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GM's new chapter

Bowtie blowout: General Motors is down but not out.

Broke ain't necessarily broke under the US bankruptcy system

General Motors logo2 Jun 2009

AS the media headlines highlight that the once-great General Motors is broke, it is important to realise that the company is by no means finished.

But GM is not what it was and ownership has effectively moved from the shareholders of Wall Street into the hands of the American and Canadian taxpayers and, ironically, the United Auto Workers (UAW) union.

Americans are taking it hard, with some readers of US business magazines calling it a workers’ collective akin to communism.

GM’s new stakeholders and the people who had invested bonds in GM are now banking on a rebirth of the company unencumbered by the accumulated legacy of generations of arrogance, hubris and unjustified over-confidence that have brought the company to this. You could justifiably ask: who would have thought that GM would ever go broke? Well, certainly not the people who worked in and ran GM. And that was the problem. Not enough of them believed that this could happen so not enough of them set their minds to the task of preventing it from happening.

Now, fortunately they know that it can and those who are left are even more fortunate that they work in America which is unique in that it gives bankrupts a second chance through the mechanism known as Chapter 11.

Chapter 11 is a halfway house or a safe refuge where companies in difficulties (cannot pay their bills) are protected from being closed down and sold up by the people who are owed money.

In Australia, this protection does not exist. If the roots of the corporate tree no longer get enough nutrients (cash) for the tree to stay alive, in Australia we chop it down and sell the wood.

 center imageIn the US, under Chapter 11, they are allowed to prune the dead wood on the tree back to a healthy part and hope it will become strong and bloom again.

So Chapter 11 allows you to reorganise your business without the risk of the people who are owed money selling you up and closing you down.

Within the protection of Chapter 11, the company can then make the changes to agreements and contracts that it could not make before. This is to fast-track changes to old burdensome arrangements that could not normally be revised without years of costly acrimony, negotiations and law suits.

Under Chapter 11 these things go by the board because the revival of the company depends on this lead being lifted from the saddlebags.

In Australia, administrators step in (usually accountant specialists) and take over the running of the company. But in the US, typically the management is not displaced although an administrator is appointed to work with management. So the management is effectively still in control. So it is business as usual as far as the public is concerned.

Airlines such as United, Continental and Delta have all been in Chapter 11 and they continued to fly passengers. Kmart, Toys R Us and the department stores Bloomingdales and Macys have been in and out of Chapter 11 and still opened their doors each day.

So it is a uniquely US device although some people argue that all it does is keep companies running that should have been broken up by a liquidator with the various element sold off at low prices to others who can make a going concern of the bit they bought.

GM has been preparing for an “express” Chapter 11 for some time so they can put the actual time in Chapter 11 behind them as quickly as possible. They are talking 60 to 90 days.

So GM has been working with all the stakeholders who are going to see their agreements and arrangements with the company unwound and new arrangements put in place.

But by getting all the ducks in a row beforehand, GM can have all the time-consuming development of new agreements in place so that time is not wasted and uncertainty not prolonged.

In effect, from today, there should be a period of agreements confirmed and signed off in record time so that GM can dazzle the American public and the world by how quickly the company was able to recover.

The key to GM’s strategy will be to use Section 363 under the Chapter 11 arrangements to create a new GM and an old GM. In other words, the bits of GM that are dragging the company down are put in the old GM and the bits that are the basis for the recovery are housed in the new GM when it starts up again.

The old GM is then liquidated.

Holden is seen as part of the New GM along with GM Daewoo (which is the biggest manufacturer of Chevrolets in the world) and Shanghai GM which is variously number one or number two in the market in China.

The three entities are linked by various shareholdings (Holden owns nearly half of GM Daewoo) and are all seen as strengths in the Asia-Pacific for GM.

Holden’s design, engineering and manufacturing expertise is the most advanced for GM in the Asia-Pacific region. Holden is linked to Shanghai GM and GM Daewoo because they are all run out of Shanghai by GM Asia Pacific and they already share common back-office support.

The concept of a pan Asian strategy involving those three is already evolving through the very strong interaction between Holden and Korea and there is a potential for this Asian involvement for Holden to become more formalised as the future of the struggling Thailand assembly operations are resolved.

The old GM is Hummer, Saab and Pontiac division and its network and plants.

Opel is part of the old GM but GM is having a bit each way with the German operations.

GM is retaining 35 per cent of Opel because Opel is a fundamental part of the international technology and design architecture of GM and a key to the DNA of some world car programs.

Vauxhall is part of the deal because Opel makes most of Vauxhall’s cars. Vauxhall makes on a fraction of the cars it sells these days and is basically a sales company for Opel production.

GM, of course, also has a stake in Europe (including the UK) though the growing Chevrolet network supplied by Daewoo.

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