Random Thoughts

General Motors, on the brink of bankruptcy?

The front cover of mid-February issue of FORTUNE is rather scary though
not too unexpected. The magazine, which is famous for its annual list of
top 500 global companies, has raised questions over viability of General
Motors, the world's biggest car manufacturer. It may have to resort to
chapter 11 sooner than expected, the magazine says.

The woes of GM are not unheard of in Detroit. The company is saddled with
the burden of funding employee retirement schemes of some 11 lakh odd
employees. This costs GM over USD 1,300 per vehicle sold in the US. To
add to the trouble, the Japanese car makers are gradually eating the
big daddy's pie in the home market. GM's share in the US auto market
has declined from about 45 per cent in 1980 to less than 30 per cent in
2005. The company lost USD 8.6 billion last year.

GM is also struggling to reinstate the brand image in the mind of American
consumer. It seems that GM's cars have lost touch with time. The company
has found difficulty in launching new models successfully in recent
time. Moreover, though the company claims that it now manufactures more
reliable cars, the 'once bitten twice shy' American consumers are not
interested in taking chances. They prefer the vehicles from the Japanese
car makers.

The reflection of all the bad news can be seen in the performance of the
GM stock on the bourses. It is currently trading at a 25-year low of
about USD 23. The slide in the value of the stock since it touched an
all-time high of USD 93.75 in April'99 is tiring. The credit rating
agencies have already junked the bonds of the company.

The executives at GM, it seems, are trying all that they can to save
the 98 year-old company from bankruptcy. The most preferred tool in such
cases is cost-cutting. The company may have to take seriously the term
'equality of sacrifices' coined by one of the investors. Under this,
the management is suggested to cut upon not only wages and other employee
benefits but also dividends paid to the investors. As per the latest news,
the management is planning to take up a 50 per cent cut in dividends.

The company has also initiated consolidation of its business activities
in USA. It plans to cut over 30,000 jobs and shut down multiple plants
in the country by 2010.

It is offering attractive pricing schemes on its cars. But a stark
possibility of bankruptcy is worrying consumers. In such a case, the
company may falter to carry out maintenance contracts.

A bankruptcy at GM is not a music to Ford's ears. The major US rival of
GM may have to face a spate of discounts and low prices offered by GM
dealers to clear the inventory if GM files for chapter 11.

Perhaps, GM may not have to face a bankruptcy. It is still the
biggest auto company in the world and holds majority stake in the US
market. Moreover, the US government, at an opportune moment, may bail
out the grand daddy just like the Italian government has done for Fiat
in the past. Only time can tell that.

Labels: Corporations

posted by Ranjit @ 2/17/2006 03:35:00 pm