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Chrysler L.L.C.

General Motors Restructuring Plan: A Metaphor for the Auto Industry's Health

Strategic Insights

— 1 min read

As the US auto industry struggles to recover from the economic downturn, General Motors (GM) and Chrysler are finding themselves in a dire situation, much like a person with a compromised immune system. The health of these companies is being measured by their balance sheets, and GM's debt-to-equity ratio has made it increasingly difficult for them to fight off the "infection" of financial struggles.

GM's restructuring plan, which includes turning half of its debt into equity and closing one-third of its existing plants, is a drastic measure aimed at strengthening the company's financial immune system. The plan is expected to keep GM out of bankruptcy and avoid the debilitating stay under court supervision.

Key Takeaways:

  • GM's balance sheet is the equivalent of its immune system, and the company has been gradually losing market share for decades, leading to built-up debt.
  • The company has been tilting production to the most profitable models, such as full-sized SUV's and pick-up trucks, which has resulted in a double whammy when the price of gasoline skyrocketed last year.
  • The UAW's decision to forgo some of its current income in favor of pensions and good health care for its members has weakened the firms' financial immune system.
  • The restructuring plan will turn half of the debt owed to the VEBA and the Government into equity, and senior bondholders will own most of the remainder of the firm.
  • Current equity holders will be diluted out of the picture, owning only about 1% of the restructured firm, and about one-third of the existing UAW workers and one-third of the existing plants will be closed.

Statistics:

  • The US auto market is expected to be around 10 million units per year after the restructuring, which is below the normal size of the market.
  • Garmin (GRMN) remains a relatively strong player within the sector.
  • The UAW has around 1.1 million members in the auto industry.
  • GM has around 100,000 employees globally.

Sources:

  • Zacks Investment Research
  • Comtex News Network, Inc. via SmarTrend
  • "GM to become world's largest 'bad bank,' bonds to be cut to 1% in restructuring plan: report" (By Tim Logan, The Times via COMTEX)

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