What’s the Fallout from GM’s Bankruptcy?
Tuesday, June 2, 2009
Now that General Motors has declared bankruptcy, what will happen to stock and bond holders, union workers, and dealerships of both active and defunct brands? How will the U.S. Government's ownership of 60 percent of GM play out? And what can taxpayers expect?
MAUREEN CAVANAUGH (Host): I’m Maureen Cavanaugh. You’re listening to These Days on KPBS. The hope is that General Motors will emerge from bankruptcy protection a new, smaller, stronger automaker capable of adapting to the changing needs of American car buyers. But no matter how positive a spin the Obama administration put on the GM bankruptcy, it is a seismic event in American business. GM’s Chapter 11 is the fourth largest bankruptcy filing of a U.S. company and the largest of any industrial company in America. The Obama administration is in uncharted territory with the government assuming majority ownership of a business but many observers say the only other choice was to see GM fail completely and lose even more jobs and plunge the U.S. into a deeper recession. Joining us to talk about the GM bankruptcy, what it means to automaking, what it means to other businesses in America, and what it means to car owners in San Diego and across the country, I’d like to welcome my guests Dr. Dan Seiver, SDSU Visiting Professor of Finance. Good morning, Dr. Seiver.
DR. DAN SEIVER (Visiting Professor of Finance, San Diego State University): Good morning.
CAVANAUGH: And Dean Calbreath is business columnist for the San Diego Union-Trib – Tribune. Dean, good morning.
DEAN CALBREATH (Business Columnist, San Diego Union-Tribune): Good morning.
CAVANAUGH: And I would like to invite our listeners to join the conversation. If you have a question or a comment about the General Motors bankruptcy, if you have a family member who was an auto worker or if you’re wondering about buying a GM car, give us a call. The number is 1-888-895-5727, 1-888-895-KPBS. Dan, the bankruptcy of General Motors is certainly an historic event and I’m wondering if you could give us a little background. What has GM meant to America.
SEIVER: Well, GM was once considered the, you know, the leading industrial firm in the world. It was many times larger than it is now. It was a case taught in business schools for how to run a large corporation. It was incredibly successful and huge and it – in a way it symbolized America, industrial America, in the twentieth century. And – and that’s what we had, say, in the 1950s but there’s been a gradual decline ever since and now we see it as just a shadow of its former self.
CAVANAUGH: And, Dean, it may – it meant a lot to American workers. For awhile, GM and the auto companies, the big three, in America were emblematic of the idea of – of workers who could work at a job and have a middle class income and have health insurance and that would also fuel the American economy.
CALBREATH: Yeah, absolutely, and – and don’t forget it’s not just the three, big three, because they have large chains of suppliers, especially around the Great Lakes region, through Ohio and Indiana and, of course, Michigan. I mean, this is a – really a central American industry, to that – especially to that region of the country.
CAVANAUGH: Well, I’m going to start asking you both then, starting with you, Dan, what you think the fatal mistakes GM made in recent years that got us – got us to this point.
SEIVER: Well, there have been – there’s plenty of blame to go around and you could say management made mistakes and the unions were too greedy and – and everybody – everybody played a part in this, and even Americans when they had this – this love affair with enormous gas guzzling vehicles and then, of course, got hit with four dollar and – gasoline. But the longrun problem has been that – that it’s been hard for the American car makers to make the cars that Americans want and make a profit and still pay the kinds of wages and benefits that were built into these contracts, and foreign competition had a lot – a lot to do with that. And – and other automakers, particularly even ones operating in this country, have been able to produce cars that Americans want at a much lower price and still make a profit, so there’s been this pressure. I mean, more recently, I think the problems have been that – that GM has these legacy labor costs, you know, health costs or pension costs that give them a huge disadvantage. And then they – they make their most money with really big cars and – and the problem is that that demand has – has fallen off a cliff and so that – that’s really hurt them. And – and they’re not ready with their little cars.
CAVANAUGH: Yeah, Dean, a lot of people say the – GM just didn’t keep up with what American car buyers need.
CALBREATH: Well, it didn’t keep up and it – it responded to what it thought American car buyers at least wanted, if not needed. You know, it’s gone back and forth between giving – giving smaller cars or – or trying to move toward smaller cars in the 1970s in the oil crisis and then as soon as oil gets more plentiful then you – then you boom out into these Hummers and – and SUVs and – and other, you know, just gas guzzlers. And the – I think they have totally misread the times. That having been said, currently every car company has experienced problems. Toyota, Nissan, they’re all experiencing declines in sales because of the recession, so it’s a double whammy of the – of the oil crisis hitting last year which really eroded purchases in the large gas guzzlers and then the recession, which has eroded purchases of cars in general.
CAVANAUGH: So, Dean, what exactly is going to happen to General Motors? What will we see. We know that there are certain brands that are going to be gone, dealerships closed. Give us a rundown, if you would.
CALBREATH: Sure. I mean, in terms of – Well, right now, the – this is almost status quo, this has almost preserved sort of the running decline of the company. It’s been declining for the past several years now. And – and in a lot of ways, this has preserved the company’s activities. You know, the government is now guaranteeing its waran – its warranty so that customers won’t be hurt. It’s allowing – Unlike it did with Chrysler where it gave Chrysler a very tight deadline for dealers to – to clear out their Chrysler stock, it’s giving the GM dealers about eighteen months or so, you know, to – to – It’s giving the ones that are going out of business eighteen months or so to clear out their inventory so there’s a – I think the government has learned what it should and shouldn’t do from the latest Chrysler takeover, which – which was maybe a experimental case for GM.
CAVANAUGH: So we have, Dan, we have the Saturn shut down, Saab. Hummer may have a buyer. Pontiac line is going away. We heard in a report on Morning Edition from our own Alison St. John there are about forty GM dealerships in San Diego, and I’m wondering – so the idea is that not only the auto workers are going to be losing their jobs but people who actually work at these dealerships are going to be losing their jobs.
SEIVER: Yes, the number of dealers is going to shrink and it’s going to shrink fairly sharply. Now what you could hope is some of those workers will get jobs with other car dealers and I think there’ll be some of that. But I wanted to get a little – remind everybody, a little longterm perspective that in – in the 1960s, GM had more than half of the U.S. car market. So this – this decline has been going on. It’s been accelerated but it’s been going on for almost fifty years.
CALBREATH: Yeah, and…
CAVANAUGH: I’m sorry, go ahead.
CALBREATH: …and it – I’m – I’m sorry. I – I just wanted to say that – that when I said, you know, extending the status quo what I meant was the status quo has been that long running decline, that – that, you know, especially since 2004, for about five years now, there has been a decline in dealerships. Dealerships have been going out of business. There has been a decline in the number of workers being – working here in San Diego County in dealerships as well as auto repair shops.
CAVANAUGH: And wasn’t – Just to go back to what you were saying a minute ago, Dan, wasn’t one of the reasons we go from half of the auto business in – in America to this bankruptcy today, didn’t people just keep complaining that GM cars, American cars in general, rightly or wrongly, fairly or unfairly, they kept complaining that the quality wasn’t where it needed to be, and – and I heard that refrain over and over again through the years. And you’d see automakers come out with
‘okay, we’re better than we used to be’ kind of commercials.
SEIVER: Well, I – I think that’s correct. I think that goes back to the 1970s when – I know that’s when I was a car buyer on my own. And I looked at – I wanted a small car in the 1970s after the first gas crisis and I looked at the General Motors cars and then I went and looked at a Japanese car, a Datsun B-210, which was less expensive. And then I looked in Consumer Reports and it seemed to be way more reliable and I kept that car for fifteen years. And what happened is, GM lost me as a potential customer because after that, you know, then I wanted – then I wanted Nissans. And so I think that was the problem and in the 1970s is when it really started, that the Japanese began making inroads in particular. And they were making what were better quality cars at a – at a lower price.
CAVANAUGH: We are talking about the GM bankruptcy and its fallout for America and for here in San Diego. My guests are Dr. Dan Sevier. He is SDSU Visiting Professor of Finance, and Dean Calbreath. He’s business columnist for the San Diego Union-Tribune. We’re taking your calls and comments. The number is 1-888-895-5727. Now I do want to return, at the end of our conversation, to what will be becoming of General Motors as a – as a corporation when – when they get out of bankruptcy and they continue on but first I want to spend a few minutes talking about this really sort of unprecedented, I’m going to say—you can correct me if I’m wrong—idea of the government assuming majority ownership in a business. That’s – that’s gotten some people real – put – to look up and take notice about that in the U.S. business community. Dan, what do you think about that?
SEIVER: Well, that is – it is pretty unprecedented on a – on a large scale like this. You know, in the banking industry, the FDIC has historically seized banks when they’re in trouble and they’re doing that again this year, of course, at a great rate. But the idea is, you seize them and then you either immediately liquidate them or you sell them or you merge them. But the U.S. is going to be the majority stockholder. And I point out, the Canadian government’s actually a significant stockholder, too, and – and the UAW and then the bond holders are going to get a little piece of it. But they’re going to be the majority stockholder probably for some years and – and there’ll be this tremendous pressure and tension: Are they going to direct GM or just be completely passive? And – and that hasn’t played out yet. Nobody knows for sure how that’s going to play out.
CAVANAUGH: And, Dean, as business columnist, have you been thinking through some of the ramifications or possible ramifications of a government-owned GM?
CALBREATH: Well, you know, this is new for the United States. It’s – it’s not new overseas. I mean, the German, Japanese, French governments, actually all of them have – have stakes in their own auto industries to – to varying extents. Not every company but – but there is government ownership and indirect government ownership in each of those countries, so – but it is new for the United States. You know, in those countries, it’s not like the government picks what color, you know, the – the new car is going to be made or picks what brand is going to be put out there. You know, it is left to the private company to do that. And I would assume that’s going to be the case in the United States. You know, I’d hope that’s going to be the case. But – but there is precedent, it’s just precedent overseas instead of here.
CAVANAUGH: We have a caller on the line, gentlemen. Paul in Kearny Mesa wants to join the conversation. I want to invite other listeners to join us, 1-888-895-5727 is the number. Paul in Kearny Mesa, good morning and welcome to These Days.
PAUL (Caller, Kearny Mesa): Thank you very much. The only point I wanted to make was that, you know, despite the claims that are being made today by the American automobile industry that their quality levels are rising to the standards of Asian and European imports and so forth, their basic approach hasn’t changed in the last 45 years. They’re still advertising today predicated on high levels of luxury and horse power and that’s clearly not the trend we’re looking for as consumers going forward.
CAVANAUGH: Thank you for that comment. And, Dan, would you like to address Paul?
SEIVER: Yeah, I think I have – I have the same concern. You know, I – I’m not – I’m really un-American because I keep my cars for fifteen years and if everybody does that, we’re in big trouble. But I’m going to need a new car in a couple of years and I would like to buy an all-electric car if I could. And I think the problem is GM has this Chevy Volt but it’s probably going to cost fifteen grand more than Nissan’s electric car in 2011 and I’ll compare them both but I have this funny feeling I’ll end up buying a Nissan. And – and I just think, you know, we’re technologically advanced enough and they’re good enough engineers that they could probably make an electric car that would easily compete with – with the Japanese cars but I’m just not sure they’re willing to commit the resources or be able to do it, so I – I tend to agree with the caller that – that GM has been behind the curve often.
CALBREATH: Yeah, not only behind the curve but also purposely behind the curve. I mean, they have – you know, Detroit has actively campaigned against fuel efficiency standards, they’re – they participated, you know, to one extent or the other in the death of previous electric car prototypes, you know, because they wanted to – to keep the gas guzzlers or the gas users. So, yeah, to a certain extent this is purposeful on their part and – and they were making a gamble and they bet the wrong way.
CAVANAUGH: We have a caller in Murietta, Pauline, and she has a similar question. Good morning, Pauline, and welcome to These Days.
PAULINE (Caller, Murietta): Yes. Have you seen that movie “Who Killed The Electric Car”?
PAULINE: And there was this battery made at Stanford, Oshinsky. He had a battery that would go a hundred miles to a charge but they bought him out and the oil company bought them up; they want to hush him up. So all the American motor vehicles have – I mean, industry have dug their own grave. They deserve what they get because they don’t want to – they’re greedy and so is – the oil company has too much power.
CAVANAUGH: Well, thank you for that comment, Pauline. And, Dean, you know, a lot of people—I’ve heard this refrain over and over through the years—that Detroit just doesn’t get it, that the American car makers just don’t get it. Now if the Obama administration pushes them to try to make them get it, in other words, what – what the American car buyer really wants, is that something that – is that going to be undue influence? Is that going to be seen as something that other American businesses get nervous over?
CALBREATH: Well, you know, the fact is, we’ve been trying for the past – or some people in D.C. at least have been trying for the past 20 or 30 years, well, ever since that oil crisis of the 1970s, to make the auto companies more fuel efficient. You know, and those attempts haven’t worked, largely because of the push-back of the auto industry. So – so basically what Obama wants to do is – is formalize this. He wants to say, okay, you know, we’re – we’re tired of telling, you know, wanting you to do this; now we’re going to have you do this. But, yeah, as far as fuel efficiency goes, it’s nothing new. It just has the added clout now of having a sixty-percent ownership in those country – companies.
CAVANAUGH: I want to ask you both, starting with Dan, what do you think would’ve happened if the government hadn’t stepped in and GM had just – had just basically collapsed.
SEIVER: Well, it would’ve gone into bankruptcy without the structure, and the bond holders probably would have been completely wiped out. There would’ve been a collapse in terms of the entire dealer network and the suppliers, and little pieces of it might’ve been sold off to vultures circling the carcass but I think it would’ve been even worse in terms of the impact on the – on the U.S. economy.
CAVANAUGH: More jobs lost, Dean? More – a deeper recession?
CALBREATH: Absolutely. It would’ve been far worse, I mean, you know, what would’ve gone on. I mean, assuming that the government did nothing that it’s done over the past few months. One of the things that the government has done is to guarantee warranties so that if your car, you know, has problems then you’ve got a federal guarantee that it’s going to be fixed, which wouldn’t have happened – which wouldn’t have happened without that government intervention. And without that guarantee, then car sales would’ve just evaporated, they would’ve disappeared. So, you know, these guys, these companies and the millions of dealers and repair people and suppliers who are tied to them, you know, a large portion of them would’ve gone out of business.
CAVANAUGH: I want to ask you both some quick questions about how this bankruptcy is likely to affect people who own GM cars. Will resale values suffer on some models, do you think, Dean?
CALBREATH: Again, with the guarantee, I would assume the resale values will be about the same as they would’ve been otherwise. I would think that, you know, the resales for the gas guzzlers are still going to plummet, especially if oil prices continue to go up but I’ve – but that would have been a trend that would have occurred otherwise.
CAVANAUGH: Dan, if you have a GMAC – a GMAC loan, will there be any impact on your interest rate or repayment schedule?
SEIVER: I don’t think so. The government’s going to take care of GMAC and make sure that it can still do its financing. And so, I don’t think so.
CAVANAUGH: And what about the dealerships themselves, all these dealerships, Saturn, Saab, the – the Pontiac dealerships?
SEIVER: Well, some of them may turn into dealerships for other kinds of cars. You know, there’s a chance for that to happen, and some of these dealerships do sell other – other brands that they’ll still be able to sell. But some of them will, invariably, close. And if your dealership closes and that’s the only place you’ve ever taken your car, you’ll have to – you know, you’ll have to go somewhere else, it’s true.
CALBREATH: That was a trend that was already happening. You know, in the past few years or so GM, Chrysler, Ford, they’ve all been closing down dealerships. You know, it has accelerated but it has been happening.
SEIVER: All right, that’s another point is that the foreign nameplates have – have operated in this country with way fewer dealerships than the American firms and so we were over-dealered in that sense and so we have cut down to their levels, I think.
CAVANAUGH: Let’s take another quick question. Tom in San Diego. Good morning, Tom. You’re on These Days.
TOM (Caller, San Diego): Yeah, good morning. Thanks. I think when the west was sleeping the great sleep of complacency the Japanese auto makers had a term, especially – notedly Toyota, and their term was Kaizen, and that’s perpetual betterment, and it’s an entire philosophy of just doing things better every day, every month, trying to search for a better way, a better car, a better bottom line, less cost, etcetera.
CAVANAUGH: Well, thank you for that, and I suppose conversely, Tom means that the American auto makers did not. I’m wondering, Dean, what’s the best scenario you see emerging from GM’s bankruptcy?
CALBREATH: The best scenario is that, you know, later, within the next couple of years, the U.S. is able to sell off its holding. I don’t think that there’s any intention for the Obama administration to be a perpetual stakeholder in GM, you know, and it will emerge as a much smaller company. It will have sold off some of its brands including, you know, as you were mentioning earlier, brands like Hummer, or Humvee, but it will – I think it’ll survive. It’ll survive as a much smaller company.
CAVANAUGH: And I’m wondering, Dan, I – I heard a report on Morning Edition this morning, they were talking to the CFO of GM and he said his best case scenario is that GM is going to return to profitability in two or three years. Do you see that happening?
SEIVER: It could. It could. If you’re the CFO, you have to be the company’s main cheerleader.
CAVANAUGH: Yes. Yes, you do.
SEIVER: And I think that is the most optimistic scenario but that – I wouldn’t rule that out. The – It’s possible that GM could be profitable if they shrink it enough so it becomes – It has to become more efficient and – and again, but it’s all going to come down to the size of the U.S. car market. They will need to hold onto some market share and be able to produce cars that – that we want and still make a profit and it’s not obvious they can do that but I wouldn’t rule that out. It could happen.
CAVANAUGH: And this…
CALBREATH: Yeah, that…
CAVANAUGH: Yes, go ahead.
CALBREATH: Oh, one thing that’s happening in the U.S. car market is a lot of car buyers are becoming much more like Dan in terms of keeping their cars for longer, maintaining them more, rather than going out and buying new cars. And if that trend continues, then it’s going to be problematic for all the car dealers, Toyota, Nissan, as well as GM.
SEIVER: I – I think that’s true but what – the thing that I’m thinking is going to get me to buy a new car is when there’s, you know, there’s got to be some game changer…
CALBREATH: Hmm. Umm-hmm.
SEIVER: …either a hybrid an all-electric or something like that. And I think I’m one of millions of Americans who would think the same way.
SEIVER: So there is – You have creative destruction. There’s always the potential for something new.
CAVANAUGH: Gentlemen, we have to end it there. I want to thank you both so much. Dean Calbreath is business columnist for the San Diego Union-Tribune. Dr. Dan Seiver is SDSU Visiting Professor of Finance. Thank you both very much this morning.
CALBREATH: Thank you.
SEIVER: Thank you.
CAVANAUGH: And I want to thank everyone who called in. We couldn’t get to all of your calls. I hope you will call in again on another topic. You’re listening to These Days on KPBS.
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