Are locked in a mournful embrace

" In this case, it takes three to tango." So said Rick Wagoner, the boss of General Motors (GM), this week—his re-working of an old cliche, capturing the contortions he is having to perform as he struggles to save the ailing giant of the car industry. Given its shrinking market share, GM would be hard enough to revive were it any firm in any industry. But GM is not any old firm, and designing more sellable cars is arguably the least of its problems. These, as Mr Wagoner says, require it somehow to find a way not only to get back on its feet, but also to dance simultaneously with Delphi, its now bankrupt parts supplier, and with one of America's toughest trade unions, the United Auto Workers (UAW). No wonder the firm's share price heads ever lower, and observers talk gloomily about GM stumbling dangerously towards Chapter 11 bankruptcy protection.

Looking at the mess that is GM today, it is easy to forget that for much of its 98-year history it embodied all that was great about American capitalism. Under Alfred Sloan, it pioneered new management techniques, enabling it to overtake Ford Motor Company in the 1920s. By the 1950s, GM had the largest workforce of any company in the free world, and had become the first firm to make $1 billion in a year.

Today, GM is primarily a case study in how the rest of American capitalism might have turned out were it not for the burst of creative destruction, starting in the 1980s, that transformed many industries and ultimately made America home to many of the world's best companies. In a free-market economy where the shareholder is king, GM is a depressing counter example: bureaucratic, union-dominated, increasingly losing out to leaner, better-run competitors, especially from abroad, and paralyzed by laws and contracts that stop management doing the necessary dirty work—sacking workers, cutting wages to market levels and trimming its portfolio of vehicle brands.

The question now is what, if anything, can be done to get GM heading in the right direction again? The priority is to sort out Delphi, which was spun off from GM in 1999. This separation, it now turns out, was never as complete as it seemed: GM remained liable for some costs if Delphi were to go bust, This it did last October, not least because of the high labour costs it inherited from GM. Delphi employees earn three times as much as some other unionized workers in similar jobs on the other side of Detroit—let alone non-union or foreign labour.

Steve Miller, Delphi's chief executive, has been trying, without much success, to win concessions from the UAW. On March 31st he exercised the "nuclear option", asking a bankruptcy judge to cancel the firm's contract with the UAW, so allowing Delphi to pay wages closer to the industry norm. Such cost-cutting is vital if Delphi is to survive, but, if the judge agrees to it after a hearing on May 9th, Delphi workers may well go on strike.

That could have nasty consequences for GM which—even if it has been building up its stocks of parts—would suffer a costly production slowdown. GM is already losing nearly $1 billion a month. A prolonged strike at Delphi could well force GM into Chapter 11. Delphi's workers know that, and also know that GM is sitting on a vast—though shrinking—mountain of cash, estimated at around $20 billion. They hope that the threat of a strike will prompt GM's management to dip into its cash reserve to compensate them for accepting lower pay and benefits (particularly the gold-plated pension and healthcare plans won over the years by the UAW). GM's Mr Wagoner is keen to avoid a strike, and has tabled a modest compensation package—but fears that Delphi workers will demand too high a price.

An even bigger challenge for Mr Wagoner is to wrest big reductions in pay, benefits and employment at GM itself—ideally even before the start of the negotiation of a new labour contract governing Detroit's "Big Three" car companies, due by September 2007_. A compensation package recently offered to GM employees agreeing to retire early has been well received, and may help cut the number of workers sitting idle in GM's notorious "jobs bank". But, almost a year after he took charge of sorting out Gm's North American operations, Mr Wagoner is under growing-pressure to realise more fundamental reforms.

In particular, Mr. Wagoner will need to satisfy Jerry York, a veteran of turnarounds at Chrysler and IBM, In particular, Mr Wagoner will need to who recently joined the board at the behest of GM's big- gest shareholder, Kirk Kerkorian. Whether Mr York can make a difference will be an important test of the effectiveness of a new trend in American corporate governance, whereby activist investors such as Mr Kerkorian target underperforming firms and try to revive them by putting their representatives on the board to agitate from within. Despite recent re-statements of GM's accounts, Mr Wagoner has just received a vote of confidence from the GM board—always a worrying sign.

The GM boss also apparently gets on well with the UAW leader, Ron Gettelfinger, who understands the need for GM to lower its costs and respects Gm's

recent "shared suffering" policy of cutting its dividend in half and slashing top executives' pay. But the union boss is up for re-election in June, and his members are increasingly angry about what they see as his chumminess with GM's leaders.

No one wants GM to end up in Chapter 11, which, at the very least, would involve huge legal costs. Mr Miller pointed out this week that America's steel industry emerged from Chapter 11 in much better shape. But it is hard to argue that the same is true of the airline industry.

Moreover, bankruptcy would probably further reduce GM'S falling market share (down from 35% in America in 1992 to 25% today), as potential customers would fear that the firm might not be around to deal with any faults in their new cars.

Even so, the leaders of GM, Delphi and the UAW are playing a dangerous game of chicken that could easily result in bankruptcy despite it being in none of their best interests. Edward Altman of New York University reckons there is a one-in-five chance of GM going bust within one year, and a 50% chance of bankruptcy within five years, although those odds will change if the sale announced this week of a 51% stake in GM'S financing arm, General Motors Acceptance Corporation, is completed. That sale seems to be a desperate money-raising move, especially as it does not guarantee the higher bond rating for GMAC that GM sought so as to minimise the financing arm's cost of capital. In addition, the buying consortium led by Cerberus Capital can walk away if Gm's own bond rating gets even junkier. A successful sale will reduce the odds of GM going bust in the short-term, but make it even likelier in the long-term, says Mr Altman.

The reason is that GM's cash mountain is not so much an asset, but something for the UAW to fight over. Selling the stake in GMAC adds to the available cash. That is likely only to postpone the day of reckoning and may thus prove a huge and costly mistake, says Dale Oesterle, a law professor at Ohio State University. Far better, he thinks, would be for GM to seize the day by handing its cash mountain back to shareholders in the form of a special dividend, and filing for Chapter 11 right away.

That is an easier call to make from the lecture theatre than the boardroom. More likely is

that for a few more years yet, everyone will suffer as GM’s remorseless decline goes on.

 

Economist

Notes

 

1. United Auto Workers (United Automobile, Aerospace and Agricultural Workers of America – UAW): Объединённый профсоюз рабочих автомобильной и авиакосмической промышленности и сельскохозяйственного машиностроения.
2. Chapter 11: Named after the U.S. bankruptcy code, Chapter 11 is a form of bankruptcy that involves a reorganization of a debtor’s business affairs and assets. It is generally filed by corporations which require time to restructure their debts.

Chapter 11gives the debtor a fresh start, subject to the debtor’s fulfillment of the obligations under its plan of reorganization.A Chapter 11 reorganization is the most complex of bankruptcy cases and generally the most expensive. It should be considered only after careful analysis and exploration of all other alternatives - Глава 11 Кодекса США о банкротстве.

1. GMAC (General Motors Acceptance Corporation): Акцептная корпорация «Дженерал Моторс» - финансово-кредитная дочерняя компания «Дженерал Моторс», которая является крупнейшим эмитентом коммерческих бумаг в США.

 

Vocabulary

 

to go bust обанкротиться

shrinking market share уменьшение доли на рынке

to overtake a company обойти, обогнать компанию

to lose out to another company проигрывать другой компании

to be liable for smth быть ответственным за ч-л

concession (grant, make, offerуступка (предоставлять, делать.

| get, obtain, win) предлагать | получать

to suffer a slowdown испытывать замедление (напр.

темпов роста

compensation package общее вознаграждение (с учётом

пособий, надбавок и льгот); оплата

труда

to realize reforms (introduce, carry out, осуществлять реформы (вводить,

put into practice, implement, undertake | осуществлять на практике,

delay, block) предпринимать | откладывать

блокировать)

to restate the accounts пересматривать счета

a company’s financial arm финансовое подразделение

компании

to have a stake (an interest) in a company иметь долю в компании

junk bond мусорная облигация, облигация

с низкой надёжностью

to file for Chapter 11 обратиться с просьбой

о предоставлении защиты в рамках

Главы 11 Кодекса США

о банкротстве

 

Assignments

 

I. Suggest the Russian for the following making use of English-English

and English-Russian dictionaries:

1. to design sellable cars

2. creative destruction

3. a leaner, better-run company

4. to sort out Delphi

5. “nuclear option”

6. to table a modest compensation package

7. to wrest reductions in pay

8. underperforming firms

9. to emerge from Chapter 11 in much better shape

10. money-raising move

II. Give the English for the following:

вновь встать на ноги

курсы акций продолжают снижаться

первыми вводить новые методы управления

обогнать конкурента

зарабатывать в три раза больше, чем другие рабочие

не говоря уже о…

иметь неприятные последствия

дефекты в новых автомобилях

 

III. Explain the following:

1. gold-plated pensions

2. “jobs bank”

3. a veteran of turnarounds

4. a “shared suffering” policy

5. a game of chicken

6. the day of reckoning

7. bond rating

IV. Answer the following questions:

How does GM’s past contrast with its present situation?

Expand on the rephrasing of the old cliche': “It takes three to tango”.

How can Delphi workers’ strike affect General Motors?

What is the new trend in American corporate governance (the role of the biggest investors on the board of the company)?

What are GM’s prospects in case it files for Chapter 11?

How can the sale of GMAC change GM’s fortunes?

What, according to the author, is the best way to get out of the fix the company found itself in?

 

V. Sum up the contents of the following article:

What My Dad Taught Me