In one of the most significant moves in the automotive industry General Motors Corporation has finally filed for bankruptcy.
The move forces the 100-year-old carmaker once seen as a symbol of American economic might and dynamism into a new and uncertain era of government ownership.
The bankruptcy filing is the third largest in US history and the largest ever in US manufacturing.
Reuters newsagency says the decision to push GM into a fast-track bankruptcy and provide US$30 billion of additional taxpayer funds to restructure the carmaker is a huge gamble for the administration of President Obama.
In a sign of progress in the government’s high-stakes effort, a bankruptcy judge approved the sale of substantially all of US carmaker Chrysler’s assets to a group led by Italy’s Fiat SpA in an opinion filed late on Sunday.
GM’s bankruptcy, which was approved by the automaker’s board after a weekend of deliberations, is the most carefully orchestrated Chapter 11 filing in the history of American business.
The automaker’s final descent started with an emergency aid announcement by the administration of President George W. Bush on December 19. It accelerated in late March when the new Obama government gave the company 60 days to restructure.
Following the bankruptcy filing, GM shares were removed from the Dow Jones industrial average and delisted by the New York Stock Exchange as “no longer suitable for listing.”
Chrysler’s bankruptcy, also financed by the US Treasury, has been widely seen as a test run for the much bigger and more complex reorganisation of GM.
President Barack Obama said that concessions by United Auto Workers union and creditors achieved a viable and achievable plan for GM to complete its restructuring and have a chance to succeed.
“I am absolutely confident that if well-managed, a new GM will emerge that can … out-compete automakers around the world and that can once again be an integral part of America’s economic future,” President Obama said.
The administration’s ambitious plan for GM is for a quick sale process that would allow a much smaller company to emerge from court protection in as little as 60 to 90 days.
In bankruptcy, GM will divide in two: a leaner “New GM” and “Old GM” — which will include the parts of GM that will eventually be liquidated.
GM said the split would be accomplished through what is called a Section 363 sale.
New GM assets would transfer to an entity owned by the US and Canadian governments, the UAW and GM’s unsecured creditors.
GM said in court documents that the Section 363 sale has to be quick as the US Treasury has made clear it will finance New GM only if the sale transaction is approved by July 10.
“Now the hard part begins, which is making GM and Chrysler competitive. If they don’t do that, then we’ll be doing this all over again in a few years,” said Christopher Richter, an auto analyst at CLSA Asia-Pacific Markets in Tokyo.
“The immediate implication is that the companies are going to get smaller and so market share is up for grabs, which means that rivals like Toyota, Honda, Nissan and Hyundai are going to gain share.”
Indeed, one of GM’s major challenges will be to create a streamlined offering of vehicles that are affordable, stylish and fuel-efficient.
Since the start of the year, GM has been kept alive by US government funding as a White House-appointed task force vetted plans for a sweeping reorganisation that will be undertaken with US$50 billion in federal financing.
By taking a 60 per cent stake in a reorganised GM, the Obama administration is gambling that the carmaker can compete with the likes of Toyota after its debt is cut by half and its labour costs are slashed under a new contract with the UAW union.
The federal government of Canada as well as the province of Ontario agreed to provide another US$9.5 billion to GM in a late addition to the plans for the bankruptcy.
GM plans to close 11 US facilities and idle another three plants. It has not provided an updated target for job cuts but had been looking to cut 21,000 factory jobs from the 54,000 UAW workers it now employs in the United States.
“The GM that many of you knew, the GM that that let too many of you down, is history,” said CEO Fritz Henderson at a news conference.
“Today marks the beginning of what will be a new company, a new GM dedicated to building the very best cars and trucks, highly fuel-efficient, world-class quality, green technology development.”
The UAW would have a 17.5 per cent stake in the New GM. The Canadian government would own 12 per cent and GM bondholders would receive 10 per cent.
US officials said there was no plan to provide any further funding for GM and insisted that all of the Detroit Three could survive. Ford Motor Co has not sought emergency federal aid.
In the case of GM, the goal of restructuring is to allow it to return to profitability if US industry-wide car sales recover even slightly to near 10 million units annually.
While New GM is expected to emerge quickly from court protection, its shuttered plants, stranded equipment and other spurned assets would be left to liquidation in bankruptcy.
Founded in 1908, GM rose to dominate the US and global car industries under the stewardship of pioneering Chief Executive Alfred Sloan, who famously pledged that the carmaker would deliver “a car for every purse and purpose.”
By the mid-1950s, at the peak of its success, GM had some 514,000 employees and it accounted for about half of US car production