Monday, March 21, 2005

What's Bad For GM...

And as one automaking legend dies, another, much larger corporate giant may not be far behind: General Motors. It was once said by the company's chairman in the 1950s that "what is good for General Motors is good for the country." The inverse may also prove to be true -- and odds are, we will find out soon. GM last week announced drastically reduced profit projections for 2005, a surprise, but not a shock given the company's dwindling domestic market share and the worsened picture for US automakers on the whole. Besides, GM is essentially a pension plan and financing corporation with an automobile manufacturer attached on the periphery.

Dry spells are not unheard of for long-lived corporations. But complicating the situation is the fact that GM is corporate America's third-largest debtor, owing about US$300 million to its bondholders. Those bonds will soon be downgraded to junk status, effectively raising GM's debt servicing fees.

I'm no expert on corporate bonds, but I say with some confidence that if GM goes bust, it would be a pretty big financial disaster. You may have heard of the following defaulted companies: Enron, Global Crossing, Long-Term Capital Management, and K-Mart. Now add the total of their defaults, together with the cost of the Iraq war. That's GM's debt load.

We're not going to see a massive nation/world-wide meltdown as a result of GM's precarious state. (This is not just an American problem -- GM also has a major presence in Canada.)Indeed, given what happened with the airlines after 9/11, and the tremendous repercussions bankruptcy would have on GM's employees, etc., the US government could step in somehow. But the situation could, and should, spark a bit of panic. After all, what's bad for GM can't be good for America. One of the interesting repercussions could be to GM's unions, which benefit from high wages and health care benefits. The company's going to have to begin cutting costs, and it wouldn't surprise me to see them start there. Right now, GM is paying $1,500 in health care for each vehicle it sells. That is absurd, and clearly, something has to give. The government should have allowed the major airlines to go bust, as they are financial calamities with wings; it will be interesting to see what happens with GM.

(Essential background reading on the topic, courtesy of The Economist.)


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