Did GM Take Us For A Ride?

It appears that GM has taken us for a ride. At the end of 2008, GM was on its deathbed (more so than normal at least) and in stepped Uncle Obama with suitcases full of our money. But don’t worry, Obama assured us, he extracted all kinds of promises of change. So why has nothing changed?

GM died about thirty years ago, it just didn’t know it. As the 1980s began, people looked for smaller, more reliable cars. GM made neither and didn’t care to. Its management understood the 1950s and little else. As Japanese and German and then Korean cars got better and better, GM didn’t or couldn’t.

But “GM learned its lessons!” At least that’s what they told us year after year after year. In fact, I recall once seeing a CNBC video showing a series of GM CEOs, every year for the past three decades, mouthing the words (or a paraphrase) “we’ve made mistakes in the past, but we’ve learned our lessons, we’re now making a competitive product.” Yet, nothing ever changed.

GM seems indifferent to its customers. Its union workers are lazy and hostile and turn out low quality, sloppy work -- anyone who ever owned a 1985 GM can attest to this, if the car didn’t kill you. Their engineers lack vision and talent. Rather than creating better, more advanced cars, they spent decades repackaging older brands and slapping new labels on the same turds that nobody wanted the year before. Forget stylish, modern or innovative.

Moreover, GM has been incapable of reigning in costs. I recall sitting in an airplane for five hours in 1998 listening to a GM “engineer” explain with great enthusiasm what he does -- this was after supposedly “draconian cost cuts” by GM. He worked in a building with about 200 people, each of whom did one thing. Their job was to design the knobs on the radios in certain GM trucks. Not all trucks mind you. . . just some. And not radios or faceplates, just knobs. When I asked if it wouldn’t be cheaper to just buy entire radios directly from a stereo maker (like Pioneer), he got an angry look on his face and told me that “GM couldn’t be sure the feel would be right on the knobs.” Seriously.

In 2008, GM nearly died. For years, they had been offering interest-free loans to get people to buy their cars. But this only robbed future car sales, it did not get more people to buy their product. In 2008, this policy came home to roost. Demand in the United States fell from a peak of around 20 million cars a year (at the initial height of the incentive craze) to between 9-10 million. This was a disaster for everyone who sold cars in America.

Having lost over $80 billion in four years, with demand collapsing, and losing $2 billion a month, GM was doomed. But in rushed the United States government to prop up the moribund company. You and I, at the insistence of Team Obama, handed GM just over $50 billion to keep them afloat (not to mention the cash for clunkers program designed to keep customers going to GM). But there were promises. . . “we’ve learned our lesson!” everyone said.

In exchange for the $50 billion, GM was to do the following:

• Cut their costs, particularly their union labor costs.

• Eliminate Pontiac, sell Saturn, sell Saab, sell Hummer (6% of GM’s American sales)

• Sell Opel (18% of GM’s global sales).

• Close 20 factories and eliminate 21,000 jobs.

• Eliminate unprofitable dealerships (1300 by the end of 2010).

These ideas were meant to (1) reduce over capacity in the industry to account for the reality that the American market would only buy 10-12 million cars each year, rather than 15-20 million, and (2) reduce GM’s costs so that they would become a profitable, self-sustaining company. The US Government also received ownership of 67% of the new company -- the rest was shared by the Canadian government and the United Auto Workers.

CEO Rick Wagoner even promised to work for only $1 a year until this crisis passed. Though he was soon fired and replaced by the government’s man, Fritz Henderson.

GM then went to Germany and received another $3 billion to keep Opel (GM’s European presence) open long enough to sell it to Magna. They also went to the Swedish government and got a pledge of $412 million and debt guarantee so that they could sell Saab to Koenigsegg. Saturn was to go to Hertz and Hummer to the Chinese.

Sounds like a ton of change right? Guess what.

Well, this week GM decided that Fritz Henderson wasn’t right after all, so they dumped him. This was such a surprise that even the other corporate officers did not know it was coming. The new guy, GM’s Chairman of the Board Ed Whitacre, is already bringing in “new” people. . . like Stephen Girsky, a former advisor to Rick Wagoner.

Wagoner, by the way, despite being fired, remains with the company. And even though he promised to work for only $1 during the crisis, someone apparently forget to mention that he’s eligible for a $20 million pension should he ever leave the company. One wonders how long before he returns to the CEO position?

But that’s not all that GM has been up to. Thursday, GM announced that they would reconsider the closings of the dealerships. Nothing definite has been announced yet in this regard, except that GM has agreed to “establish a binding review process to evaluate closures and determine whether those were based on business decisions.” Look for this to save most of the 1300 “closed” dealerships.

And we’re not done there. GM decided to cancel the Opel sale. It did manage to sell or dump the rest (or supposedly will soon), but by keeping Opel, GM managed to reduce its capacity by only 6% rather than the 24% promised.

Those union concessions? If you believe the UAW, they made concessions that will save GM $1.2 billion per year, which isn’t all that much for a company that takes in approximately $150 billion in revenue each year. Not to mention that many of these savings may be pay freezes rather than actual cuts -- an old Democratic trick, calling a smaller increase than planned a “cut.”

One thing the union did agree to though was to forgive part of GM’s promise to pay $20 billion to cover health care costs of retirees -- how big of a part I don’t know. Still, it’s nice of the union right? Oh, forgot to mention, in exchange for this promise, GM gave the union a 17.5% ownership of the company and $6.5 billion in preferred stock (paying 9% interest) and a $2.5 billion note. By the way, now that the union is taking over the duties of providing health care, any retiree old enough to be on Medicare will lose their “Cadillac” plan and must instead rely on Medicare. Thanks tax payer.

But at least they shut down factories and trimmed their labor force right? Think again. GM reduced the number of plants to be closed to 14. AND, it will keep four of those on “standby” in case they are needed to meet rising demand. AND they’ve recently announced that another will be retooled to make subcompacts rather than being closed. That leaves nine currently closing rather than the twenty they promised.

GM likes to point out that they’re reducing their labor force from 91,000 to 64,000, but it doesn’t appear to have happened yet. Moreover, it’s not clear that these are anything other than Saturn, Hummer or Pontiac workers. Thus, it’s not clear that they’ve actually made their remaining production facilities any more efficient.

So where does that leave us? It leaves us with a company that got $51 billion of our money based on promises that the company doesn’t appear to be keeping. It leaves us with an industry that will continue to struggle with over capacity. It leaves us with a company that will continue to stagger along on the verge of death until the next bailout.

And people wonder the American public doesn’t trust bailouts.