What's the future for GM?

Plant closures, drastic cuts in white and blue collar jobs, elimination of brands, postponement or cancellation of new products and aggressive streamlining of its dealer network in the US, are just some of the measures it will need to be take very rapidly, if it is to avoid needing another rescue package in the coming months.

Autocar Pro News DeskBy Autocar Pro News Desk calendar 29 Jan 2009 Views icon2685 Views Share - Share to Facebook Share to Twitter Share to LinkedIn Share to Whatsapp
What's the future for GM?
Since 2004, General Motors has suffered cumulative losses of nearly US$73 billion and lost US$ 4.2 billon in the third quarter of 2008. Its financial position was already very weak coming into 2008 and the current tough environment in the US has tipped it over the edge. Hence, it is not surprising to see that it is now on the verge of bankruptcy.

Even following the recent bailout and provision of emergency loans by President George Bush to the US auto sector, it will be a massive challenge for GM management to turn around the company. Even without bankruptcy, GM is now looking at draconian measures to reduce its cash burn rate which is around US$ 2 billion every month.

Plant closures, drastic cuts in white and blue collar jobs, elimination of brands, postponement or cancellation of new products and aggressive streamlining of its dealer network in the US, are just some of the measures it will need to be take very rapidly, if it is to avoid needing another rescue package in the coming months.

North American operations will suffer the biggest cutbacks, but other parts of the world will not be immune from these problems. GM’s Opel subsidiary, based in Germany, is in slightly better shape and has already requested assistance from the German government. In Asia, where GM does not have any of the legacy issues, such as high labour costs, associated with North America or Europe, it has been performing very well, especially since the acquisition of Daewoo Motors in 2001. Its most significant activities are in Korea (GMDAT) and China (Shanghai-GM). The company has also recently been showing greater commitment to expand its operations in India with the opening of its new Talegaon plant. However, profits made in Asia pale into insignificance when compared to the huge losses being racked up at its North America operations.

One interesting question is what will happen to GM’s Asian operations with the parent company being in such dire straits. The Asian operations cannot exist in isolation and the repercussions of what is happening to GM in North America and Europe are already being felt in Asia.

The situation will only worsen in the coming months. For example, GMDAT in Korea, which exports over 80 percent of its production, mainly to Europe, has been forced to suspend production in response to slumping global demand. Permanent cuts in headcount are not planned as yet, but could be considered if the slump deepens. In addition to weak demand, the cash crunch at GM is also having an impact on its operations and several new models, including a midsize saloon and a crossover vehicle, planned for 2009, will likely be delayed by over a year.

GMDAT is the main source of new models for operations in China, India and Thailand. Any delays in Korea will inevitably mean delays in China and India as well. All prior investment commitments will be re-examined and the postponement or cancellation of some initiatives is inevitable. India impact

What will be the impact of these developments on GM’s operations in India?

Firstly, the market slowdown will mean slower growth for the company and in this environment; sales and production plans will need to be scaled back. This is not specific to GM since all OEMs are bracing themselves for a tough 2009 and possibly 2010. Secondly, in an environment of sluggish global markets, export plans from the new Talegaon plant will need to be reassessed, as GM also tries to maintain sufficient production of the Matiz in South Korea. Combine this with weaker demand in India and consumer caution in buying a car from a troubled automaker and the production ramp up at this new plant is likely to be much slower than originally planned. On the plus side, the new Matiz is still expected to arrive in 2009 and delays in the launch of other models should not have much of an impact on GM’s Indian operations.

In an optimistic scenario, from an Indian angle, GM could accelerate lower cost engineering and product development as well as low-cost component sourcing. All this could mean more investment in places like India. However, using US taxpayer money from the bailout to shift jobs overseas is politically unacceptable in the US and GM is likely to tread very carefully in this regard.

Even the fate of GM’s more significant Asian operations in Korea and China will depend on what happens to the parent company in the US. If GM runs out of cash again, the next step would be a Chapter 11 bankruptcy filing, in a bid to reorganise the company. In the current credit environment it is very unlikely that another automaker or a private equity group will step forward and purchase sizeable chunks of GM.

The first possibility is a drastic scaling down of GM’s global operation to produce a much leaner, flexible, globally integrated and profitable company. It is doubtful that GM’s current management has the mindset to pull this off successfully. Under this scenario, most of the cutback would need to be in North America and Europe. GM’s Asian and South American operations would remain largely unscathed, although it would need to be very selective about investments.

The worst case scenario, which would involve the liquidation or breakup of GM’s global empire, also needs to be contemplated. Depending on the price-tag, Japanese, European or Chinese companies could bid for some of the more productive assets. But they would need to be wary about the impact of such purchases on their own balance sheets. The fate of GM Europe and its Opel subsidiary would rest on the attitude of the German government as well as other European governments. They are likely to be more supportive, but will target assistance to safeguard European jobs rather than creating a globally competitive operation. This may store more problems for the years to come. In a liquidation scenario, the creation of an entity consisting of profitable parts of GM Opel and GM’s Asian operations is a distinct possibility.

In summary, India is a very tiny part of GM’s global and Asian operations. In spite of this however, GM India certainly cannot operate in isolation and does not have its fate in its own hands.
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