Why has the world's best known car company gone bankrupt? Before making very general statements, lets understand the actual reasons which mad this iconic brand AKA American giant go kaput....
A killer combination - In a nutshell, very high labour costs, rising competition from foreign car makers, a frightening spike in fuel prices, freezing of credit, the collapse of the American economy, drop in sales caused by lack of purchasing power among Americans due to the recession, etc have formed a lethal concoction leading to the bankruptcy of the iconic carmaker.
However, General Motors's problems run much deeper. Here's why. . .
Over the years, protesting workers' unions at GM managed to get the company to agree to contracts that provide lifetime benefits to the members. This excessive cost of lifetime benefits pushed labour costs through the roof.
These costs have now reached an unmanageable proportion and the automotive giant just does not have enough money to either make these payments or to keep the company afloat, given the decline in sales and plummetting profits. Expansion, upgrade, new investments were totally out of the question.
Reports suggest that GM is paying more than $1,500 per car that is built as just benefits to people who are not even working for the auto giant any more. An interesting bit of statistics says that the cost of steel used in a car made by GM is less than what it pays its retired union members in terms of benefits.
Added to this is the huge pay that GM workers draw even for low-level jobs at the company.
The company does not have much cash and even if it adds receivables to this, it accounts payable and accrued expenses are many times higher than that figure. Even adding the company's current assets (inventories, equipment on lease, etc) to this still leaves it way behind it current liabilities.
The first signs of GM's gargantuan financial troubles began to surface in early 2008. When by mid-2008, the prices of furl touched a historic high, there was a stunning change in consumer behaviour with Americans deciding to keep off big fuel-guzzling cars and SUVs in favour or smaller, fuel-efficient vehicles. The sudden rise in the price of oil, the deepening recession and the falling sales led to Detroit's Big Three - GM, Chrysler, and Ford Motor Co - almost throwing in the towel.
Car loans too were difficult to come by as banks, already reeling under the world's greatest financial crisis, decided to freeze credit. More and more people failed to qualify for loans, leading to a huge drop in car sales. A study conducted by the car firms said that the historic spike in fuel prices was the '500-pound gorilla' that almost single-handedly kayoed GM.
Is this a lesson for everybody? A company which ignores the ground reality is bound to face the same situation. Everything in this world has to evolve over a period of time and failure to do will also result in doom. Change is the only constant thing in this world and innovation is the only way to succeed. Will this be the begining of the climax for the current recession or is it a curtain raiser? Obama's speech on the day of filing this bankruptcy has a lot to understand and interpret. But again can we learn from this slowdown and avoid any future re-occurences? By saying so,are we defying the laws of nature-that everything has to see ups and downs. Can somebody really forsee a situation where "Everything that goes up stays there"...But one should really hope to see only one recession in his lifetime!!!
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