Management Student Society FEUI - The Bankruptcy of General Motors

The Bankruptcy of General Motors

Written by Mariana Putri K.

Wednesday, 08 July 2009

The Bankruptcy of General Motors

As we all know, especially in the United States of America, news headlines have been concentrated on the bankruptcy of General Motors. This company is a huge one since it had hired more than 200,000 workers around the world. Any changes that affect General Motors, the fate of hundred thousand workers are on the line. Well, it was started in the early of June when General Motors finally declared their bankruptcy…..

Not just have many workers around the world, General Motors also have four segments that represent their sale around the world. The biggest segment is GMNA (North America) where GM’s business concentrated and concentrates on. This segment has several types of company and cars comprises of Chevrolet, Buick, Saab, GMC, Pontiac, Cadillac, Hummer and Saturn. Other segments located outside of north America comprises of Opel (German), Saab(Switzerland), GMC, Vauxhall, Buick, Cadillac, Isuzu, Holden, Daewoo(Korea) and Suzuki.

Nevertheless, having many segments located at every continent just has not been as a comparative advantage started in 2006. Logically, when you have many places to produce and sell your product around the world, you’d have a large number of sales and revenue in your pocket. Those words should take it back because according to the GM’s financial reports, there are contradictory signs.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in millions, except per share amounts)

Item 8. Financial Statements and Supplementary Data


	Years Ended December 31,
	2008			2007			2006
Net sales and revenue
Automotive sales	$	147,732		$	177,594		$	170,651
Financial services and insurance revenue		1,247			2,390			33,816

Total net sales and revenue		148,979			179,984			204,467

Costs and expenses
Automotive cost of sales		149,311			165,573			163,214
Selling, general and administrative expense		14,253			14,412			13,650
Financial services and insurance expense		1,292			2,209			29,188
Other expenses		5,407			2,099			4,238

Total costs and expenses		170,263			184,293			210,290

Operating loss		(21,284	)		(4,309	)		(5,823	)
Equity in loss of GMAC LLC (Note 9)		(6,183	)		(1,245	)		(5	)
Automotive and other interest expense		(2,345	)		(2,983	)		(2,642	)
Automotive interest income and other non-operating income, net		424			2,284			2,812

Loss from continuing operations before income taxes, equity income and minority interests		(29,388	)		(6,253	)		(5,658	)
Income tax expense (benefit)		1,766			37,162			(3,046	)
Equity income, net of tax		186			524			513
Minority interests, net of tax		108			(406	)		(324	)

Loss from continuing operations		(30,860	)		(43,297	)		(2,423	)
Discontinued operations (Note 4)
Income from discontinued operations, net of tax		—			256			445
Gain on sale of discontinued operations, net of tax		—			4,309			—

Income from discontinued operations		—			4,565			445

Net loss	$	(30,860	)	$	(38,732	)	$	(1,978	)

Earnings (loss) per share, basic and diluted
Continuing operations	$	(53.32	)	$	(76.52	)	$	(4.29	)
Discontinued operations		—			8.07			0.79

Net loss per share basic and diluted	$	(53.32	)	$	(68.45	)	$	(3.50	)

Weighted-average common shares outstanding, basic and diluted (millions)		579			566			566

Cash dividends per share	$	0.50		$	1.00		$	1.00

In this preceding discussion, we will talk about issues and factors that lead GM into bankruptcy

· Recession and Global Crisis

The greatest impact of global economy crisis that leads to recession is experienced by United States as a result at which it was all started. Recession that US citizens experience make their income are decreasing as well as GM’s when they found out their customers (GMNA) can’t afford to buy American cars.

· Volatile Oil Price

The fluctuation of oil price is a nerve game for companies that have a relation to oil, such as car and Oil Company. Both agree that they gain profit when the oil price is high. But what happen when the oil price is constantly high? Car companies, especially American car companies lost their comparative advantage and brand.

American cars are known with their huge horsepower that consumed greater gas per mile and Americans love it to have cars like that. But they have to throw away that kind of American way of lifestyle when the oil price is soaring to the highest price ever in the history. They will look to Japan cars that consumed little gas per mile or even the new electric cars. Both (less gas consumption and electric cars) are the weak point of American car companies. They know that if they produce cars that have less gas consumption, then their partner (oil company) or even the government as the oil producer can’t have high profit. The ego of American car companies has taken them as a loser to Japan car companies.


Vehicle Sale and Market Share	Vehicle Sales(a)(b) Years Ended December 31,
	2008			2007			2006
	Industry	GM	GM as a % of Industry	Industry	GM	GM as a % of Industry	Industry	GM	GM as a % of Industry
	(Vehicles in thousands)
United States
Cars
Small	2,601	328	12.6%	2,647	381	14.4%	2,617	426	16.3%
Midsize	2,920	760	26.0%	3,410	884	25.9%	3,595	946	26.3%
Sport	272	48	17.7%	372	68	18.2%	452	83	18.4%
Luxury	963	122	12.6%	1,142	157	13.7%	1,190	170	14.3%

Total cars	6,757	1,257	18.6%	7,571	1,489	19.7%	7,854	1,625	20.7%

Trucks
Pick-ups	1,993	738	37.0%	2,710	979	36.1%	2,874	1,022	35.6%
Vans	841	151	17.9%	1,119	219	19.6%	1,326	245	18.5%
Utilities	3,653	809	22.1%	4,752	1,136	23.9%	4,505	1,173	26.0%
Medium Duty	257	26	10.1%	321	44	13.7%	501	59	11.8%

Total trucks	6,744	1,723	25.6%	8,902	2,377	26.7%	9,206	2,499	27.1%

Total United States	13,501	2,981	22.1%	16,473	3,867	23.5%	17,060	4,125	24.2%
Canada, Mexico, and Other	3,057	583	19.1%	3,116	649	20.8%	3,141	682	21.7%


Total GMNA	16,557	3,564	21.5%	19,588	4,516	23.1%	20,201	4,807	23.8%
GME	21,981	2,041	9.3%	23,136	2,183	9.4%	21,895	2,005	9.2%
GMLAAM	7,477	1,276	17.1%	7,267	1,236	17.0%	6,269	1,036	16.5%
GMAP	21,105	1,475	7.0%	20,717	1,436	6.9%	19,230	1,248	6.5%

Total Worldwide	67,120	8,356	12.4%	70,708	9,370	13.3%	67,595	9,095	13.5%

· Supply of Raw Materials

GM purchases a wide variety of raw materials, parts, supplies, energy, freight, transportation and other services from numerous suppliers for use in the manufacture of our products. The raw materials primarily consist of steel, aluminum, resins, copper, lead and platinum group metals.

Over most of the past three years the global automotive industry has experienced increases in commodity costs, most notably for raw materials such as steel, aluminum, copper, lead and platinum group metals. These price increases have been driven by increased global demand largely reflecting strong demand in emerging markets, higher energy prices and a weaker U.S. Dollar.

In some instances, GM purchase systems, components, parts and supplies from a single source, and may be at an increased risk for supply disruptions. Furthermore, the inability or unwillingness of GM’s largest supplier, Delphi, to supply GM with parts and supplies could adversely affect GM because their production capacity would be affected without those parts and supplies. In addition, Delphi has gone bankrupt and declare chapter 11 months before GM that leads too of the inability GM to produce cars without supplies so that their revenue and sales declined rapidly.

Now, GM’s life depends on debts and loan derived from U.S and Canada Government and other investors.

Payments Due by Period
	2009			2010-2011		2012-2013		2014 and after		Total
	(Dollars in millions)
Debt (a)	$	16,772		$	2,026	$	2,595	$	24,244	$	45,637
Capital lease obligations		174			312		144		273		903
Interest payments (b)		2,927			5,258		4,156		33,103		45,444
Operating lease obligations		618			940		616		620		2,794
Contractual commitments for capital expenditures		977			109		—		—		1,086
Delphi Facilitation Support payments (c)		110			110		—		—		220
Other contractual commitments
Postretirement benefits (d)		3,645			1,204		—		—		4,849
Less: VEBA assets (e)		(10	)		—		—		—		(10	)

Net postretirement benefits		3,635			1,204		—		—		4,839
New VEBA Contributions, net (f)		—			9,662		5,918		11,384		26,964
Material		1,671			1,246		533		159		3,609
Information technology		814			9		—		—		823
Marketing		617			200		26		3		846
Facilities		386			196		116		108		806
Rental car repurchases		3,678			—		—		—		3,678
Policy, product warranty and recall campaigns liability		3,792			3,939		676		84		8,491
Other		88			—		—		—		88

Total contractual commitments	$	36,259		$	25,211	$	14,779	$	69,978	$	146,228

Non-contractual postretirement benefits (g)	$	439		$	1,121	$	2,366	$	30,295	$	34,222
Less: VEBA assets (e)		(5	)		—		—		—		(5	)

Net other long-term liabilities	$	434		$	1,121	$	2,366	$	30,295	$	34,216

Conclusions:

1. Let GM’s sub-companies stand autonomously because GM is now not able enough to maintain the general existence of all of the company’s units. For example : Kingdom of Saudi Arabia purchased Hummer production.

2. Bring up the innovation so the new products will be into the demand of the market. Innovation such as technology to consume less gas per mile and electric cars should take it for granted since demand for those innovations is high on the market.

3. Stop the GM-belongs-to-USA culture because this culture is the main cause of GM bankruptcy. Huge horse power that consumes greater gas per mile is the culture of American car that should be revised due to lack of energy resources and soaring oil price. They should provide cars that fulfill those two terms to compete in market share as well as the japan car maker do.

4. State bankruptcy of chapter 11 that enable GM gain financial support from U.S Government and others to re-establish their financial strength even though they have gone bankrupt.

Sumber :

¡ UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004

¡ http://en.wikipedia.org/wiki/General_Motors

Discussed by : Finance Division MSS ( Ivan, Menur, Sotta, Nusa, Pascal, Fitri)

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