GM: What Went Wrong

and What's Next

For decades, General Motors reigned as the king
of automakers. What went wrong? Reflections on
the wrong turns and missed opportunities of the
former industry leader, and ideas for recovery.
 GM: What Went Wrong
 Brands Owned by GM (once upon a
time)  Oldsmobile

 Buick  Opel
 Cadillac  Pontiac
 Chevrolet  Saab
 GMC  Saturn
 GM Daewoo  Vauxhall
 Holden
 Hummer
 GM: What Went Wrong
 Formed in 1908, General Motors was
the world's largest carmaker between
1931 and 2008.
 GM filed for bankruptcy protection
(Chapter 11) on June 1, 2009.
 In the bankruptcy petition, GM
claimed slightly over $82 billion in
assets and nearly $173 billion in
debts.
 GM: What Went Wrong
 Bankruptcy is a legally declared inability
or reduced ability of an individual or
organization to pay its creditors.
 Creditors may file a bankruptcy petition
against a debtor ("involuntary bankruptcy") in
an effort to recoup a portion of what they are
owed or initiate a restructuring.
 In the majority of cases, however, bankruptcy
is initiated by the debtor (a "voluntary
bankruptcy" that is filed by the insolvent
individual or organization).

Source: Wikipedia
 GM: What Went Wrong
 There are six types of bankruptcy under the
Bankruptcy Code, located at Title 11 of the
United States Code:
 Chapter 7: basic liquidation for individuals and businesses;
 Chapter 9: municipal bankruptcy;
 Chapter 11: rehabilitation or reorganization, used primarily
by business debtors, but sometimes by individuals with
substantial debts and assets;
 Chapter 12: rehabilitation for family farmers and fishermen;
 Chapter 13: rehabilitation with a payment plan for
individuals with a regular source of income;
 Chapter 15: ancillary and other international cases.

Source: Wikipedia
 GM: What Went Wrong
 In Chapter 11, the debtor retains ownership and
control of its assets and is re-termed a debtor in
possession ("DIP").
 The debtor in possession runs the day to day
operations of the business while creditors and the
debtor work with the Bankruptcy Court in order to
negotiate and complete a plan.
 If a plan is confirmed the debtor will continue to
operate and pay its debts under the terms of the
confirmed plan. If a specified majority of creditors
do not vote to confirm a plan, additional
requirements may be imposed by the court in
order to confirm the plan.
Source: Wikipedia
 GM: What Went Wrong
 The General Motors bankruptcy is the
Chapter 11 bankruptcy of automobile manufacturer
General Motors and some of its subsidiaries in the
United States Bankruptcy Court.
 The United States government-endorsed bankruptcy
plan will permit Vehicle Acquisition Holdings, LLC
("New GM") to purchase the more productive assets
of the old GM.
 Payments to employees continue uninterrupted, and
warranty and other customer service continue
uninterrupted.
 Operations outside of the United States are not
included in the court filing.

Source: Wikipedia
 GM: What Went Wrong
 The company received government assistance in 2008
under the condition it would produce a reorganization plan
to become a viable company in the long run.
 The petition is the largest bankruptcy filing of a U.S.
industrial company. The filing reported US$82.29 billion in
assets and US$172.81 billion in debt.
 As ranked by total assets, the bankruptcy is the fourth-
largest bankruptcy in U.S. history, following after
Lehman Brothers Holdings Inc., Washington Mutual, and
WorldCom Inc.
 Shortly after the Chapter 11 filing, it was announced that
as of Monday, June 8, 2009, GM would be removed from
the Dow Jones Industrial Average, to be replaced by
Cisco Systems.

Source: Wikipedia
 GM: What Went Wrong
 General Motors was financially vulnerable before the
automotive industry crisis of 2008-2009.
 It came close to insolvency and bankruptcy after falling
sales caused a US$4.45 billion loss in 1991.
 Cost-cutting and management changes restored
profitability for the next 10 years.
 In 2005 the company posted a loss of US$10.6 billion.
 In 2006, its attempts to obtain U.S. government
financing to support its pension liabilities and also to
form commercial alliances with Nissan and Renault
failed.
 For fiscal year 2007, GM's losses for the year were
US$38.7 billion, and sales for the following year
dropped by 45%.

Source: Wikipedia
 GM: What Next
 Efforts to sell General Motors' European operations
ran into difficulties, as the corporation was
expected to file for bankruptcy by June 1, 2009.
 United States government officials suggested that,
if they were satisfied with the company's plans to
restructure, the U.S. government would take at
least a 50% equity stake and reserve the right to
name board members.
 On 31 May 2009 news broke that the U.S. would
initially likely become the largest shareholder of the
reorganized GM following a bankruptcy filing and re-
emergence from bankruptcy.
 The U.S. government would invest up to $50 billion
and own 60% of the new GM and the Canadian
government would own 12.5%.

Source: Wikipedia
 GM: What Next
 On May 27, 2009, the U.S. Treasury, advanced a
secured loan of US$ 360.6 million to GM, and GM
issued a note to the Treasury for US$ 360.6 million.
 The loan also funded a separate account established
by GM Warranty LLC, a new special purpose
subsidiary of GM that was formed to operate the
warranty program.
 On 30 May 2009, it was announced that a deal had
been reached to transfer New GM Europe (Opel plus
Vauxhall, minus Saab) assets to a separate company
majority-owned by a consortium led by Sberbank of
Russia (35%), Magna International of Canada (20%),
and Opel employees and car dealers (10%). GM is
expected to keep a 35% minority stake in the new
company.

Source: Wikipedia
 GM: What Next
 Is there a light at the end of the tunnel for
General Motors? Or are those just
headlights from an oncoming train?
 Its future appears uncertain at best—yet
expensive nonetheless. The government
has pledged $50 billion to the company,
with no assurances American taxpayers
will recoup any of that investment.
 How should business leaders learn from
this latest turning point? HBS faculty
weigh in.
 GM: What Next
Daniel Snow, Assistant Professor of Business
Administration:
 GM will emerge from this crisis with a
dramatically weakened portfolio of both current
and future products.
 Although much attention has been focused on electric cars,
hybrids, and fuel cells, I believe that the key player in the
carbon-conscious automobile market of the next ten years is
the compact car, especially one powered by a diesel engine.
 But GM has just lost its ability to develop small cars with the
sale of its Opel subsidiary. GM's best small cars are
engineered (and some are manufactured) by Opel in Europe.
 But it's not just about design and engineering. The supply
chains and factory networks that provide these cars will
need to be divided.
 GM's explicit strategy of the last decade has been to foster
areas of specialization within its subsidiaries around the
world—small cars in Europe, subcompacts in Asia, trucks and
SUVs in North America—and this has started to yield great
results.

Source: HBS Publn. 15 June

 GM: What Next
Joseph L. Bower, Baker Foundation Professor of Business
Administration:
 The GM bankruptcy poses several questions. How did the board
and management of a great company ever allow this
extraordinary situation to develop? It is easy to point to:
 the labor agreements from the 1950's, and
 the slow response to the superior engineering and manufacturing of
Japanese competitors, and
 a reluctance to take environmental issues seriously.

But these were not overnight developments.

 Did GM's financial controls become too powerful a force for the
product engineers to overcome?
 Did the marketers not see what Toyota was doing with the
Camry and Lexus?
 On another front, what does it mean for the U.S. government to
be supporting one competitor against a group of healthy rivals?
Is that what our bankruptcy laws were designed to accomplish?
 Doesn't a healthy industry require less capacity, so that the
winning companies can actually prosper? The administration is
embarking on an interesting experiment in political economy.
Source: HBS Publn. 15 June
 GM: What Next
Nancy F. Koehn, James E. Robison Professor of Business
Administration:
 General Motors had laid the groundwork for decades of industry
dominance, offering "a car for every purse and purpose" and
pioneering the multidivisional structure.
 Consider the root causes of General Motor's decline, which has been
under way for 30 years. Although there are many factors that
contributed to the company's long, slow bleed, the three
fundamental issues are
 First, pay close attention to what is happening to consumers' lives in the
context of the larger environment—not only their stated preferences, but
their hopes, dreams, wallets, lifestyles, and values.
 Second, keep an equally close eye on the competition.
 And third, understand how a company's structure and culture relate to
its strategy. Use all this understanding to place innovative bets. This is
what the early leaders of GM did. And this is what several generations of
executives have consistently failed to do.
 It has been a failure of leadership as astounding and momentous
(and ironic) as the company's early achievement: management's
consistent failure to do the very things that made the business so
successful initially.

Source: HBS Publn. 15 June