General Motors Corp.'s filing for bankruptcy protection Monday will force what was once the world's largest auto maker to develop new products and slash costs if it is to emerge as a viable company.
The bankruptcy filing, the largest for an industrial company in U.S. history, was essential for GM's survival and part of a “viable, achievable plan that will give this iconic American company a chance to rise again,” said President Barack Obama at the White House.
The move will transform ownership of the century-old company. The U.S. government is to take a 60-per-cent ownership stake in the new firm and the Canadian government will now own 12 per cent of the common shares. The United Auto Workers will get a 17.5-per-cent share with unsecured bondholders receiving 10 per cent. Existing shareholders get wiped out.
“Even though the writing's been on the wall, it's still shocking. General Motors was the word's largest company that, in many ways, created modern consumerism and capitalism,” said Dimitry Anastakis, a history professor and auto expert at Trent University in Peterborough, Ont.
“At the same time, it provides an incredible opportunity going forward ... to reshape the way consumers drive and the way they interact with the environment.”
The task now is to develop more fuel-efficient cars and maintain or grow GM's market share in countries such as China, said Mr. Anastakis, who predicts the auto maker could become profitable in the next three to four years.
GM chief executive officer Fritz Henderson said he doesn't expect the Canadian operations will face any further cuts than those already announced in the last year.
He pleaded with customers who abandoned GM to give the company another chance. “The GM that had let too many of you down is history,” Mr. Henderson said at a news conference in New York.
Mr. Obama said he hoped the firm would emerge quickly from bankruptcy court. The auto maker currently has $83.3-billion (U.S.) in assets and $172.8 in debt.
GM's reorganization plan will rely on up to $30-billion of additional financial assistance from the U.S. Treasury Department, on top of the $19.4-billion in taxpayer money GM already has received in the form of low-interest loans.
Ottawa and the Ontario government will invest an additional $9.5-billion in the restructured company, on top of the $500-million they have already provided.
The president of the Canadian Auto Workers Union says he expects some Canadian General Motors plant to suspend production while the U.S.-based parent company files for bankruptcy protection.
Ken Lewenza says he would be shocked if all plants manage to stay open after GM files for chapter 11 bankruptcy protection.
“I ... would be incredibly surprised if we don't lose some production as a result of the Chapter 11 in the United States,” he said in a telephone interview. “If it doesn't, that means [GM's Canadian unit] did their homework much more detailed than one could anticipate.”
The automotive giant began those proceedings Monday morning in a New York court.
General Motors of Canada Ltd. will not file for protection Monday under the Companies' Creditors Arrangement Act, said Stew Low, a GM Canada spokesman.
GM will follow a similar course taken by Chrysler LLC, which filed for Chapter 11 protection in April and hopes to emerge from its government-sponsored bankruptcy this week.
A person familiar with General Motors' plans says the auto maker will permanently close nine more plants and idle three others to trim production and labour costs under bankruptcy protection.
GM's U.S. filing comes 32 days after a Chapter 11 filing by Chrysler, which also was hobbled by plunging sales of cars and trucks as the worst recession since the Great Depression intensified.
The third of the one-time Big Three, Ford Motor Co., has also been stung hard by the sales slump, but it avoided bankruptcy by mortgaging all of its assets in 2006 to borrow roughly $25-billion, giving it a financial cushion GM and Chrysler lacked.
The downsized GM's brands will be limited to Chevrolet, Cadillac, GMC and Buick. Its Pontiac, Saturn, Hummer and Saab operations will be either sold or closed. GM said it was finalizing a deal to sell Hummer, and plans for Saturn are expected to be announced within weeks.
GM, whose headquarters tower over downtown Detroit, said it believed the filing was not an acknowledgment of failure, but a necessary way to cleanse itself in an orderly fashion of problems and costs that have dogged it for decades.
Trading of GM shares was halted early Monday after they plunged Friday as low as 74 cents, the lowest price in the company's 100-year history. GM will be kicked out of the Dow Jones industrial average because rules established by the News Corp. unit that oversees the index prohibit it from including companies that have filed for bankruptcy.
Assembly plants in Pontiac, Mich., and Wilmington, Del. will close this year, while plants in Spring Hill, Tenn., and Orion, Mich., will shut down production but remain on standby.
The person spoke on condition of anonymity because the plans have not been made public.
A union spokesman at the GM plant in Spring Hill confirms the 2,500 employees there have been told the plant will be idled.
Powertrain plants in Livonia, Flint and Ypsilanti Township, Mich., will close next year, along with plants in Parma, Ohio, and Fredericksburg, Va.
Stamping plants in Indianapolis and Mansfield, Ohio, also will close. A stamping plant in Pontiac, Mich., will remain on standby.
The bankruptcy filing represents a dramatic downfall for GM, which was founded in 1908 by William C. Durant, who brought several car companies under one roof and developed a strategy of “a car for every purse and purpose.” Long-time leader Alfred P. Sloan built the global auto maker into a corporate icon.
GM first sought help from the Bush administration and Congress last year as it was in the midst of being staggered by $30.9-billion in losses and seeing its cash resources shrink by more than $19-billion.
Consumers, worried about the economy and the future of GM, shied away from the company's cars and trucks this year even after President George W. Bush promised loans and Mr. Obama followed through with billions more in assistance – plus a stiff set of new requirements GM was ordered to meet.
When GM failed to do so by a March 31 deadline, Mr. Obama forced out CEO Rick Wagoner and replaced him with Mr. Henderson.
Mr. Wagoner served at the helm since 2000 and was the face of GM when he first flew on the company jet to ask Congress for aid. After a firestorm of negative publicity, Mr. Wagoner rode in a hybrid Chevrolet Malibu from Detroit to Washington for a second set of withering questions before lawmakers.
But that amounted to only a sideshow as the automaker's financial position worsened. Its revenues plunged almost 50 per cent in the quarter ended March 30 and it racked up another $6-billion in losses.
The Henderson-led GM faced a government-imposed June 1 deadline to restructure, slash costs and modify contracts with its union and dealers. But meeting most of those demands, plus a late agreement by many bondholders to swap portions of the $27-billion in debt they are owed for shares in a new GM, were not enough to prevent the court filing.
In fact, it was an all-out sprint to Monday's filing, as GM quickly sought to nail down deals with its union, bondholders and sell off brands and along with most of its Opel operations in Europe in an effort to appear in court with a near-complete plan to quickly emerge as a leaner company with a chance to become profitable.
The German government on Sunday agreed to lend GM's Opel unit $2.1-billion, a move necessary for Magna International Inc. to acquire the company. The Canadian auto parts supplier will take a 20 per cent stake in Opel and Russian-owned Sberbank will take a 35 per cent, giving the two businesses a majority. GM retains 35 per cent of Opel, with the remaining 10 per cent going to employees.
In the U.S., the UAW's ratification of concessions, announced Friday, will save GM $1.3-billion per year. The new deal freezes wages, ends bonuses and eliminates some noncompetitive work rules.
It also moves billions in retiree health care costs off GM's books. In exchange for its ownership stake, $6.5-billion of interest-bearing preferred shares, and a $2.5-billion note, the trust will take on responsibility for all health care costs for retirees starting next year. Higher health care costs alone accounted for a $1,500-per-car cost gap between GM and Japanese vehicles.
GM will offer buyouts and early retirement packages to all of its 61,000 hourly workers as it plans to shrink overall employment. The company also has about 27,000 white collar employees. In contrast, GM employed 618,000 Americans in 1979, more than any other company.
GM earlier outlined a plan to cut about 1,100, or 40 per cent, of its dealers by the end of 2010. It also plans to shed about 500 dealerships that market the Saturn, Hummer and Saab brands.
But just cutting labour and overhead costs won't be enough to save the company. It also has been working to streamline its engineering and design, as well as standardize many parts so they can go into multiple models.
The once powerful GM earns a place in history as the largest U.S. industrial company to file for bankruptcy protection, and the fourth-largest company overall to do so based on its $82.29-billion in assets.
Lehman Brothers Holdings Inc.'s September 2008 bankruptcy filing is the U.S.'s largest with $691-billion in assets, and likely served as a catalyst for GM – and Chrysler's – downfall, as it hastened the erosion of credit markets, making it more difficult for consumers and dealers to finance new vehicles.
© Canadian Press
