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Killing G.M. Softly

Shikha Dalmia
June 3, 2009, 1:34pm

President Barack Obama, the New York Times reports, is "upbeat" about GM's future. "I am confident that the steps I'm announcing will mark the end of the old G.M., and the beginning of a new G.M.," he said. Great! Then what do we, the taxpayers, who have just been forced to fork over $50 billion to G.M. -- in what is it? loans? stock? -- have to worry about? The president is cool with it. And he, after all, has an Ivy League degree, a silver tongue, not to mention a glamorous wife with lovely arms who dotes on him. But even His Awesomeness can't command a drowning man to swim after tying lead weights around his ankles.

The president seems to think that there is nothing that G.M. has that a visit to bankruptcy court won't cure. Amputate its liabilities to bondholders, excise all its promises to unions (no, actually, scratch that one, that didn't quite happen) and, presto, it'll be ready, once again, to kick some foreign ass.

If only!

Chapter 11 is certainly a necessary - and a long overdue - condition for G.M.'s return. But it is not a sufficient condition. What G.M. also needs is a winning business model. For that, as Paul Ingrassia pointed out in the Wall Street Journal yesterday, it needs to rediscover its instinct to give car buyers what they want even before they know they want it. G.M. once captured the imagination of the car-buying public by offering it chrome, tail fins, muscle cars, and the catalytic converter. (O.K. -- so its revival won't be all good!). But recovering its mojo with consumers won't be so easy for G.M. now given that its new owners - government and labor - don't really care about them.  

The Obama administration recently accelerated the timetable for the new CAFÉ standards. This means that G.M., along with other car makers, will have to increase its overall fuel efficiency from about 25 mpg right now to 35.5 mpg by 2016, four years earlier than previously mandated. The only way G.M. can do this is by shifting its vehicle mix toward smaller, more fuel efficient cars - consumer desire be damned. Why? Because if it had the technology to boost fuel economy of its SUVs, trucks etc., without jacking up costs and compromising safety, it would run - not walk - to bring it to the market. But then of course it wouldn't be in bankruptcy!

There had been some vain hope that giving unions' ownership in G.M. (and Chrysler) might be good for the company. Why? Because this would tie the UAW's long-term survival with G.M.'s bottom line and prompt it to use its considerable influence to counter business-busting government demands. It was a nice theory. But it obviously didn't pan out in the CAFÉ fight.

However, even though unions couldn't protect G.M. from Uncle Sam in CAFÉ, it can use Uncle Sam to have their way with G.M. when their own interests clash with the company's bottomline.

For starters, the concessions unions have made to G.M. in bankruptcy are - to put it mildly -- pathetic. They agreed to scrap the policy that allowed their members to go home - or demand overtime -- after half a day's work if they met their production quota for the day. But their salaries and benefits are still higher than Japanese behemoths like Toyota and Honda's.

In addition, thanks to union demands, Midwestern Democrats from states like Ohio and Michigan have already warned the administration to not let G.M. increase its global manufacturing footprint, even if it means a huge reduction in production costs. Indeed, Ohio Democratic Sen. Sherrod Brown, speaking for the UAW, recently told Tim Geithner: "If it was a firestorm in this country when we give (sic) billions to banks and they pay bonuses, you haven't seen anything yet for what's going to happen if we put billions in auto companies and they open plants in China."

Besides limiting imports, Michigan's congressional delegation has also, as a condition of receiving the bailout money, forced the company to agree to reopen two idled plants by 2011 in, presumably, union states where its production costs are likely to be the highest in the country.

What all this means is that G.M. will emerge from bankruptcy with cleaner balance sheets, but far less flexibility. This is not a formula for "viability" understood as profitability -- President Obama's chipper confidence that its comeback is nigh notwithstanding. Far from returning the $50 billion, G.M. is likely to become an unquenchable money-guzzler that taxpayers will have to feed for many, many, many years to come.

Better grab your wallets.


Shikha Dalmia is Senior Analyst


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