Yes. Even though markets have been anticipating this, when it arrives, the losses by the remaining shareholders and bond holders (US$ billions) will still have to be worn.
Bankruptcy stalks General Motors By David Teather, New York November 22, 2005
WHAT began as a whisper on Wall Street has become a deafening roar. Could General Motors, the world's largest car maker and the backbone of American industry, be preparing to file for bankruptcy?
The company's shares skidded to their lowest since 1987 amid fears for its future. The company is in a quagmire — partly of its own making, partly due to globalisation — but a mess nonetheless into which GM is sinking fast.
The company has lost almost $US4 billion ($A5.46 billion) so far this year. It now has a market capitalisation of $US12 billion. To compare, the market values Wal-Mart at $US204 billion and Google at $US112 billion. If GM was forced into bankruptcy it would be a deep psychological blow for the US. As GM and Ford suffer, so do suppliers. Michigan and the surrounding states that rely on the car industry have already seen thousands of job losses and slashed wages.
The speculation had gathered enough momentum at the end of last week for chairman and chief executive Rick Wagoner to send a highly unusual letter to staff.
"I'd like to just set the record straight here and now," he wrote. "There is absolutely no plan, strategy or intention for GM to file for bankruptcy."
The biggest problem is in the company's core North American division. In the most recent quarter, the car maker narrowed its losses in Europe to $US105 million from $US236 million a year earlier. In the US, it lost $US1.6 billion. Amid intensifying competition from Asia, GM's market share in the US has fallen to 25.6 per cent from 28.5 per cent a year ago.
Mr Wagoner, in charge since 2000, is looking increasingly vulnerable.
Argus Research analyst Kevin Tynan said: "If there is a continued dip in US market share, board members will have to say enough is enough. Even though it is not completely Wagoner's fault, you just have to shake things up."
In the US, GM has found it difficult to wean buyers off the profit-eroding incentive deals it introduced to get sales moving
after the 2001 terrorist attacks. Without incentives in October, sales dropped 23 per cent. The company has also been heavily reliant on the sport utility vehicles that generated much of its profits in the 1990s.
As petrol prices have risen, sales of the gas guzzlers have plummeted. In the meantime, GM has been slow to invest in the petrol and electric hybrids that are becoming increasingly popular.
GM's biggest difficulty is the soaring cost of pension and health-care liabilities for US workers and retirees, which add $US3500 to the price of each vehicle. Unions fear that under bankruptcy, GM could cancel worker contracts to reduce its liabilities sharply, erasing decades of hard-won gains. It insures 1.1 million Americans and health-care costs this year will be about $US5.6 billion, up from $US4 billion four years ago.
The killer blow could be dealt by Delphi Corporation, the vehicle-parts maker that GM spun out in 1999. Delphi filed for bankruptcy last month. GM could be liable for up to $US12 billion of the pensions and health care of Delphi workers, under a contract signed when the supplier was spun off.
More urgently, Delphi's attempts to lower its costs could lead to a strike that would disrupt GM's production line. Delphi is seeking to halve the average hourly wage for its factory workers from $US25 to $US12.50 as well as eliminating 18,000 jobs — an offer that unions have baulked at.
GM's cash pile is shrinking alarmingly fast, from $US24 billion a year ago to $US19 billion today. A strike at Delphi could cause GM to burn through reserves even faster. A note from Deutsche Bank last week suggested that a three-month strike could use up $US13 billion.
Mr Wagoner admitted in his letter that the "large losses at GM North America are unsustainable" but for now he is sticking with a plan announced last month.
The company is accelerating a program to reduce costs by $US5 billion by the end of next year. About 25,000 blue-collar jobs will go, in addition to further cuts among office staff. Some plants will close.
GUARDIAN
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