Thursday, August 16, 2012

The Many Contributors to General Motors' Next Bankruptcy

Joe Biden is making a lot of noise about the "success" of General Motors; he should enjoy it while he can.

It may be doomed by its understated pension obligations, or by its substandard product line, or by its return to subprime lending, or by the rapacity of the UAW, or some combination thereof, but doomed it is.

While his gaffe regarding the current century yesterday is getting all the attention, his comments were actually a gaffe two-fer:

"Once again General Motors [is] the largest automaker in the world. Folks, where is it written that we cannot lead the world in the 20th century in making automobiles? I’ve not seen it written anywhere."

Not only has it been the twenty-first century for a little over a decade, but General Motors' brief reign as the largest auto manufacturer in the world is also a thing of the past.

General Motors did lead the industry in sales in 2011, not due to the good offices of the Obama administration but rather due entirely to Mother Nature, in the form of the Japanese earthquake and tsunami that crippled the production of Japanese competitors. With supply chains restored, Toyota lost no time in displacing General Motors in the first quarter of 2012, and there is every reason to expect that Volkswagen will consign GM to third place in fairly short order.

Looking down the road, though, the greater concern for General Motors is not the loss of bragging rights for top of the league tables, but the substantial probability of a return to bankruptcy.

Earlier this week I examined GM's dodgy pension assumptions, with the conclusion that the actual level of underfunding could be twice the $25 billion reported in the 2011 10-K. That incremental $25 billion alone would devour most of GM's $41.6 billion in total equity at June 30th (and substantially all of the common equity).

In yet another perversity of government intervention, it may well be in GM's interest to maintain the massively underfunded status of its pension plan. If forced to return to the government for yet more handouts, GM management can then make the case that failing a direct bailout, the government will simply wind up on the hook for an indirect bailout via the equally massively underfunded Pension Benefit Guaranty Corporation. (Thank you, President Nixon. Is it any wonder that William F. Buckley Jr. was moved to question Nixon's conservative bona fides in the early 70's in an essay entitled "Is Nixon One of Us?")

Yet at least in theory, a successful GM can fully fund its pension over time. Note well the modifier "successful."

Coming out of bankruptcy GM had a plan, and that plan was premised on the ability to maintain 19% U.S. market share. Easy enough when your toughest competitors' supply chains are in a shambolic state. In the first seven months of 2011, GM boasted 20% market share. With Toyota and Honda back on their feet this year, however, GM's year-to-date market share fell to 18%, and in July was lower still, at 17.4%.

Even if GM is well short of its targets today, at least tomorrow is another day. Yet today Louis Woodhill at Forbes looks at GM's future where the rubber meets to road, so to speak - the actual merits of its bread-and-butter models - and like McKayla, he is not impressed. Woodhill shreds the 2013 Chevy Malibu, and notes that the nature of the product cycle is such that Chevy will be locked into peddling an also-ran on the basis of profit-sapping financial incentives for years to come.

So there's that.

And I submit that even if GM manages to develop marketable cars, sell enough of them to make a profit, and adequately fund its pension, that ultimately the company is still screwed. It is screwed for one simple reason, and that reason is the National Labor Relations Act of 1935, better known as the Wagner Act. The UAW is rapacious, and the Wagner Act affords it the power to extract not just a simple wage premium but ultimately, as we saw in 2009-2010, the entire value of the enterprise.

Even with the UAW's financial power on the wane, the fixed investment and operating leverage inherent in auto manufacturing leave GM ill-equipped to win a battle. For the UAW, a shut down is painful; for GM it is catastrophic. The jobs bank, the Cadillac health care plans, the cushy retirement benefits and, yes, the wage premia that finally brought GM down were simply different manifestations of this same underlying dynamic, and it is a dynamic that remains in place.

GM may once again drag the process out for years, buoyed by periods of waxing demand, and its aggressive return to the subprime lending business. (Side note: GM's apologists like to imagine that bankruptcy was brought on by the exogenous catalyst of the financial crisis, GMAC was for years among the nation's largest mortgage lenders, and GM participated fully in the mortgage bubble. Indeed, in the years before the crisis their mortgage business effectively subsidized the auto business. The mortgage bubble didn't sink GM so much as keep it from sinking years earlier.)

But in the end, GM's destination is in little doubt, and as rivers flow to the sea, so will GM move inexorably back toward bankruptcy.

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