General Motors grew from a small company in 1908 into a corporate giant within a couple of decades. For years, people believed that GM was too big to ever go away. Investors had a lot of confidence in the company and many employees invested their life savings into it.
Everyone realized the mistake they’d made with this assumption when, in 2009, the company officially declared Chapter 11 bankruptcy. Even amidst one of the worst recessions in United States history, no one would have expected General Motors to face financial failure.
Fortunately, the company was reorganized and given a second chance. If it faced Chapter 7 bankruptcy instead, GM would have been completely dissolved. That would have cost investors billions and over 200,000 employees would have lost their jobs.
So, what leads such a steadfast, household name to file bankruptcy, and what does the future hold? Read on to find out the history, causes, and where things go from here.
The Legacy of General Motors
General Motors was established in 1908, and grew steadily over the next twenty years. There were a number of factors that led to GM becoming one of the largest auto-manufacturers in the world:
- Offered lines of credit to consumers in the 1920s. Henry Ford was morally opposed to offering credit to customers. GM was more than willing to offer credit, allowing a broader spectrum of customers to afford its automobiles.
- Involvement in World War II. GM was instrumental in the war movement. Their UK division even built the Churchill tank. On a darker note, GM profited by continuing its contracts with Germany even after Hitler declared war against the US. Right or wrong, this involvement in the war effort was lucrative for General Motors, and they continued to grow substantially.
- Introduction of popular models in the post war era. Many GM lines, such as the Oldsmobile Cutlass, became major hits with customers in the 1960s and 1970s.
GM was a spectacular company that grew through the years. Its pride in innovation helped it grow significantly through its inception, to the 1970s. However, this golden era couldn’t last forever. GM made a number of mistakes over the next three decades that contributed to its eventual bankruptcy.
Causes for Failure
GM’s luck began to turn in the early 1980s. By the 1990s it was facing some of its worst losses ever. These losses were largely inspired by a brief recession.
It made a short-lived recovery before the turn of the century, but the 2001 terrorist attacks on the World Trade Center and the onset of yet another recession caused further complications for the company. That said, these events were not completely responsible for GM’s downfall. There were many other reasons why GM struggled through the recession and turned into one of the biggest corporate disasters in history.
What factors ultimately drove General Motors into bankruptcy? There were a number of issues that played a role, including:
- Unsuccessful lines of automobiles. Everyone remembers successful automobile lines put out by GM, such as the Corvettes and Pontiac GTOs. But what about the Vega and the Chevette (please, don’t get me started on the Vega)? Although these brands may not have ruined GM’s reputation, they certainly put a hole in its bank account.
- Payments to retired workers. For a long time, GM was praised for providing health care coverage and generous pensions to retired employees. When business was good, they were revered for their generosity. However, once they could no longer afford these payments, investors were not as happy with the choice. These obligations were beginning to eat away at the company. If they foresaw the sudden financial crisis, they would probably never have agreed to these terms. These costs translated to a couple thousand dollars a car, which of course was passed along to the consumer.
- Loss of innovation and shoddy management. The innovative spirit was the driving force behind GM’s success for over a century. New management entered the picture and ended up turning the company into a bureaucratic mess. They were more focused on numbers than the quality products and new ideas that had made GM successful in the first place.
- Emphasis on less fuel-efficient models. General Motors tended to make its money from gas guzzlers. Demand for these models decreased significantly when gas prices rose through the roof. Many customers wanted to purchase greener fuel-efficient cars such as hybrids, but GM did not place much emphasis on those lines.
- Competition. For a long time, GM was one of a few key players in an oligopoly industry. As a result, they failed to respond to new players in the global marketplace. The lack of a clear plan to respond to competition from auto manufacturers in Japan and Europe resulted in significant losses in GM’s market share.
Mismanagement played a large role in GM’s bankruptcy. Knowing this, the company has gone to new lengths to fix its past mistakes and move forward towards a greener, more profitable future.
Reorganizing for a New Future
The United States created a plan to help reorganize General Motors under Chapter 11. The new company, General Motors Company LLC, is entirely separate from the original General Motors. A variety of changes have been made to the structure of the company to ensure that it will be more successful in the future:
- Changes in management. New executives have been brought in to overhaul the company. This is one of the most important changes, as the previous management team was held responsible for the misfortunes of the old General Motors.
- Transfer to a greener company. Amidst filings and court hearings, President Obama declared that GM was to become a greener company with a focus on hybrids, fuel cells, and other clean technologies. This past June, GM stated that its future was going to be in fuel cells. It seems as though GM is living up to its word to turn itself around and become a greener company.
- Discontinuation of less profitable models. GM has announced plans to discontinue many lines that have not been profitable over the past years. These lines include Saturn, Hummer, and Saab. Many of these models have been sold to foreign companies such as Sichuan Tengzhong Heavy Industrial Machinery Company and Koenigsegg Automotive AB. Focusing on more profitable lines should help ensure GM has a better future.
- Changes to benefits of retired workers and their families. Effective January 1, 2009, retired workers and their families are no longer eligible to participate in the Salaried Health Care Program. This change should help reduce the expenses associated with its retired employees.
Almost no other company would have been afforded this kind of second chance. But the U.S. government did not want to see GM go bankrupt, and people worked tirelessly to make sure that it didn’t happen. Hopefully, GM will continue to learn from its prior mistakes and see what it can do differently in the future. Its recovery from bankruptcy will probably be long and hard, but with a new vision and a little discipline, the company may be able to turn things around.
Lessons from GM’s Failure
Here are a few of the invaluable lessons investors can learn from GM:
- Any company can go bankrupt. GM was one of the largest corporations in the world. Most people never thought they would see the day when it would go under. Investors need to be wary of the possibility that any company they invest in could struggle. It is never wise to place all your eggs in one basket when you invest in stocks, or any other commodity. Many GM employees made this mistake when they put their life savings in their company.
- Recessions impact everyone. Just because a company seems larger than life doesn’t mean that it won’t be affected by a major recession. Sometimes, the bigger companies are the hardest hit, because of the way they manage their money.
- It’s important to keep or invest in a lean company. Businesses that don’t control their expenses can make terrible investments. When GM spent so much money on its employees, it ultimately was endangering the well-being of its shareholders. It is important to study a company and know how it is managing its money before you invest.
- Innovation should always be a priority. GM built itself on this principle. Often, older firms become more conservative and bureaucratic as they grow. Innovation is essential to growth for any company. In fact, it is essential merely for a company to survive.
- Give the customers what they want. Focusing on automobiles that no one wanted to buy was clearly a mistake. It is inevitable that a company is going to create lines of products that aren’t going to do very well. However, if a company continues to make the same mistakes with the products that it launches, this should be an indication to you as an investor that you may want to reconsider where you put your money.
- Follow consumer and economic trends. GM closed its eyes to changes in the environment it did business in when it ignored the fact that customers didn’t want to pay for large gas guzzlers. Other companies have made similar mistakes in different capacities. Before you invest in a company, you should also ask yourself how they are responding to technological and economic changes in the environment. Established companies like GM often turn a blind eye to these patterns and feel that they are immune to their effects.
It really rocked Wall Street when GM, one of the biggest corporations in the world, had to declare Chapter 11 Bankruptcy. Investors learned the hard way that any company can experience financial difficulties, and even go bankrupt if it doesn’t look out for itself.
Many of the factors that led to GM’s decision could have been prevented. Lucky for employees and investors alike, GM was given a rare, second chance. Hopefully the necessary management changes they’ve made as a result will keep these problems from resurfacing in the future.
What are your thoughts on GM’s financial hardships? What can you learn from their success and failure? Please share in the comments below.