think, is, can they re-engage with the American people as consumers? G.M. absolutely had the pulse on American taste for a very long time, and then, as you've just heard, they really lost it in the '80s and '90s.

JEFFREY BROWN: Well, so, James Womack, look forward then for us. What kind of company might emerge? What role might it play in a future American industry, corporate life?

JAMES WOMACK: Well, I think this is a playable lie. They're now going to write down the legacy costs of the past. They're going to write down the "Generous Motors" compensation. They will now have sort of normal compensation.

And there are some good car people at General Motors. Their factories are actually quite productive. Their quality has gotten much better.

So the question going forward, I think, is, can they re-engage with the American people as consumers? G.M. absolutely had the pulse on American taste for a very long time, and then, as you've just heard, they really lost it in the '80s and '90s.

And so now the question is, can they rethink what General Motors is and explain that in a way that American consumers want to be involved, want to be back in the G.M. family?

And that's the creative sort of magic part of management, is to look out at a new situation, see the new opportunity, and seize that opportunity. But it's very much on the product side, that the production side is now really being taken care of, the supply base, which is another long story, is being taken care of, as well.

The real question for the future, I think, is in terms of product. And in particular, can G.M. develop products that Americans will cheerfully pay good money for, what you might call BMW or Toyota money, for a product that's in a certain place in the market?

But right now, G.M. has higher production cost and lower selling prices, which is a hopeless combination. They're now going to have -- production costs, I think, are going to be well in hand. The question is, can they get higher, which is to say the successful selling prices that they need to move ahead?

JEFFREY BROWN: All right, Dan Neil, what's your answer to that question about looking forward and what might emerge?

DAN NEIL: Well, I think, first of all, the rough justice of the reorganization has left General Motors without Saturn, which sold cars that were made by Opel, which is precisely the sort of cars that General Motors needs. The loss of Saturn will also blow a hole in G.M.'s CAFE numbers, which is very disconcerting.

The government is going to step up with a lot of money. I've seen numbers as high as $50 billion -- I think Mickey has reported that number -- to help General Motors restructure. Well, that's an awful lot of money.

And at the end of this, you're going to have a much smaller company with far fewer overhead costs. And it will be lean, and it will be filled with smart people.

They've also committed, at least notionally, to this idea of electrification of the automobile. You know, that's the sort of big idea that could propel General Motors in the future. I hope that they see it through.

JEFFREY BROWN: All right. We will leave it there and watch, of course. Dan Neil, James Womack, and Micheline Maynard, thank you, all three.