GM Better Off Bankrupt? A Rebuttal From Ron Silberstein

A discussion with Ron Silberstein was the inspiration for my previous post on the question of a GM bankruptcy.  Now he’s written a rebuttal.  It’s reprinted here, in its entirety.

Francine – thanks for the nice intro!

A few comments re: the GM points you make…

Let me preface these with my viewpoint that should GM file for bankruptcy, it would lead to quick demise and GOB (“Going out of Business”), not an orderly restructuring.  Sales would “fall off a cliff” as many believe they will.

GM has publicly stated they believe they can be break-even within a year or two.  They have new products in the pipeline, many of them very energy efficient. Has its management done a poor job? Absolutely.  Are its losses and cash burn rate ridiculous? Yes.  But if the government is giving money away to other screwed up companies – AIG, banks – then why not also try to save GM, if it can be done? 

Also, note, I am not a “Car guy.” These opinions are my own, not those of my company or partners.  I was not in favor of the bailouts and am really a free-market kind of guy. If there is value, it will come. If not, let them go out of business.  However, the bailouts started  –  and I didn’t have the hotline number to the White House to voice my concerns – and once started how do you decide who gets funds and who doesn’t? Which came first? (Although “Who’s on First” might be more appropriate) 

A good friend of mine takes the position,  “Let them all fail. The cleansing will hurt in the short-term but in the long-term the U.S. economy will be better for it.  Government needs to stay out of this and is getting way too big again.  We don’t need more regulation – we just need to enforce the existing regulations.”  Is his the correct position?  Or, are we in a place and time and do we have the right leader so that more government regulation and financial stimulus are the proper approaches?

To rebut your points specifically:

Points One and Two: Job loss and Continuity of service: 

According to GM’s web site, they have >252,000 employees located throughout the world. This job loss has not already occurred (some has, of course…but there are still 252,000 people working there.  And, the job loss that we’ll see will be far higher if, as I believe, a GM bankruptcy really means the end of GM and consumers cease buying GM cars.  Numerous suppliers will also be affected. I also count in the potential losses and failures the businesses that depend on GM and supplier employees to support their business, for example restaurants, retailers, etc..

GM is a worldwide employer.  This is not a Detroit or a Michigan issue. Michigan is already pretty decimated and would be further harmed by a GM bankruptcy/GOB, but many other states and countries would also be negatively impacted.

Yes, GM sales have plunged, but it’s not a problem unique to GM. Every car maker has reported similar declines, even Toyota and Honda.  It’s a global problem and related to the financial crisis.  Job losses, inability to get credit to finance a car, cutbacks in lease programs, etc. 

Per Edmunds.com:

Change from February 2008             Change from February 2008            

(Adjusted for fewer selling days)     (Unadjusted for fewer selling days)  

 Chrysler        -53.1%                                -55.0%                               

 Ford              -47.5%                                 -49.6%                               

 GM               -46.2%                                 -48.4%                                

 Honda           -32.1%                                -34.8%                               

 Nissan          -32.9%                                -35.6%                               

 Toyota          -36.3%                                -38.8%                               

 Industry Total  -38.9%                            -41.4%                               

 

So, it’s not simply “GM is a loser, sales are down, people prefer to buy cars from other companies, so let them die.”

To address your “buy a house for a dollar in Detroit,” give me a break.  Detroit is all about its suburbs, Metro Detroit, not just Detroit.  There is still incredible wealth here.  For example, Bloomfield Hills, MI consistently ranks as one of the top five wealthiest cities in the United States with populations of between 2,500 to 9,999.  Does Detroit have its problems? Certainly, from high unemployment, to a crooked ex-mayor, to vacant land and run-down homes, Detroit is not exactly a model city.  But the GM issues are far larger than just Detroit and Michigan.

Bottom line? There will be tremendous job loss at GM, its suppliers, and other businesses should GM go down.  This is one of the largest companies in the world.  Its demise would be felt, big time. Get those dominoes out, too.

Point Three: Retiree impact. 

GM is restructuring its union contracts.  They may have obtained some concessions today from the CAW.  And yes, the unions have taken advantage and have harmed the Big 3.  Looks like it took the government involvement for the UAW/CAW to wake up a little. 

The problem I have though is with what will happen to the retirees.  There will be issues re: health insurance. For example, pre-existing conditions may cause many to not be able to get health insurance, or for those who can the cost may be so high they can’t afford it. Maybe it is an impetus for Obama to get a new health care system in place.  He’s going to be in MI today (Monday 3/9) to meet with Governor Granholm and the health insurance issue is one that it appears he’ll be discussing with her.  I just have this thing about living up to the contracts and promises you have made, especially with retirees.

Point Four: Lead time. 

GM has new cars in the pipeline (Chevy Volt, for example) that as concepts wowed the consumers.  They have cut some redundancies among product lines.  They have made some changes…not enough, not fast enough, but they have made some and they are now making more at a much faster pace, finally recognizing the urgency.

Point Five: Maintain global image as manufacturing leader.

I don’t think “image” is important but we are and always have been a manufacturing economy and the best manufacturers in the world.  Sure, much is done overseas now – in Asia – but that is likely due to their advantages in wage and benefit structure and working conditions.  There are those who think we’ll be able to be a worldwide leader as a services-based economy – to that I say – we’ll run into the same issues, and Asia and India have made great inroads in the service areas as well.

Random thoughts:

1)    Why phase out the sales tax deduction based on income – we need to encourage the buying of cars and even the wealthy are cutting back on purchases.  They are the ones likely to be able to get credit to finance a purchase.  I don’t see why it would be a big deal to incentivize them to buy a new car.

2)    Encourage the purchase of fuel efficient and environmentally friendly vehicles by giving larger tax credits to buyers.  Once again, not phased out based on income. And, have penalties for other, less fuel-efficient vehicles.  Subsidize loans too, if necessary, for buyers of the types of vehicles that we want.  Buyer behavior can be influenced and needs to be influenced to help lessen our dependence on foreign oil.

3)    I was at a convention in February and the luncheon keynote speaker was Bill Clinton.  He stated he has total confidence in Obama’s team (some of whom are Clinton’s guys.)  He said the infusion of capital back in 2008 and now was, and is, necessary to ‘avoid a total meltdown.” I don’t know about you, but I am not into total meltdowns.  His timetable for “better times” was 15 months, possibly 24 months at the longest. 

Conclusion: I think GM needs to be given some more time, some additional loans, some breaks by the unions. They need to show rapid progress and urgency.  Management needs to be accountable for the changes and for the money they take.   Their plan and change programs need to be watched over very closely by someone in charge.  I just think it is too early to pull the plug on them (and I view a Chapter 11 for them as the end of the road.)  Hopefully it isn’t just throwing good money after bad.  The right answers may not be known for a while, but coming.