Joe Yaun Fin 798 Case Study 1 GM Case Study The story of the downfall (or down-turn at the very least) of GM began long before the recent recession in which the U. S. has succumb. GM sunk their resources heavily into larger vehicles like trucks and S. U. Vs. In doing so, they neglected an emerging trend towards smaller, more fuel-efficient cars that was occurring around the globe. Additionally, the quality of their products continually lagged behind that of Japanese automakers as outlined by studies of initial quality[1], resale value, and overall customer satisfaction.

Another growing concern for GM was the financial commitments contractually required by their labor agreement with the United Auto Workers, notably pension funding and healthcare. With all of these internal issues, GM continued to focus on external factors such as lobbying Congress for tariffs on imported vehicles[2]. When gas prices increased dramatically in 2007, GM had few products to meet the demand in the marketplace for fuel-efficient vehicles. Around the same time, the world was entering a global recession which was further fueled by risky lending by banks.

As a result, disposable income decreased, requirements for securing a loan became much more stringent, and demand for automobiles plummeted. GM started burning through their free cash to sustain working capital, debt payments, etc. which put them in a very difficult financial position. The result of their financial distress left them with two options, file for bankruptcy or raise cash from another source. Since their situation was dire as far as bordering on insolvency, no one in their right mind would actually extend a loan to GM.

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That left the government as their only alternative for raising funds quickly. GM received $13. 4 billion in emergency funding from the U. S. government. As a condition of accepting funding from the U. S. government, GM was to present a plan as to how they were going to address their financial distress, and their future in general. “The U. S. government bailout requires GM to seek deep concessions from bondholders and the United Auto Workers union in order to cut both its debt and hourly wage costs. ” [3]

Another recent condition for receiving “emergency funding” required by the Obama administration was that GM CEO Rick Wagoner resign effective immediately (March 27th)[4]. Former COO Fritz Henderson then became the new CEO. The Board of Directors will also look vastly different in the near future as “at least” 6 members that sit on the current Board of Directors will be replaced[5]. This move is unprecedented, and amounts to the U. S. government taking control of a publicly traded company. When GM declared they were too big and too important to fail, they opened themselves up to this type of move by the government.

Many agree that Wagoner had to go[6], but the government involvement in who controls a privately held company tiptoes the line of capitalism. Rick Wagoner became the face of all that is wrong with the U. S. automaker industry, and for that, he became the fall-guy. It remains to be seen whether GM will continue a major overhaul of their business model, and how quickly they can put those plans into action. On one side, continuing to loan GM cash to maintain operations keep hundreds of thousands of people employed and out of un-employment lines, including direct GM employees and vendors of GM.

On the other side, letting GM file for bankruptcy would alleviate the liability of taxpayers to fund a failing company that was too slow to react to changing market conditions and consumer needs, was too slow to overhaul an out-dated employee pension and healthcare plan, and was too stubborn to compete against more streamlined competition (instead looking to add tariffs to imported cars). If there was no recession, this would be a no-brainer, and the answer would be to let GM fail and re-build. With the recession, the answer becomes a little cloudier, as the ripple-effect on the fragile economy is unknown.

What is also unknown is why the GM Board of Directors didn’t call for Wagoner’s head while the company was losing billions of dollars every quarter under his watch, and stood by him as he pleaded with Congress to aid his company from the mess he created. Though I feel a little uneasy about government intervention into the private sector, ultimately, the Obama administration made the right call on getting Wagoner removed. If GM and Wagoner wanted to keep government out, they shouldn’t have accepted the bail-out. ———————– 1] http://www. businessweek. com/autos/autobeat/archives/2007/06/gms_quality_spi. html [2] http://www. forbes. com/2008/07/09/gm-washington-detroit-oped-cx_jt_0710tamny. html [3] http://www. financialweek. com/apps/pbcs. dll/article? AID=/20090121/REUTERS/901219983/-1/FWDAILYALERT01 [4] http://news. yahoo. com/s/ap/gm_wagoner/print [5] http://online. wsj. com/article/SB123844960840571093. html [6] http://blogs. harvardbusiness. org/kanter/2009/03/transform-or-die. html? loomia_si=t0:a16:g2:r1:c0. 136843:b23471548

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