Abstract about the company GM:
The case examines the problems faced by GM, the second largest automaker in the world. These problems have brought the company at the verge of bankruptcy. The major reasons for the crisis at GM were its inability to bring out new vehicles that suit the needs of the customers, poor business strategy, and high costs associated with employee healthcare and pension benefits. These problems, coupled with global financial crisis and recession in the economies of several developed and developing countries adversely impacted the revenues of GM, which fell by 11% in 2008 as compared to 2007. In order to solve its liquidity crisis, GM approached the US Government for financial aid.
The company was granted US$ 13.4 billion through a series of federal loans. In December 2008, GM got a loan of US$ 4 billion. The company was required to fulfill specific targets that included reduction in debt, renegotiation of employee contract terms with the unions etc, before a stipulated time as a part of the loan package. If GM failed to meet these targets by the predetermined time, it had to repay the loan amount with interest within 30 days. On February 17, 2009, while submitting the 'Restructuring Plan,' GM asked for additional financial aid from the US government to carry on its operations after March 2009. The case concludes with a note on the challenges GM is likely to face in the near future if it is not able to meet the targets specified. It also debates on whether the US Government should have offered any financial aid to GM at all and let the company file bankruptcy.
Issues regarding case to find out:
» Examine the flaws in GM's business strategy that led the company face major problems.
» Understand the reasons behind GM's financial crisis.
» Debate whether the US government was right in bailing out GM.
» Analyze the challenges faced by GM in the near future.
GM Asks for Financial Aid
| On December 02, 2008, General Motors Corporation (GM), the second largest automaker in the world, sought financial help from the United States (US) government, to run its operations. The company asked for financial aid amounting to US$ 18 billion - US$ 4 billion before the end of 2008, US$ 8 billion in the first quarter of 2009 and another US$ 6 billion in credit line if the car market did not improve. Frederick Henderson (Henderson), the President and Chief Operating Officer (COO) of GM, said, "Without support, frankly, the company can't fund its obligations."3 |
Analysts opined that in addition to a poor business strategy, GM was also burdened with high costs associated with the healthcare and pensions benefits that it offered its employees. Between 1993 and 2007, GM had spent US$ 103 billion in funding healthcare and pension benefits.
In 2008, like other automobile companies, GM faced problems including rising oil prices and a global financial crisis and economic slowdown which adversely affected its sales. The company sold 1.7 million vehicles worldwide in the fourth quarter of 2008, a decline of 26 percent compared to the fourth quarter of 2007. For the calendar year 2008, GM sold more than 8.35 million vehicles, a decline of 11 percent compared to the vehicle sales in 2007.
On December 19, 2008, George W. Bush (Bush), the then President of the US, announced a financial package for GM. GM got the first US$ 4 billion of a series of federal loans amounting to US$ 13.4 billion on December 31, 2008.
By March 31, 2009, GM was required to fulfill some 'targets' including a two-thirds reduction in debt via a debt for equity exchange with current bondholders, and a renegotiation of employee contract terms with the United Auto Workers (UAW)4. In case it failed to meet these targets by the stipulated time, GM had to repay the loan amount with interest within 30 days.
GM submitted a 'Restructuring Plan' on February 17, 2009 (Refer to Exhibit I for the highlights of GM's restructuring plan). The company stated that it would require more financial assistance from the US government to continue its operations after March 2009...
According to the analysts, the major reasons for GM's financial problems were its huge pension and healthcare liabilities and poor business strategy. The global financial crisis in 2008 only resulted in further deterioration of the company's financial health...
PENSION LIABILITIES
GM's white collar retirees had been enjoying pension benefits from the 1940s. In 1950, the company had created a defined benefit pension plan for hourly and salaried employees who had worked for the company for more than five years.
On December 02, 2008, GM submitted a plan for long-term viability to the US Congress in order to secure financial aid from the government. The company stated that this aid was necessary for it to survive a decline in sales due to the credit crisis and consequent global recession. In the plan, GM announced that it would reduce its total US workforce from 96,537 in 2008 to about 65,000 salaried and unionized workers by 2012. The total number of US plants would also be reduced to 38 by 2012 from 47 in 2008. GM had already cut nearly 50 percent jobs from the 2000 levels of 191,465 people...
GM expected the ongoing tight credit situation and global economic slowdown to continue to affect auto sales in the year 2009 as well. Jonathan Browning, Vice President, Global Sales, Service and Marketing at GM, said, "The challenges in the global financial markets, including credit tightening, the drop in commodity prices, and economic uncertainty continue to negatively impact overall demand for new vehicles."...
