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Marina Whitman
  Marina Whitman
 

A New Chapter For General Motors

6/11/2009 --

Professor Marina Whitman predicts shock of Chapter 11 may finally change culture at GM.

ANN ARBOR, Mich. — General Motors Corp., the largest U.S. automaker and once a symbol of the country's industrial might, succumbed to the economic crisis and years of declining market share when it filed for Chapter 11 bankruptcy protection. But the company is being backstopped by the U.S. government, which now holds a majority stake in exchange for financial aid. Marina Whitman, professor of business administration and public policy at the Ross School of Business and the Ford School of Public Policy, is a former chief economist at GM. She says Chrysler's quick and relatively smooth Chapter 11 process bodes well for GM's restructuring. But, she warns, government ownership carries risks.

Not long ago, General Motors, under its previous CEO, said bankruptcy was not an option. What happened between then and June 1?
Whitman: I think two things happened. For one, the situation just kept going downhill. GM lost more and more money, auto sales kept dropping, and the financial markets stayed frozen. They had several months during which things got worse. That's one side of it. The other side of it is, whatever (then-CEO) Rick Wagoner believed in his mind about the probabilities of bankruptcy at that point, I suspect he felt he had to say what he did. He, along with most of the rest of world, believed that if a company was in bankruptcy or likely to go into bankruptcy, people wouldn’t buy its cars. Well, things changed in the intervening period and customers have been treating GM as if it were in bankruptcy anyway. There has been a continuing decline in its market share and I think part of the reason was that customers were treating it like a company in bankruptcy. That means the impact on customers of declaring bankruptcy was not the kind of shock that it would have been had Mr. Wagoner said some months ago that bankruptcy might be a possibility. As things got worse, the government was increasingly running the show and it kept suggesting that bankruptcy might be the best option. The upside, if I can put it that way, was that the effect on potential consumers was probably attenuated.

As GM filed its Chapter 11 petition, the sale of Chrysler assets to Fiat was approved by the bankruptcy court. The Chrysler case has gone more smoothly than a lot of people predicted. So was that a good sign for GM?
Whitman: I think it's a very good omen. There's no question, as the president himself said, that GM is much larger, much more complicated, and the structure of its creditors is much more complex. I can't imagine they'll do it in 32 days like Chrysler, but the fact is that Chrysler’s did go smoothly and I think that's a good omen for GM. I think it increases the possibility that they can get it done in 90 days or so. Something can come out of left field, of course, but I do think that precedent is helpful to GM.

How important was it for GM to have agreements in place with the United Auto Workers and a majority of the bondholders before they filed?
Whitman: Well, if they hadn't had that, I don't see how there would have been any hope of an expeditious exit from bankruptcy. I know some of the bondholders didn't agree, but they have the majority of the class agreeing and I think getting that and getting the union agreement before they went into bankruptcy was critical.

When GM emerges, what kind of company will it be and will it have a different culture?
Whitman: It's not rocket science to say it's going to be smaller, leaner, have fewer employees, fewer plants, and fewer dealers. As for the corporate culture, the GM culture has proved to be remarkably resistant. From time to time, CEOs have made serious efforts to change that culture. Even the much-maligned Roger Smith did a number of things to try to change the culture, and the culture has tended to fight back. Now, the culture has never confronted a shock of this magnitude. So maybe this really will change things. There were certain symbols that allowed both the management and the workers to believe they were a breed apart. The management had all kinds of perks and the workers had these incredibly high oligopolistic wages and benefits. They all saw this as a kind of entitlement. I would guess those expectations must be gone now on the part of both executives and workers. Being clubbed by reality may well be effective. Now, I don't mean to say it was simply the GM culture that brought them to this situation. It was the persistence of the culture plus this absolutely perfect storm that nobody foresaw -- the recession and a total freeze-up of the financial markets.

What are the risks and benefits of the government becoming the majority owner of GM?
Whitman: The main benefit is that it's not clear there was any alternative other than liquidation. GM couldn’t get any financing. And if you can't pay your suppliers, pretty soon you're not going to be able to build cars. So the government made a judgment and decided -- for a lot of reasons -- it wasn't about to see GM cease to exist. And that's a big benefit, no question. But there are some real risks, I think. I believe the president when he says the government is a reluctant shareholder and will get out as soon as it can. But the fact is, government involvement already has had a significant impact on some important decisions. The president has made it clear that GM is to build small cars here in the U.S. That decision came in two pieces. First, that GM would build more small cars. Then he made it clear, I think under pressure from Congress, that GM can't build them all somewhere else, which was clearly the plan. No executive in his right mind would have made the decision to build more small cars in the U.S. independently. I can understand the Congressional motivation -- they don't want to use taxpayer money to subsidize production somewhere else. It certainly gave the union leverage to get the promise out of GM. It was brave of (CEO) Fritz Henderson to say they'll make small cars here profitably, but if they break even, it'll be impressive. This is just an example of the risks. Can they get through a period of government ownership with that being the only example? I doubt it. My concern is that the president had two major goals here. One was to have GM become a viable, profitable company, and the other was to have it build more 'green' cars. The truth is that those two goals may well clash because the American public, the minute gasoline prices go down, shifts its preference to large vehicles. The only thing that can guarantee the popularity of small cars is higher gasoline prices. Gasoline prices may very well go back up, but it's a crapshoot and nobody can make long-run investments on a crapshoot. If the Congress had the courage to impose a broad-based energy tax, that could bring the two goals together.

—Terry Kosdrosky



For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu