7 reasons GM is headed to bankruptcy

BySharon Silke Carty, USA TODAY
May 31, 2009, 9:36 PM

DETROIT -- If just one big mistake had brought General Motors gm to its knees, maybe it could have been fixed and averted its march into bankruptcy court Monday.

But what put the huge company — it once sold more than half the cars in the U.S. market and now controls less than 20% — in such a hole was a series of missteps, an inability to change lanes quickly when the market or government veered … and a heaping dose of bad luck.

"If there was one decision that was the lynchpin … it would be easier to fix," says Laura Marcero, a restructuring expert at Grant Thornton. "But these are systemic problems pervasive in the industry for decades."

Now, GM is operating on $20 billion in government aid and will need billions more to reorganize. Over the weekend, GM put final pieces in place for a filing: a cost-cutting labor deal got union approval; the U.S. and Germany brokered the sale of its European Opel unit to Canadian parts maker Magna; and more than half its bondholders agreed to a deal to cut its debt.

Some would argue GM got here mostly because the sales-killing recession came just as it was about to turn around. "This has nothing to do with the management of the company over the years," says David Cole, chairman of the Center for Automotive Research. "When you take sales down to Depression-era levels in a high-fixed-cost industry like this, it's a killer."

Still, GM made some key missteps that hastened its decline. Here are seven of the biggest:

1. Not filing for bankruptcy sooner

Momentum toward a bankruptcy filing accelerated since the auto market collapsed last fall. But as far back as the North American International Auto Show in Detroit in 2005, then-CEO Rick Wagoner faced questions about whether GM would be better off filing for bankruptcy reorganization to cope with its labor costs, debt load and excess dealers.

Wagoner was then, and remained until his last days at GM, adamantly opposed to bankruptcy. He said it would drive away buyers and irreparably harm workers and shareholders. He believed GM could turn around: He was CFO in 1992 when GM teetered on the brink of bankruptcy, only to make a strong rebound.

But a bankruptcy filing in 2005, when the company was stronger and the economy was chugging along well enough to absorb job losses, could have been better for everyone, says Martin Weiss, president of Weiss Research. Weiss predicted GM would file for bankruptcy in 2005 and still believes it should have. "They could've been leaner and meaner to prepare for the tough times that were coming," Weiss says.

2. Driving incentives into the ground

Following the 2001 terrorist attacks, GM was praised for responding quickly and decisively: It offered consumers 0% financing on loans up to five years. When the newness of that deal wore off, the automaker piled on a $3,000 rebate.

And the deals kept coming. GM stuck with cash-back deals and low-rate financing for years, increasing rebates to $6,000 to $8,000 in some cases. But to afford the rebates, GM kept sticker prices high. It took GM until 2006 to realize it was damaging itself with the non-stop deals: Shoppers often wouldn't consider a GM vehicle because its sticker price was so much higher than the competition.

Jesse Toprak, executive director of industry analysis at Edmunds.com, says once GM started offering heavy incentives, it was stuck with them, because competitors weren't easing off on rebates, either.

"It was a function of the marketplace at the time," says Toprak. But rebates killed residual values, meaning new car buyers would see the value of their GM car erode faster than foreign brands.

And GM's heavy incentives skewed its marketing into promotions for the deal, not the cars.

"If you're constantly advertising the deal, and the car is in the background, that's not a viable strategy," Toprak says.

3. Killing the EV1 electric program

Wagoner said his biggest mistake was killing the EV1, the company's pint-size electric car that was in test fleets in the late 1990s. It was a public relations debacle when the test cars had to be reclaimed and GM then scrapped them. But the real loss was scrapping the program behind them. GM abandoned a big lead in electric car technology and let Toyota take the green mantle for its hybrid Prius.

Now, GM is scrambling to regain the lead, promising its plug-in electric Volt will be on sale at the end of next year.

Al Benchich, a retired union president, says with the failure of the EV1, GM squandered the opportunity to keep the U.S. a dominant manufacturing force in a greener era.

"We have the people and the skills to do these things, and there's no reason we can't be doing it," says Benchich, who watched membership in his local United Auto Workers shop shrink from 2,800 13 years ago to about 500 today. "We could've been building this kind of stuff for a while now, keeping plants open and keeping people working."

4. Selling control of GMAC

For years, the ongoing joke was that GM was a bank that happened to make cars. Quarter after quarter, year after year, GM's financing arm, GMAC, pulled in way more revenue than its automotive operations.

In 2006, facing a cash crunch, GM sold off 51% of GMAC to private-equity fund Cerberus for $7.4 billion in cash and another $6.6 billion in staggered payments.

"That was a huge mistake," says Pat O'Keefe, managing director of turnaround firm O'Keefe & Associates. "GMAC was the financial strength of General Motors. … GMAC was a cash cow."

Although GMAC ran into problems with its mortgage unit in the housing crisis, keeping control could have helped GM weather the slide in auto sales last fall, O'Keefe says.

During the credit crisis, dealers saw their GMAC financing for inventory revoked, and about 25% of potential buyers couldn't get GMAC car loans.

In the past, GMAC could have extended loans with a "wink and a nod" to help keep dealers stocked with cars and keep financing loans, O'Keefe says.

But once GM gave up control of GMAC, it lost that flexibility.

5. Ignoring Jerry York

In the fall of 2005, billionaire investor Kirk Kerkorian bought up 10% of GM's shares, making him the company's largest shareholder. He then pressured GM to take his aide, Jerome York, as a board member, and tried to force GM to partner with Nissan and Renault.

Although the Nissan/Renault marriage failed, York showed some foresight.

In an early 2006 speech, he spelled out what he thought GM needed to do to right itself: Be more realistic about market share and revenue expectations, cut excess products and brands, sell or close business units that weren't making money and take what he called a "clean sheet of paper approach to the business," looking at everything in the company with fresh eyes.

Most important, all of it needed to be done fast.

"Time is of the essence," he said.

That list of fixes is eerily similar to the moves President Obama's automotive task force has forced GM to tackle in recent months. It rejected GM's first restructuring plan, saying the automaker wasn't realistic enough about market share and revenue projections. GM has been pressured to sell off Hummer, Saturn, Saab and its European unit, Opel. It's closing Pontiac.

CEO Fritz Henderson has said the automaker is going over the entire company, questioning every plant, product and personnel move. But Henderson's moves came after the company was essentially in free fall and operating on billions in federal aid.

York didn't hang around long. He resigned from the board after eight months, sending directors a sharp letter chastising them for not being critical enough of GM and saying he had grave reservations about GM's ability to compete.

6. Mishandling Fiat

When GM bought 20% of Italian automaker Fiat for $2.4 billion in GM shares, the deal seemed like a genius move. With Opel/Vauxhall, it would've given GM dominance in the European market and made GM an even stronger global player.

But then Fiat CEO Gianni Agnelli died, and problems with the automaker mushroomed.

As part of the deal for GM's stake, Fiat had the right to force GM to buy the remaining shares and take control. In 2005, GM decided, instead, to pay Fiat $2 billion to get out of the deal.

Fiat used that money to turn itself around, and it will be Chrysler's newest owner.

Is it ironic or sad?

7. Overreacting to the truck boom

GM is often criticized for too many SUVs, but, as Wagoner has acknowledged, GM actually overlooked the start of the high-profit truck boom kicked off by the launch of the Ford Explorer SUV in 1990.

"We always considered ourselves a 'car' company," he later explained to USA TODAY.

When GM realized how fast 1990s buyers were switching to trucks as personal transportation, it overreacted, pouring time and money into SUVs and pickups at the expense of car development. The result: As long ago as 2000, Wall Street was warning that GM could be overcommitted to trucks and wind up out of phase if the pendulum of buyer preference swung back to cars. Once consumer tastes began changing, the market was awash in new truck models, and profits were sapped by discounts needed to keep sales boiling.

The symbol of GM's swing too far toward trucks is the high-end Hummer. GM launched the big SUV in 2003, the compact H3 in 2005. As buyers edged away from trucks, then fled as fuel prices hit records in 2008, GM wound up with pricey models that not only didn't sell, but also gave it an environmental black eye. Some of the heftiest Hummer H2s barely managed 10 miles per gallon.

Contributing: James R. Healey in McLean, Va.

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