High expenses led to gm downfall

General Motors has filed for bankruptcy protection on June 1, seeking cash bailout from US federal government. General Motors tried to ward off bankruptcy and avoid government control, but in vain. The fall has been very hurtful as General Motors was the epitome of American capitalism and economic might.

As General Motors filed for bankruptcy it went down American history as the third largest company to file for bankruptcy and the largest bankruptcy for the manufacturing sector. The company has gained time and protection from creditors as it filed for bankruptcy protection under Chapter 11. The bankruptcy plea has deeply affected 92,000 employees directly and over 5 lakh retired employees.

Automotive analysts say that General Motors started loosing the plot of clever marketing when it started multi-branding strategy in the 80s. It also laid emphasis on manufacturing big cars and SUVs, to characterize America’s economic might. When the world changed drastically, General Motors was caught unawares. It was knocked off in a sudden and precise move. The combination of high labour costs, rising competition from asian car manufacturers, sky high fuel prices, freezing of credit, global economic meltdown, and lack of buyers, formed a lethal combination. Even as these reasons were visible on the surface, the problems ran deeper.

Over the years, the GM workers have struck work and held protests demanding enhanced lifetime benefits. General Motors often agreed to workers demand. As such the cost of lifetime benefits pushed labour costs through the roof over a period of time. Prominent reports suggested that the company was paying US $ 1,500 per car it built for the lifetime benefit fund, for people who were no longer working for them. Interestingly, the report also stated that the cost of steel needed to make cars was less than the amount it was required to pay to retired union members. Moreover, even the workers in low level jobs drew huge salaries, compared to other car manufacturers.

Thus its payables and accrued expenses are many times higher than receivables. Currently, the value of the assets put together, still leaves behind huge liabilities. The giant auto manufacturer did not have enough money to pay its liabilities. It had to make a choice of either to make these payments or to keep the company afloat. To rub salt on wounds, car sales declined and profits plummeted drastically. Further, expansion and new investments were unthinkable in this situation.

Actually the first signs of trouble surfaced in early part of 2008. As the global fuel prices skyrocketed and the consumers turned their backs on fuel guzzling cars and SUVs. Asian car manufacturers like Honda Motors, and Toyota and hybrid cars gained form this scenario. The historic hike in fuel prices knocked out every hope by GM and other US car manufacturers to sell their products.

When the global meltdown began in October 2008, American banks decided to freeze credit. Consumers failed to qualify for credit and car sales dropped. Moreover, banks refused to raise funds for General Motors in such a situation.

Now that GM has got busy restructuring its house, it is speculated that the labour union the United Automobile Workers (UAW) would get a 20 percent stake through its retiree health care fund and the bond holder and other parties will get the remaining share in the company. The shareholders are expected to be wiped out. The government is likely to hold 70 percent of the stake in the company.

A lot of questions on GM remain unanswered and particularly on those whether the federal government aid will help revive the company’s fortunes. Uncertainty hangs on GM’s future, but a lot rests on whether consumers want to buy their cars now.

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