How Did GM Land in This Mess?

General Motors has filed for bankruptcy protection on June 1. This was despite all efforts by General Motors to stave bankruptcy at all costs and government control. Afterall General Motors was the epitome of American capitalism and economic might.

General Motors is the third largest company to file for bankruptcy in the history of America and the largest bankruptcy in the manufacturing sector. The company has filed for bankruptcy protection under Chapter 11 which will give time to GM to restructure its finances and protect it from creditors. It has affected over 1 lakh workers who are directly employed by GM and 5 lakh retired employees.

Auto Analysts say that General Motors started loosing the plot of creating cars in 80’s when it started the multi-branding strategy. It also laid thrust on manufacturing big cars and SUVs. This policy worked for more than two decades, but then the world changed drastically and GM was caught unawares. Here are the list of reasons which could have possibly led to downfall of General Motors. It was a killer combination of high labour costs, rising competition from Asian car manufacturers, extremely high fuel prices, freezing of credit, economic meltdown, and lack of buyers due to massive layoffs, and other factors. These reasons were visible on the surface, but the problems ran deeper. Remember General Motors has a history of over 100 years.

Over the years, workers union has held strikes and protests demanding better lifetime benefits to members. General Motors was reporting high profits and thus kept agreeing to workers demand. Over a period of time, the cost of lifetime benefits pushed labour costs through the roof. Some auto reports suggested that the company was paying US $ 1,500 per car that it built as benefits to people who were no longer working for them. Interestingly, the report points out that the cost of steel to make the cars was is less than the amount it paid to retired union members in terms of benefits. Moreover, even the workers in low level jobs drew huge salaries.

The company did not have much cash and even if it included receivables to this, it payables and accrued expenses are many times higher than those figures. Even if the current assets are put together, it still leaves behind huge liabilities.

These costs reached unmanageable proportion. The giant car manufacturer just did not have enough money to either make these payments or to keep the company afloat. To run salt on wounds, sales declined and profits plummeted drastically. Further, expansion and new investments were postponed due to lack of funds.

Actually the first signs of trouble surfaced in early that year. Fuel prices skyrocketed and dramatically consumers turned their backs on fuel guzzling cars and SUVs. They flocked to Asian car manufacturers like Honda Motors and Toyota and hybrid cars. The historic hike in fuel prices knocked out every hope by GM and other US car manufacturers to sell cars.

When the global meltdown started in October 2008, GM struggled to keep it head high. American banks ere hit by sub-prime crisis and decided to freeze loans. More people failed to qualify for loans and car sales dropped. Moreover, banks refused to raise funds for General Motors, while it tried to keep capital flowing in.

After filing for bankruptcy, GM has got busy restructuring its house. It is speculated that the labour union the United Automobile Workers union would hold up 20 percent stake in the company through its retire health care fund and the bond holder and other parties will get the remaining share of the bounty given by US federal government. The shareholders would be wiped out, without a single penny. The government is expected to hold 70 percent of the stake in the government.

People still have a lot of questions on whether United States aid will help revive the company’s fortunes. There are a lot of uncertainties involved and GM’s hope of coming out of this mess rests on whether consumers want to buy their products.