GM Restructuring Really Looking Smart
Fitz Henderson deserves credit for seizing the moment. He is adroitly using the bankruptcy process to create a new GM that will be a global powerhouse. My read on the situation is that the Obama Administration is giving Mr. Henderson the political cover that he needs to unfold the clean-sheet restructuring plan of the consummate GM insiders, i.e., the alumni of GM’s Treasurer’s Office in New York. Sidestepping the emotion, shame and hurt suffered by GM stakeholders, including its executives who have lost at least $100 million in supplemental pension benefits, the new GM will be positioned to dominate the world auto industry again based on the actions of a few smart men.
If you subscribe to “The World is Flat” theory, the growth in the 21st Century will be in the BRIC economies of Brazil, Russia, India and China. So any car company that wants to end the century as a leader needs to thrive in these markets. Mature North America and Old Europe are no longer the battlefields of commercial combat.
Shifting GM’s center of gravity to the BRIC economies has been at the core of GM’s strategic plan for the last decade. While Ford was buying tired luxury brands in Old Europe and Toyota building full-size pickup truck plants in Texas, GM was shifting as much capital as possible to China, Russia and Brazil. [Though GM’s disastrous $2 billion flirtation with Fiat doesn’t square with its BRIC strategy, except as a source of small car technology; leave it to the Italians to rip-off anyone who tries to enter their markets.]
Capital is the lifeblood of a car company because it is a capital intensive industry, i.e., you have to make huge bets on plant and equipment before seeing any return on investment. During the last ten years GM has built plants in Brazil, Russia, India and China. Note the emphasis on engine plants. The engine is the one component that defines a motor company. After all, it’s name is General Motors, not General Cars and Trucks. Here are some examples of plant construction in the BRIC economies.
GM’s deal regarding its operations in Old Europe was particularly smart. GM Europe is the ultimate tar baby. The European car market is marked by over-production and too many vendors, all protected by local politicians to preserve jobs and, more importantly, national security baselines. It is a market in a perpetual state of collective paralysis and unprofitability.
GM foisted this secular drain on its financial resources on an ‘at-first-sight’ oddball alliance of Russia’s largest savings bank and an Austrian-Canadian conglomerate called Magna International led by an industrial genius, Frank Stronach. I met Frank Stronach for one afternoon in the 1980’s together the future head of GM Europe, Lou Hughes. That day, Frank espoused a theory of distributed manufacturing that was truly original. Production needed to be broken down in units or modules that could be produced in a factory of 300 people. He had observed that monasteries in the Middle Ages had been allowed to grow to only 300 souls and then split in two. The abbots had observed that above 300 persons they could not know each monk as a person, i.e., 300 persons is the limit to meaningful human interaction and the saving of souls. In addition, Magna preferred to hire immigrants who were grateful to have jobs and won’t unionize as quickly. In contrast, at the same time at GM’s now shuttered Framingham, Massachusetts assembly plant workers would pick fights with foremen so that they could be suspended for two weeks at full pay and go hunting in season.
Frank’s partner in the new GM Europe entity is Sberbank. Sberbank is the largest savings bank in Russia with more than 20,000 branches; the next largest Russian consumer bank is the Austrian Raiffseisenbank (former Impexbank) with 300 branches. Sberbank got a 20% minority stake in Magna International earlier this year when Russian oligarch, Oleg Deripaska, received a collateral call on his holdings in Basic Element, an over-leveraged holding company that was trying to take over Norilsk Nickel at the height of last years’s commodities bubble.
Sberbank is basically an extension of the Russia Government. Vladimir Putin underscored this when is called Angela Merkel two weeks ago to signal his support for the Magna deal. GM and the US Treasury also signaled their support of the Magna deal wherein GM would retain a meaningful 35% stake and get a preferred position through Sberbank in the Russian market by sending ‘low level’ officials. This infuriated the Germans who thought the deal was about them – as usual -- and the bloated Opel mega-factory in Ruesselsheim near Frankfurt. The Ruesselsheim factory is so big that it requires two stations on the light rail connecting Frankfurt and Wiesbaden.
But this deal is all about getting out of Old Europe under the cover of an Austrian-Canadian conglomerate and shifting capital and energy to domination of the Russian market with the support of the Russian Government. Hat’s off.
Back in the US, the bankruptcy has had all of the elements of the obvious clean-sheet restructuring that outsiders like Jerry York have been pushing for years. Downsize the brands to Chevrolet and Cadillac, get rid of the underperforming dealer franchisees, cut the pay packet for hourly workers to that of the Japanese imports, and reduce retiree pension and medical costs to a minimum (preferably through a nationalized health care plan). The part of the plan that these outsiders didn’t really confront was that the capital markets, i.e., bond and stockholders, and the executives had to be screwed as well.
Roger Penske’s purchase of Saturn is another example of how the GM insiders are calling the shots in the restructuring. Like Frank Stronach, Mr. Penske has been a GM ‘insider’ for decades. He bought a Cadillac dealership in 1965; he was the go-to guy for lots of small GM divestitures over the years. Mr. Penske’s idea of using Saturn as a mega-distribution channel and sourcing its branded vehicles from a number of manufacturers is real out-of-the-box thinking. Plus GM gets to continue building cars for at least two years.
Finally, the Delphi deal, Delphi is the old GM parts division, is another consummate inside deal. GM is providing the financing for Delphi to come out of bankruptcy with money furnished by the US Treasury. GM picked Platinum Technologies led by Tom Gores, an old Michigan boy, as the counterparty. Mr. Gores is a comfortable partner for GM, partly because he will do exactly the deal that GM wants to do. GM gets to claw back its high-value added components plants in Grand Rapids, MI, Lockport, NY, Rochester, NY, Kokomo, IN., and Saginaw, MI that make important components like radiators, air conditioners, steering gears, engine control modules, car radios, and pollution control modules. Mr. Gores gets to ring profits from factories that make thousands of new and spare parts that are more commodity-like. This is exactly what Mr. Gores has done to become a billionaire.
Postscript: General Motors was a leveraged buy-out in 1923 when Jimmy Durant went bankrupt after betting too much money on the copper-cooled engine. Mr. Durant was bought out by the Dupont family that provided the equity and J. P. Morgan that provided the debt financing. The GM LBO group has always been located in New York and is now called the New York Treasurer’s Office or T.O.N.Y . Every CEO of GM has gone through TONY except the ill-fated Robert Stempel. In 1954, the Federal Government forced the Dupont family to divest its stake in GM under an anti-trust settlement and that marked the beginning of the long decline of GM’s fortune. Roger Smith sealed GM fate in the 1970’s by pushing unit body construction that led to look-alike vehicles and by moving headquarters from New York to Detroit.
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