It is really only a matter of time. Maybe next month, but probably sometime later next year. Still, the end result is all too clear. Sooner or later there will be a bankruptcy filing for General Motors. The auto giant, that once controlled more than half of the U. S. auto industry, is eventually heading for a day in bankruptcy court.
Through the first half of 2008, GM burned through $1.05 billion a month in cash. Its stock has recently been downgraded into junk status and is hovering near an all time low. Problems for the largest U.S. automaker abound. A deep recession looms, its creditors are lining up, and the automaker is not cost competitive in the global marketplace. As a result, Standard & Poor’s warns that GM will face a “serious challenge to liquidity sometime next year.”
Of course, before any G.M. bankruptcy filing, United States lawmakers will surely waste tens of billions of taxpayer dollars on the failing automakers in the form of a government loan. A Democratic Congress supported in the last election by unions like the United Auto Workers (UAW), will not allow several million auto worker layoffs before the Presidential Inauguration early in the New Year.
However, any Congressional bailout loan will only delay the inevitable result. The truth is that the business model of the American auto industry does not work and it has not for many years. General Motors has unsustainable wage levels and has benefits which are far too generous. The company is the victim of an era when its labor relations led to its current high cost structure. This happened during a time when the big three automakers enjoyed a near monopoly in domestic car sales.
To illustrate how dire the situation is in the American auto industry, consider that General Motors cost of manufacturing is more than 50% higher than that of Toyota. Any loan by Congress will not alter this dubious cost structure. General Motors is just not competitive with Toyota in its current business form.
During the Reagan administration the United States automakers got assistance in the form of import quotas to give them "time to retool." However, as soon as the automakers' prospects improved, salaries and wages immediately increased. The only thing they did not "retool" was production efficiency and the creation of better, innovative, more fuel efficient cars.
Today, during another down cycle in auto production, once again executives are on Capitol Hill asking for assistance and predicting dire consequences if no federal aid is forthcoming. It is the same sad story for a domestic industry that cannot compete in the current global marketplace.
However, the end of the road has now arrived for incompetent auto industry management. Any Congressional bailout will only waste taxpayer dollars and postpone the inevitable bankruptcy result. The truth is that any short term Congressional fix will be temporary and not provide a viable solution. The domestic auto industry is on life support.
The solution to the problems of American automakers have been obvious for years. A reduction in auto worker wages, with fewer benefits and less generous pensions are the only way out of the abyss. Unfortunately, it is a reality that the United Auto Workers will just not accept. This lack of acceptance of economic reality is destined to result in massive auto worker layoffs.
So, a General Motors bankruptcy is the only economic medicine to achieve a global competitive balance for the automaker. It is an economic reality that the American automaker needs in order to finally begin to take the long road back.
James William Smith has worked in Senior management positions for some of the largest Financial Services firms in the United States for the last twenty five years. He has also provided business consulting support for insurance organizations and start up businesses. Visit his website at
http://www.eWorldvu.com or his daily blog at
http://www.eworldvublog.blogspot.com
