Au revoir of a General

Yet another fall of an icon of capitalism was marked by the demise of General Motors, the largest of its kind in the history of United States. Replicating the fate of Chrysler, the week witnessed the 100 year old car major file for bankruptcy under Section 11 of the United States Bankruptcy Code after a trail of speculation by the experts.


The Obama government has decided to infuse another $30bn of the tax payers’ money into GM for a 60% stake in the restructured company after already providing an aid of $20bn which was not sufficient enough to keep the auto giant out of bankruptcy. The company is set to shed its Pontiac, Saturn, Hummer and Saab brands followed by shutting down of production units, cancellation of dealerships and severe loss of jobs. CISCO Systems will replace GM in the Dow Jones Index in addition to suspension of trading of its stocks in the New York Stock Exchange. However, the profit making Indian wing of the company will be unperturbed by re-skinning of the parent company.


Now the question arises: What caused the fall of General Motors? An amateur would blame it all to the economic crisis, but there is more to it than it appears to all. Personnel costs had almost wrecked the cash flow of the company which was itself the result of huge pay scales offered by the company in addition to the lifetime benefits contract signed with the labour union. It is approximated that the company paid a sum of $1500 per car to the ex-personnel who are not even employed any more. Another interesting finding: the company pays to its retired personnel a sum even more than the cost of steel that is used in the making of a single car! Declining turnover and continued losses left the company at crossroads with no scope of making any payments or for that matter make expansion plans or keep the company afloat.


Following the sub-prime crisis, the freezing of credit had put a virtual end to car loans leading to unprecedented dip in car sales. Besides, the company itself found it impossible to borrow. The oil price speculation by the OPEC saw an unanticipated change in consumer behaviour in matters of fuel efficiency or smaller cars. The world witnessed the eclipse of GM as the top automaker of the world to Toyota after reigning for about 80 years till the previous year. This gave a clear indication of how severely hit this auto major was. A host of other factors, including the ones stated above, culminated in the present state of the company.


General Motors is undoubtedly shrinking. It plans to shut down 11 plants in the US. The state of Michigan which already had the largest rate of unemployment in the United States was further burdened by the loss of jobs of about 20,000 employees. Detroit could have never anticipated a wind fall so strong. CEO Fritz Henderson however believes that the restructuring plans will revive the lost glory and bring back a stronger and more focused GM.


What will be the post bankruptcy era like? The 60% federal stake in the company will be diluted gradually to withdraw from the restructured General Motors. The Canadian government will hold 12.5% stake followed by the unsecured creditors and the Labour Union. With the withdrawal of major brands, the market share of GM will fall as low as an estimated 16.4% at current rates. The iconic General Motors will shrink, indeed.


For years, General Motors had been one of the most successful and versatile driving factors on the face of American capitalism. A vindictive trash of the banking sector followed by the sudden downfall of big corporate giants has steered the demurring fate of Americana. The fall of General Motors appears to be the deciding link. The question to be asked is: Is neo-capitalism turning blue or has it already?


Ankit Khirwal

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