Why General Motors Went Bankrupt


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World's second Auto major declaring bankruptcy. Good study for MBA Students

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Why General Motors Went Bankrupt

  1. 1. Shashikant Kulkarni
  2. 2. <ul><li>100-year-old iconic car major </li></ul><ul><li>the third-largest bankruptcy filing in American history </li></ul><ul><li>20,000 workers are likely to lose their jobs. </li></ul><ul><li>GM has 92,000 employees in the United States and supports 500,000 retirees under the contract filed with the workers' union. </li></ul>
  3. 3. So why has the world's best known car company gone bankrupt? <ul><li>very high labour costs, </li></ul><ul><li>rising competition from foreign car makers, </li></ul><ul><li>Rising fuel prices </li></ul><ul><li>freezing of credit </li></ul><ul><li>the collapse of the American economy </li></ul><ul><li>drop in sales caused by lack of purchasing power among Americans due to the recession, </li></ul>
  4. 4. General Motors's problems run much deeper <ul><li>Over the years, protesting workers' unions at GM managed to get the company to agree to contracts that provide lifetime benefits to the members. </li></ul><ul><li>These costs have now reached an unmanageable proportion </li></ul><ul><li>the automotive giant just does not have enough money to either make these payments or to keep the company afloat, </li></ul>
  5. 5. General Motors's problems <ul><li>decline in sales and plummeting profits </li></ul><ul><li>Expansion, upgrade, new investments were totally out of the question. </li></ul><ul><li>No cash, few receivables and huge expenses </li></ul><ul><li>GM is paying more than $1,500 per car that is built as just benefits to people who are not even working for the auto giant any more.. </li></ul>
  6. 6. <ul><li>the cost of steel used in a car made by GM is less than what it pays its retired union members in terms of benefits. </li></ul><ul><li>Added to this is the huge pay that GM workers draw even for low-level jobs at the company </li></ul><ul><li>The company does not have much cash and even if it adds receivables to this, it accounts payable and accrued expenses are many times higher than that figure </li></ul>
  7. 7. Government aid <ul><li>The United States government, gave it over $19 billion from taxpayer money to keep it alive. </li></ul><ul><li>It also sacked its legendary chief executive Rick Wagoner and decided to monitor the company's restructuring itself. </li></ul><ul><li>Once it goes into bankruptcy, the US government will infuse yet another tranche of about $30 billion to refinance and restructure GM. </li></ul>
  8. 8. The first signs of trouble <ul><li>GM's gargantuan financial troubles began to surface in early 2008 </li></ul><ul><li>The sudden rise in the price of oil, the deepening recession and the falling sales led to Detroit's Big Three - GM, Chrysler, and Ford Motor Co - almost throwing in the towel. </li></ul>
  9. 9. Hard-to-get car loans and crazy fuel prices hurt GM <ul><li>Car loans too were difficult to come </li></ul><ul><li>Companies like GM found it almost impossible to raise funds or borrow from the market to keep from going belly up. </li></ul><ul><li>By the end of the year, car giants were begging for help </li></ul>
  10. 10. <ul><li>Reports say that the US government may own 70 per cent stake in the restructured General Motors, </li></ul><ul><li>Under the GM restructuring plan, the United Automobile Workers union would hold up to 20 per cent through its retiree health care fund, and bondholders and other parties will get the remaining share. Shareholders would be virtually wiped out. </li></ul>
  11. 11. Some thorny questions <ul><li>The prospect of GM being effectively owned by the government raises a number of thorny questions: </li></ul><ul><li>fuel economy standards </li></ul><ul><li>tax incentives to replace aging cars </li></ul><ul><li>green technology initiatives </li></ul><ul><li>The day-to-day running of the firm would be left to professional managers and the government would not be involved in decisions about closing factories, renegotiating contracts or selecting product lines. </li></ul>
  12. 12. GM India not to be impacted <ul><li>The sales of new cars have plummeted by as much as 40 per cent since early 2009 and even Toyota, the world's biggest car maker, is suffering losses. </li></ul><ul><li>Indian automobile market, even during this slowdown, is still growing faster than in most other economies. </li></ul>