x Abu Dhabi, UAEWednesday 24 January 2018

Trouble down the road

What if the Obama administration forces 'Government Motors' to start building cars nobody wants?

Car salesmen and customers gather to watch Barack Obama comment on General Motors. The company has effectively been nationalised by its recent bailouts.
Car salesmen and customers gather to watch Barack Obama comment on General Motors. The company has effectively been nationalised by its recent bailouts.

What if the Obama administration forces 'Government Motors' to start building cars nobody wants? What once had been thought unthinkable had become, well, seemingly inevitable. Yes, the company once thought "too large to fail" has indeed failed. General Motors is bankrupt, and will, almost certainly never again be the world's largest car maker. The numbers being bandied about are staggering. GM - now, and perhaps forever, to be known as Government Motors, testament to the billions of taxpayers' dollars it has frittered away - used to employ 600,000 American workers. By the time it is finished closing plants, that number could dwindle to not much more than 40,000. In Canada, the numbers are just as dramatic: where the Canadian Autoworkers Union (CAW) represented some 30,000 GM employees 25 years ago, it will eventually boast but 4,400 members once all the cuts are factored in. The worse news, though, are the numbers representing The General's ever-dwindling sales in its home markets. GM only produced 3,258,082 vehicles - or 25.2 per cent - of the total market in North America last year. That's a whopping drop from the 7,731,575 it produced in 1978 and the commanding 55.9 per cent of the market it enjoyed in 1980.

Throwing financial statistics into the discussion doesn't make GM's malaise any more palatable. According to the Associated Press, General Motors has something in the neighbourhood of $172 billion (Dh631bn) in debt and but $82 billion (Dh301bn) in assets. As outrageous as those numbers may seem, that only ranks as the third largest bankruptcy in American history, taking into account both assets and debt (though it is the largest for an industrial manufacturer); Lehman Brothers and Washington Mutual saw more shareholder equity destroyed. Nonetheless, it does not change the fact that the company that once represented almost five per cent of the entire American GDP and boasted that "What was good for the country was good for GM, and vice versa" is now a drag on society to the tune of $50 billion (Dh 183 bn).

It also doesn't make out the "bailout" dollars being bandied about any less staggering. The Canadian federal and provincial governments, for instance, will pony up around $9.7 billion to keep GM in business north of the 49th parallel, a number that translates, says Toronto's Globe and Mail, into 1.4 million Canadian "loonies" for every blue- and white-collar job saved. Dennis Desroisers, the country's leading car industry analyst, puts the number closer to two million per rescued job. Of course, this doesn't reflect the massive number of jobs that will be retained in the parts supply business, but nonetheless these are very expensive jobs indeed that are being "saved."

South of the border, the numbers are hardly less formidable. The US government has already invested $19.4 billion in keeping the leaky ship GM afloat. It's estimated that it will take a minimum of $30 billion to see it through these Chapter 11 proceedings. And that's if the restructuring is as surgically- precise as Chrysler's has been; more pessimistic sources say that the total cost of the reinvigorating GM will be closer to US$100 billion if bondholders manage to drag the car maker and its new owners - the government - through the mud.

All those billions aren't the most scandalous numbers, however. The New York Times is reporting that bankruptcy lawyers stand to charge hundreds of millions of dollars to see General Motors through the court-mandated restructuring. Things are so bad that the American Bar Association writes, if partly in jest, that there might not be enough bankruptcy lawyers available for such a complicated and far-flung proceeding, surely a sign of the apocalypse. Indeed, since December, 60 bankruptcy experts from AlixPartners have been working full time - at $175 to $835 an hour - evaluating GM's assets in preparation for liquidation. And this before they admitted that Chapter 11 was even a possibility.

Albert A. Koch, vice-chairman of AlixPartners told the Times that selling off all the clunky bits of General Motors - hitherto to be known as "OldCo" - could take up to five years. Do the maths and you'll quickly figure out why most jokes about lawyers don't end with a bright, sunshiney punchline. But these numbers are merely fodder for journalistic outrage. Soon enough, they will be ancient history trotted out whenever anyone needs an example of how far the mighty can fall when hubris replaces common sense in the corporate boardroom. No, the numbers that really catch my attention is the projected ownership of the new and improved General Motors.

Though the numbers seem to change daily, the minority shareholders look to be the Canadian government, with 12 per cent of the "New GM," the UAW at 10 per cent and bondholders another 10 with warrants available to increase that by as much as 15 per cent. The big news, however, is that the US government will end up owning approximately 60 per cent of GM. And the question everyone is asking is, how deeply will the President Obama's mandarins dig into GM's Renaissance Center headquarters?

Recent headlines, for instance, have trumpeted the sale of Opel, GM's European subsidiary, to Canadian mega car parts supplier, Magna. But, in fact, Magna will be but a minority shareholder, with 20 per cent of the newly reformulated German car maker and, contrary to the original statements of Frank Stronach, Magna's founder, it will not be building Opels in Canada. The big stakeholders, however, will be General Motors and Sberbank, Russia's largest savings bank. Yes, in case you missed the inference there, Opel will be run by a partnership of a Kremlin-controlled Russian bank and a White House-controlled American car company.

Indeed, Sberbank is already making noises about ceding control of its portion of Opel to a number of companies with even closer ties to the Kremlin and to use GM's technology to prop up Russian car maker GAZ. Oh, to be a fly on the wall for those board meetings. And just how deeply will state ownership affect long-term product and business decisions? Though it is a majority shareholder, the Obama administration has indicated that it will not interfere with the daily operations. But how will the mandarins react if one of President Obama's pet projects comes under fire?

The recent acceleration of the American Corporate Average Fleet Economy (CAFE) fuel economy standards could well create the ultimate automotive catch-22 situation. President Obama wants all car companies to boost the fleet averages to 35 miles per gallon by 2016, a number that more than a few car makers - and, no, not just the domestics - claims is unattainable. What will the government do if General Motors can't make the grade? Will it punish itself for such flagrant anti-environmentalism and risk sending its 60 per cent stake of GM into turmoil once again? Or will it give itself a get- out-of-jail-free card so that the taxpayers who have invested so much in saving Detroit aren't short-changed?

What if Obama is overestimating that Americans will want to buy more fuel efficient vehicles? The American president's overriding theory seems to be "if you build it, they will come". That's a fine premise for a speech on a California college campus, but there's very little indication that the American heartland has got the message. There is a genuine fear that the government could force new GM to build cars nobody wants. The Chevrolet Volt may be GM's future and a laudable technological tour de force, but, in the meantime, the company has to sell a lot of pickup trucks to construction contractors, farmers and recreational vehicle users for whom fuel efficiency and reducing greenhouse gasses are not nearly as important as the ability to haul or tow a heavy load.

Will Cadillac's recent, highly successful run of high-performance luxury cars be sacrificed at the altar of good politics? Both are key to the new GM's recovery while the small, fuel efficient cars that President Obama wants GM to build will be a tough sell until there's another dramatic spike in fuel prices. It's unlikely that private investors will want much to do with a car company subject to the whims of politics and the polemics of changing administrations.

Indeed, the most important thing the American administration can do right now is provide a clear and convincing vision of what the new General Motors will look like and who is really going to run it. motoring@thenational.ae