GM: Files for Bankruptcy. Now What?

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William Holstein
Auto Industry Consultant, Author
Monday, June 1, 2009; 12:00 PM

William Holstein, auto industry consultant and author of "Why GM Matters," was online Monday, June 1, at Noon ET to discuss the filing of bankruptcy protection by General Motors, the government's restructuring plan, Chrysler's move through bankruptcy and its purchase by Italian carmaker Fiat and what all this means to the U.S. auto industry and American economy.

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Washington, D.C.: I currently have a car note with GM. What does this bankruptcy mean for me and my monthly payments?

William Holstein: You should not be immediately affected.

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William Holstein: Hi, it's Bill Holstein, author of "Why GM Matters," to talk about today's news. I look forward to your questions.

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Ann Arbor, Mich.: What will be the immediate impact on GM operations, supplier operations and cash flow to suppliers?

William Holstein: The company is taking a 60-90 day shutdown. That means suppliers won't be making money during that time. That, combined with the uncertainty of bankruptcy, means that many suppliers will simply go out of business. We'll see how many, if and when, the company seeks to restart its assembly lines. I'm not entirely convinced they can.

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Manassas, Va.: What does this mean to the car buyer who wanted to possibly buy a Chevy Volt in the next year or two. Chevy in particular had "seen the light?" of alternative fuel cars (electric plug in, hybrid, Ethanol...). Is it too little too late?

William Holstein: We don't know whether GM will be able to introduce the Volt or not. It would have been, and could still be, a real breakthrough vehicle.

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Richmond, Va.: Thanks for taking our questions.

I have to ask...as a "Mr. Joe Average" consumer, why in the world would I want to buy a car built by a government-owned company? The whole U.S./Gen. Motors vs. Japan has hurt the U.S. auto industry for years, NOW add in the factor of "built by Uncle Sam" and I think the alienation between the consumer and U.S. car makers will continue to widen. How will this government ownership effect sales in your opinion? Signed, going to buy a Toyota.

William Holstein: This is the key question--will anyone want to buy a car from a company in bankruptcy?

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Arlington, Va.: How many of the major automobile companies around the world are owned or partially owned by national governments? I would love to see a list. It would help me identify the companies that succeed without government ownership, and it is from one of those companies that I want to purchase my next car. Suffice it to say, I will not be buying a GM vehicle.

William Holstein: There is an implicit government support for the vast majority of auto companies. A province owns 20 percent of Volkswagen. Italy stands behind Fiat. Germany stands behind Opel. The Chinese car industry is entirely government-owned. The Japanese auto industry is not supported directly by government because there's no need for it. Instead, in that case, their business groups, or keiretsu, support individual car makers. The Mitsubishi Group, for example, ponied up $10 billion to save Mitsubishi Motors.

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Silver Spring, Md.: Wouldn't taxpayers have saved a lot of money if GM had been allowed to go through bankruptcy a year ago? Seems like if we had done that, their restructuring/recovery would be on its way by now, instead of just (barely) beginning.

William Holstein: A complete liquidation of GM would have been, and would still be, an outright disaster for the entire U.S. economy. That way lies madness.

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Washington, D.C.: What happens to GM Stockholders now? I've seen a lot of info about bondholders, but that's not the same (or is it)?

William Holstein: GM stockholders are expected to be wiped out. You get nothing for your shares. They become collector's items.

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Warren, Mich.: I believe that about 3,400 white-collar workers in the USA have been separated by GM since February. What will the bankruptcy filing mean for all these workers? Will they still receive the severance pay that they were given? What about their pensions? Will there be any other affects for them?

William Holstein: They should continue to receive their severance. We don't know what will happen to pensions in a bankruptcy proceeding. The government, theoretically, guarantees all pensions, but the federal agency that does that is already overwhelmed.

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Anonymous: The financial issues have dominated the discussions. What about the product?

GM has 5-10 years to overcome stigma of poor quality. I'm a 40-something that grew watching my father pour money into his Oldsmobiles and Buicks. I vowed I would never do that and have never owned a U.S.-made car. I always looked at U.S. cars, but there was no comparison.

William Holstein: GM has made dramatic progress in recent years in manufacturing quality and productivity. So much so that there is no discernible difference between a Chevy Malibu made in Kansas City, Kan. and a Toyota Camry made in Georgetown, Ky. The problem is that your perceptions of GM quality are based on watching your father. It's true that their products were bad for a long period of time, but they've made huge strides in recent years and Americans haven't been able or willing to adjust their perception.

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Ann Arbor, Mich.: Follow-up to the first question:

What will happen to suppliers holding receivables from GM incurred prior to the declaration of bankruptcy?

William Holstein: Nobody knows with complete certainty. My understanding is that GM has a list of suppliers it really needs and it will continue to pay them. Suppliers not deemed to be essential could be in a different category and not be paid as fast, or at all.

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Apples and Oranges: For the sake of clarity, how many foreign automakers receive aid or are partially owned by their national governments? Also, to what degree does the government actually make production decisions?

William Holstein: In almost no case that I'm aware of does a government make product decisions. So if the Obama administration tries to tell GM or Chrysler what vehicles to make, that will be new territory. One possible exception is China, where, as I said, government entities at the municipal level run the Chinese auto industry.

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Houston, Tex.: I understand that the government will be able to name at least 4 of 9 director positions. At the same time, the administration is saying that they are uninterested in running the day to day operations. Do you think they will try to pick professional business people or political types to put on the board?

William Holstein: This is a great question. How will the government know what kind of directors GM really needs? Will it be able to understand the need for international business and financial savvy? Or: will it appoint people who are politically connected? Campaign fund raisers and the like? We just don't know, and this is a huge uncertainty hanging overhead.

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Poplar Bluff, Mo.: Thanks for the chat. I believe President Obama will be facing a public relations nightmare with the federal government controlling 60 percent of GM. What do you think the public's reaction will be when corporate executives at GM start spending taxpayer dollars on things like executive bonuses and advertising at sporting events?

William Holstein: Obama is saying that the government won't interfere with individual business decisions, but if GM wanted to pay $100 million to advertise in a sports league or at a major event like the Superbowl, what would Congress say? That spending might be essential to promote GM's vehicles, but would Congress understand? Good question.

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Alexandria, Va.: Could GM be restructured to manufacture a green infrastructure such as high-speed rail, solar and wind technologies?

William Holstein: Not a chance. That's absolute madness and reflects the conviction among the environmental lobby that they should hijack this process and turn GM into something it cannot be. That's suicidal.

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Tampa, Fla.: Is now the time to reconsider the independent dealer model of retail car sales? Why not allow manufacturers to own their own retail stores?

A few years ago, GM experimented with fixed factory pricing. No haggles, no salesmen lying through their teeth, no finance guys trying to trick you into buying extended warranties, just pick the car and the options you want, and take or leave the price.

The business press reported car sales jumped because consumers loved not having to deal with the usual agony of negotiating with salesmen. So why not move to this model? Consumers clearly prefer it over the existing model. Manufacturers could lower their prices by cutting out the middlemen and sell more cars. The only losers would be the salesmen, and abysmally low regard in which the public holds them shows they won't be missed.

William Holstein: Good point, but the manufacturers would first have to overcome franchise laws in all 50 states that protect their dealers. It would be scorched earth warfare.

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Baltimore, Md.: In addition to your response about the liquidation of GM being a bad idea, I think what people really need to hear is WHY a liquidation of GM would be a bad idea.

So, Why then would a total liquidation of GM be a bad idea for the U.S. economy?

William Holstein: GM, even in its enfeebled state, represented a full 1 percent of the American economy, along with its suppliers. It has tendrils that reach into Silicon Valley because it buys $3 billion of IT a year. It spends hundreds of millions on marketing and advertising, which affect Madison Avenue. And it sits on top of a pyramid tens of thousands of suppliers in metals, plastics, glass, semiconductors, etc. It's about more than just jobs on the line. In fact, each of those jobs on the line supports nine or 10 other jobs such as designers, engineers, financiers, managers, marketers, etc. GM is hugely important to all of us.

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Silver Spring, Md.: Follow-up: Why is it that bankruptcy a year ago would have to have equaled "total liquidation"? Why could it not have resulted in something else? Just because the company went bankrupt wouldn't mean that factories or the worker's skills would disappear? It seems to me that the company would have been reorganized (much as is happening today) but with a lot less taxpayer money.

William Holstein: Who would have come in and taken over? No one.

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Bailout question: Hi Mr. Holstein,

Does any bailout money go to fund the pensioners (and their spouses) health care?

Since most Americans (except for federal employees and that is another story) do not have retirement health Care, then taxpayers should not be footing the health-care bill for folks who retire (and sometimes earlier than 65 years of age).

Thanks.

William Holstein: I would expect that pensioners will see their benefits reduced, but not eliminated. So yes, some federal money would be used for that. That might actually not be a bad thing from a taxpayer point of view because if the pensions and medical benefits were simply to be cut off, that would have a hugely negative impact on a million people, damaging the economy, and creating the need for the government to step in and support these pensions...

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Washington, D.C.: American automobile manufacturers put all their marbles on producing trucks, including SUVs, because there were import restrictions on these vehicles. Japanese companies were not permitted to export trucks to the USA over a certain limit. Now that these restrictions have been phased out, American carmakers have become bankrupt. Why didn't USA car maker spend more effort at becoming competitive when they had the chance?

William Holstein: GM has been spending heavily in recent years to improve its manufacturing, improve its design and lower its cost structure. It's not like they were simply sitting on their haunches throughout all this. The problem is that Americans PERCEIVE that to be the case and Americans PERCEIVE that they don't make cars they want to buy. But if you go to a dealer, there are lots of attractive vehicles, including cars, at very attractive price points. This is the real tragedy. GM did change itself; but no one would pay attention.

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Hagerstown, Md.: GM didn't change quickly enough. In my town there are scores of stale, uncompetitive Impalas and Cobalts on the lot. The Malibu is a step in the right direction, but GM has been very slow to make inroads in other classes. Hopefully, the process to get new models to market will improve. Is there any reason to think this after they emerge from BK?

William Holstein: GM's approach to the market is going to be very different now because they are going to eliminate a couple thousand dealers and they are going to concentrate on just four brands, Chevy, Cadillac, GMC and Buick. I think that there are many excellent vehicles in these brands already--the Cadillac line is very exciting. Chevy has got the Malibu and the Camaro is just out. That's a great looking car. The Cruze and Volt are coming. The Aveo is a great small car that they're bringing in from Korea. So I'm convinced that the products are dramatically improved.

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Washington, D.C.: Sounds like the old maxim, "Build a better mousetrap and the world will beat a path to your door" just doesn't hold up. Even for the biggest manufacturing corporation in America.

William Holstein: That's a completely trite statement. Congratulations.

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Palm Beach Gardens, Fla.: What about holders of GMAC stock? Is this effected by the bankruptcy also?

William Holstein: GMAC has been converted into a bank holding company. I don't follow GMAC as closely as I follow GM, but I think shareholders there are going to be okay.

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Near 1600 Pennsylvania Avenue: I don't know who you are exactly, but I love your frankness! Thanks for the answers to the impact of liquidation, folks don't understand the production process and GM roles in this economy.

Though I would not be a member of the environmental lobby, I do think the U.S. has a growing market for rail and transit vehicles. GM seems to be a likely firm to enter/expand into that market. Locally, I think METRO typically orders from Italy.

William Holstein: It's not at all clear what kind of market there is for light rail and such. The very structure of the United States, in terms of how population is distributed, will make it very hard for us to suddenly launch into mass transit. We need a whole series of other steps taken to begin concentrating people in urban areas rather than exurbs. We would need consistently high gasoline prices of say $4 a gallon, thanks to federal taxes. We would need new zoning and highway practices. Just switching GM into making different equipment would not work because the public policy environment is not right for it. It would be a disaster and would cost billions of dollars.

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Baltimore, Md.: A comment. I just wish more people would get all of the information when it comes to U.S. autos. I have a Ford Fusion and a friend of mine has a Chevy Malibu. These are solid, well-built cars. People need to stop thinking about their father's and grandfather's experiences and get informed!

William Holstein: Amen.

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Silver Spring, Md.: Sorry for the "Business 101"-level of these questions, but are you saying that last year "No One" but the federal government saw any future opportunities with GM? It seems that if GM had filed for bankruptcy last year, some company (Fiat perhaps?) might have stepped in and picked up the pieces (those that had any value) and continued to make those quality cars you mention above. That company would be taking on the risk, not the U.S. taxpayer.

William Holstein: With its huge liabilities and huge risks, no other company would have wanted to assume control of GM, not even Toyota. It would be far smarter to build new factories and dealers and overall capacity than assume control of something as deeply troubled as GM. I've heard some speculation that certainly some investors would have swept in and bought GM assets for 10 cents on the dollar, but I don't agree. And meanwhile, the communities and states where these facilities are located would be pushed over the economic edge.

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Germantown, Md.: I'm actually starting to look at buying a GM product in the next few months. We have been pretty happy with our last GM cars. Is it true that Toyota lost more money last fiscal year than GM?

William Holstein: I'm not sure that Toyota lost more money, but it did in fact lose money for the first time in many decades. It over-invested in the United States, with plants or plans for plants in eight states. It also failed to penetrate the full sized pickup market.

I'm pleased that you're looking at a GM product in the next few months. What's your thinking? Why would you do that in the midst of bankruptcy?

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Bristow, Va.: If this was asked previously I apologize I didn't see it. At the end of the Bush administration the GOP did not want to bail out the automakers as they said let them fail with poor business models. Now barely five months into his administration Obama has spent BILLIONS on aid to the automakers that he said essential to prevent them from going into bankruptcy yet in the end that is precisely what happened. Wasn't all of that money that Congress and Obama approved to both Chrysler and GM just a massive waste considering they could have done this in February and both companies would have been on the road to rebuilding now -- four months later? I will never buy a GM product again due to this as well as never vote for a Democrat again because of the amount of money this Administration is spending and wasting.

William Holstein: There is a chance that this strategy will work and the taxpayers will be repaid with interest. And I would point out that the sums involved here are a pittance compared with how much the government and Federal Reserve have pumped into AIG, Freddie and Fannie and the financial system as a whole.

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Silver Spring, Md.: People were making the argument that AIG was too big to fail and that regulations shouldn't have let it get that way. You are saying GM is too big to fail -- not in how it was run, but more so in who depends on it. Should there have been government regulation to prevent GM from getting to occupy a "too big to fail" role in the U.S. economy? Isn't that what anti-trust laws are about? What is the difference?

William Holstein: I don't think the government could have, or would have chosen, to limit the size of General Motors, particularly because it has been in a state of market share retreat since 1962 and particularly since its size and scale were seen as important in competing against Toyota and other global players.

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Washington, D.C.: GM employs more than a million, but other businesses in the aggregate employ more, and many of those businesses are building better mousetraps every day. Yet their workers and owners don't enjoy the same level of government assistance when they encounter problems. Things are different for GM. Always have been.

William Holstein: The auto industry is particularly essential, and dare I say strategic, for the U.S. economy. So many skills sets and so many other supplier industries depend on it. And it plays a critical role in supporting our ability to project military power around the world. No wonder that the U.S. Army's R and D headquarters is in Michigan. If we both the Chrysler and GM bankruptcies, perhaps the Department of Defense will have to turn to Toyota for help.

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L'Enfant Plaza: What happens to current white collar? Do white collar employees continue to work/get paid?

William Holstein: Many white collar workers are getting fired or bought out, and white collar retirees are particularly incensed that they aren't receiving the same treatment as UAW retirees.

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William Holstein: Thanks everyone. Bill Holstein

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In an e-mail interview with washingtonpost.com, Holstein said, "This is one of the most decisive moments for the American economy in modern times. If the Obama administration's unprecedented intervention in Chrysler and General Motors is successful, they will be hailed as masterminds. But in what I regard as the more likely outcome, namely the mismanagement of this process, they will have contributed to a further downward spiral in the U.S. economy.

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