What happened to General Motors?

General Motors (GM) is an American multinational company founded in 1908. By the 1931 to early 2000s, GE was among the most successful companies in America, and yet as the financial crisis hit in 2008, General Motors filed for Chapter 11 bankruptcy reorganization on June 8, 2009, after losing more than $90 billion in the previous four years. General Motors was effectively split in two during Chapter 11 bankruptcy proceedings. The new company took GM’s best brands and operations, while the old company kept its massive liabilities.

Background

General Motors (GM) is an American multinational company with a core focus on the design and manufacture of vehicles, vehicle parts, and the selling of financial services. It was founded in 1908 by William C. Durant, Charles Stewart Mott, and Frederic L. Smith.

GM enjoyed a 60% market share in the United States at its peak and was the worst’s largest automobile manufacturer from 1931 until 2007. Thanks also to one of the most prominent CEOs of America’s history, Jack Welch:

However, by the 2000s, and as the financial crisis of 2008 hit the automaker industry very badly, General Motors filed for Chapter 11 bankruptcy reorganization on June 8, 2009, after losing more than $90 billion in the previous four years. The Government-backed deal saw the original company sell its assets and some subsidiaries to form a new company using the General Motors trademark.

Today, General Motors remains a significant global presence producing 6.829 million vehicles in 2020 with revenue of $122.48 billion

Following is a look at the fall and subsequent rebirth of the American giant.

Fixed operating costs

When General Motors experienced a decline in sales, it could not cut costs because many of its expenses were fixed.

This made the company somewhat unique as a manufacturer. In most cases, operating costs fall as sales fall because fewer units are being produced. That is, the business can employ fewer staff and spend less money on raw materials. 

However, GM employees were on union contracts. The company could have closed a manufacturing facility to reduce costs, but this did not guarantee employees would lose their jobs. Union employees also received company pensions and health care coverage which were also fixed costs.

As a result, GM posted enormous losses as sales declined with expenditure remaining largely the same.

Automotive industry crisis

The so-called automotive industry crisis lasted from 2008 to 2010 and was the result of the Global Financial Crisis (GFC) and subsequent recession.

In the years before the GFC, General Motors invested heavily in SUVs and pick-up trucks with poor fuel economy. As the recession pushed gasoline prices up, the company experienced a decline in sales as consumers looked to other makers for fuel-efficient cars. This situation was made worse by a rise in the cost of raw materials.

Bankruptcy

Saddled with high levels of debt, GM predicted it would run out of cash by mid-2009 without government funding, a merger, or the sale of assets. Government loans were then handed out to GM on the condition that it produced a plan for future financial viability.

The Obama administration then endorsed the sale of General Motors’ operational assets to a new company called NGMCO Inc. (or “New GM”). The latter would take on GM’s most profitable brands and operations, leaving the former with most of the liabilities. 

The restructuring then took place before the bankruptcy filing to make the new company profitable. This enabled proceedings to conclude in a matter of days and not be dragged out for years as creditors scrambled to recoup their costs. Nevertheless, it became the largest industrial bankruptcy in history with General Motors $173 billion in debt.

Normal operations continued throughout the proceedings with operations outside the U.S. unaffected. The “new” General Motors then emerged just 40 days later.

Rebirth

General Motors then undertook a restructuring program. The company discontinued the Pontiac and Saturn brands and sold Saab to Dutch automaker Spyker. It was left with four divisions: Buick, Cadillac, Chevrolet, and GMC. 

In 2010, GM held a momentous IPO and regained its title as the largest automaker in the world the following year.

Key takeaways:

  • General Motors is an American multinational automobile designer and manufacturer. It was the world’s largest automaker for 76 years before filing for bankruptcy in 2009.
  • General Motors was exposed in the wake of the GFC as rising gas prices saw consumers look elsewhere for fuel-efficient cars. GM also had several employee-related fixed costs which it had to meet as sales revenue declined.
  • General Motors was effectively split in two during Chapter 11 bankruptcy proceedings. The new company took GM’s best brands and operations, while the old company kept its massive liabilities. Pro-manufacturing U.S. governments helped underwrite the transition with the new GM holding an IPO in 2010.

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