How did General Motors Go Bankrupt

General Motors Corporation (GM) is an automaker based in Detroit, U.S. In 2008 it was the world’s second largest automaker in sales. For 77 consecutive years (1931- 2007), GM was the global sales leader. It manufactures cars and trucks in 34 countries. It had almost 2, 50,000 employees and has sold over 16 million cars in 140 countries. GM had gotten US$15.4 billion as loan from the US Treasury Department under the Troubled Assets Relief Program (TARP). On June1, 2009, General Motors filed for a government-assisted Chapter 11 bankruptcy protection. It is the third largest bankruptcy filing of the world.


It was a series of missteps that led to this bankruptcy and some of them are as follows. GM offered too many incentives. After the attacks in 2001, it offered 0% financing and later a rebate of $3000. To meet these high rebates, GM kept its sticker prices up not realizing that it was injuring itself. Later GM couldn’t give up its cash-back deals and low financing because competitors weren’t backing down on incentives either. One huge mistake that GM made was to scrap the program under which it developed an electric car, EV1. GM should have taken the lead in hybrid car technology and been a part of the green car movement.


For a long time, GMAC, GM’s financer, brought in more earning than its production processes. Faced with a financial crunch in 2006, GM sold off 51% of GMAC to Cerberus for $7.4 billion in cash and $6.6 billion over a period of time. With no GMAC financing, 25% buyers couldn’t get car loans from GMAC during credit crunch.


It seemed like a brilliant move when GM decided to by 20% of Fiat, in GM shares. It would have made GM a more powerful global corporation. However, Fiats CEO died suddenly ensuing problems. According to the agreement, Fiat could force GM to buy all its shares. Instead GM decided to pay $2 billion to move out of the contract. On the other hand the irony is that Fiat used that money to pull through and is now going to be an owner of Chrysler.


During the 1990s, SUV sales were picking up. Seeing this, GM decided to diverse into SUV production at the expense of its car production. By the time GM came out with its SUVs in 2000, the SUV market was already shrinking.


Given all of these reasons GM should have filed for bankruptcy much sooner when business was falling in 2005 because the world market was still strong and could have absorbed the crunch.


As of now GM is going to focus on its four key brands Chevrolet, Cadillac, Buick, and GMC. The U.S. Government is to acquire 60% stake in its equity. GM is also set to receive $30 billion as further loan from the U.S. Treasury Department. GM will also bring down its breakeven point from 16 million car sales to 10 million and in doing so GM is expected to be debt free by August. It was once said that what’s good for GM is good for America. The automaker giant will soon be back on its feet but on a smaller scale of operations focusing only on core brands.


Prakriti Sharma

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