101 Years

Although once unthinkable, the inevitable finally occurred last week when General Motors, the former standard bearer for American Industry, filed for bankruptcy. Like the venerable George Burns, the company that made it to the ripe old age of 100 years, didn’t survive beyond that magical number. Oh well. The bulk of GM’s viable assets will be sold off, mostly to a newly formed operating company in which the company’s bondholders will hold a 10% stake with options (warrants) to buy 5% more.

The current collective bargaining agreement with the United Autoworkers will fall by the wayside, labor costs (wages and benefits) will drop, jobs will be cut by the thousands, plants will close, the U.S. government will infuse cash, and a new mini-behemoth will emerge to continue the tradition. Unfortunately, the “new” GM will stare into the ugly eyes of a managed depression, where consumers truly are putting off major purchases until the credit freeze ends and job markets stabilize.

Even as GM will have to arrange credit for car loans, average consumer FICO credit scores are plummeting; there are simply going to be fewer people willing to buy cars and even fewer qualified to pay for them. With the job market expected to stay down through most of 2010, and with residential and commercial real estate still tumbling, how is GM going to rebuild sufficient volume to survive? Filing Chapter 11 is a restructuring; it does not mean that the new company can actually compete in today’s environment.

AOL’s Daily Finance (May 28^th): “GM's long-term problem is still sales. The domestic vehicle market was over 16 million units four years ago. This year that number may drop to 10 million. GM is still losing market share and that figure dropped below 20 percent in the company's last reported quarter, the first time in memory that it has been that low.” Think Toyota , Ford and Hyundai want GM to expand their market share? That they will just roll over and play dead as GM’s new union concessions make their products more affordable?

There are fewer willing buyers out there, and the car companies are going to have to convince those willing to buy that they provide value, sustainable long-term service capabilities (and that parts will be there), that their warranties are solid, that quality has not suffered (in fact that it will be better) and that resale values will sustain. Perhaps the car makers can convince a few consumers who are on the fence to jump down and take advantage of the bargains.

But the same consumers are in the same crosshairs of each of the car manufacturers, and with the economy in a long-term stall, perhaps the world really doesn’t need as many automobile manufacturers as exist today. Does the U.S. really need three domestic companies? Does it help that Japanese automakers have lots of plants here in the U.S. ?

Daily Finance: “If the Japanese and Korean imports and a relatively healthy Ford … push GM's market share toward 15 percent in the US , the Chapter 11 will not have meant much.” Auto parts manufacturers are beginning to fall by the wayside too. Visteon and Metaldyne Corp, companies that supply components for U.S. carmakers, have just filed for reorganization under U.S. bankruptcy laws as well.

Will Fiat-Chrysler and General Motors, in any configuration, still be around in five years? Ford, which has side-stepped most of the disasters that have bedeviled its U.S. competitors, also has to survive in this contracted economy. It’s a complex puzzle, but without a steady stream of consumers with cash (or access to credit), what will the America automobile manufacturing landscape really look like when the dust settles?

I’m Peter Dekom, and I just wonder.