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MarketLine Case Study

General Motors
Leading US car maker emerges
from bankruptcy
Reference Code: ML00007-007

Publication Date: July 2012

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OVERVIEW
Catalyst
US-based automotive manufacturer General Motors (GM), which in the 1950s and 1960s supplied almost one in two of
all the cars sold in the country, had been losing market share for many decades. In addition, it had posted net losses for
several years in succession and was burdened by legacy employee benefit schemes. The recession of 200809 led to a
sharp fall in demand for cars and trucks and a double-digit decline in GMs revenues. In mid-2009, the company filed for
Chapter 11 bankruptcy. It emerged a month afterwards with dramatic changes in ownership and structure. This Case
Study examines how well the rescue plan has succeeded in the subsequent two years.

Summary

GM entered Chapter 11 bankruptcy in June 2009.

This followed several loss-making years for the company.

GM had enjoyed US market share of nearly 50% in the 1950s and 1960s, but subsequently this was eroded by
the rise of Asia-based automotive companies in the US market.

Compared to sales in the US market overall, GM sold a higher proportion of large vehicles such as SUVs, which
had poor fuel efficiency. Gasoline prices in the US have been rising steadily over the past decade after many
years of stability, with the risk of declining demand for such vehicles.

GM had major pension and healthcare commitments for its former employees, dating back to an era when such
obligations were more affordable.

The recovery plan involved GMs assets being purchased by the US and Canadian governments and auto
workers unions prior to an initial public offering in 2010.

Several underperforming brands in the North American business were wound down or sold.

Retirement and healthcare benefits were altered to reduce the burden on GM.

Management structures were changed to make the company more responsive to customers.

In 2010 and 2011, the company posted healthy revenue growth, positive net income, and higher net margins
than it achieved during its most recent earlier years of profitability.

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TABLE OF CONTENTS
Overview ............................................................................................................................................................................. 2
Catalyst............................................................................................................................................................................ 2
Summary ......................................................................................................................................................................... 2
Table of Contents ................................................................................................................................................................ 3
List of Tables ....................................................................................................................................................................... 4
Table of Figures .................................................................................................................................................................. 5
Analysis ............................................................................................................................................................................... 6
Once the largest car maker in the US, GM has more recently suffered several problems .............................................. 6
Market share has been declining for several decades ................................................................................................. 6
For several years, GM posted billion dollar net losses ................................................................................................. 7
Production was focused on large, fuel-inefficient vehicles ........................................................................................... 8
Employee benefits were costly to maintain ................................................................................................................ 10
The recession led to a sharp fall in demand for cars and trucks ................................................................................ 10
In 2009, GM filed for bankruptcy .................................................................................................................................... 11
The ownership of the company drastically changed................................................................................................... 11
Employee benefits were altered ................................................................................................................................. 11
Fewer marques were to be produced......................................................................................................................... 11
The company aimed for a flatter management structure ............................................................................................ 12
Since emerging from bankruptcy, GM has posted two successive profitable years ...................................................... 13
Financials ................................................................................................................................................................... 13
Conclusions....................................................................................................................................................................... 14
Will a brief bankruptcy result in long-term change? ....................................................................................................... 14
Appendix ........................................................................................................................................................................... 15
Definitions ...................................................................................................................................................................... 15
Sources ......................................................................................................................................................................... 15
Further Reading ............................................................................................................................................................. 15
Ask the analyst .............................................................................................................................................................. 16
About MarketLine .......................................................................................................................................................... 16
Disclaimer ...................................................................................................................................................................... 16

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LIST OF TABLES
Table 1: GMs marques in North America, 2008 and 2011............................................................................................... 12
Table 2: GM'
s financial performance before and after bankruptcy ................................................................................... 13

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TABLE OF FIGURES
Figure 1: The rise and fall of GMs share of the US light vehicle market, 19202010 ........................................................ 6
Figure 2: US light vehicle market shares, 1960s typical ..................................................................................................... 7
Figure 3: US light vehicle market shares, 2011 .................................................................................................................. 7
Figure 4: GM revenue and net income/loss, 19982011 .................................................................................................... 8
Figure 5: Top seven auto makers in the US, ranked by average fuel efficiency of product lineup, 2006 ........................... 9
Figure 6: Rising gasoline retail prices in the US and the UK, 19782012 .......................................................................... 9
Figure 7: US new car market value ($bn), 200511 ......................................................................................................... 10

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ANALYSIS
Once the largest car maker in the US, GM has more recently
suffered several problems
General Motors (GM) was established in 1908 by a horse-drawn coach manufacturer diversifying into automobiles.
At the time, according to GM the entire automobile fleet in the US was around 8,000 vehicles. 100 years later,
Department of Transport statistics revealed that there were 256 million vehicles on US roads, a compound annual growth
rate of 11%. GM played a central role in the rise of the automobile during the 20th century, but by the start of the 21st
century the company was clearly in difficulty, posting several years of large net losses.

Market share has been declining for several decades


During the mid-20th century, GM was the colossus of US car makers. While Ford dominated the market in the 1920s, by
the 1940s it had been overtaken by GM, which held around 44% of light vehicle sales. In the 1950s and 1960s, GMs
share increased to almost 50%. As late as the 1990s, it was the leading company in the US light vehicle market.
However, its relative position had started to be undermined as early as the 1970s, with its market share falling quite
consistently. By 2010, it held just 19%. The main reason for this was not competition from its main US rivals, Ford and
Chrysler, as over 19902004, at least, their own shares of the light vehicle market were declining. Rather, it was new
entrants from Asia, notably Toyota, Nissan, and Hyundai, which were seizing market share from the US-based auto
companies.

Figure 1: The rise and fall of GMs share of the US light vehicle market, 19202010

CHICAGO TRIBUNE, CAR OF THE CENTURY

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Figure 2: US light vehicle market shares, 1960s typical

"#
$

CAR OF THE CENTURY

Figure 3: US light vehicle market shares, 2011

' (
'

&
%

GM 2011 ANNUAL REPORT

For several years, GM posted billion dollar net losses


Despite the encroachment of foreign competitors on market share, GM was able to report annual revenue growth in most
years. Even the turn-of-the-century US recession, which led to a significant revenue decline in 2002, did not have a longterm impact, with GMs sales recovering in 2003.
Net margins were low, however, averaging 1.8% over 19982006, and in 2005 GM posted a net loss for the year of
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$10.5bn. Multi-billion dollar net losses were then posted every year between 2005 and 2008.
Figure 4 shows these trends. The large net income in 2009 is a consequence of the restructuring that occurred during
GMs bankruptcy.

Figure 4: GM revenue and net income/loss, 19982011


+ , (

*
*

GM ANNUAL REPORTS

Production was focused on large, fuel-inefficient vehicles


GMs product lineup is diverse. However, in comparison to the rest of the US light vehicle industry it had a stronger focus
on larger models, such as pick-ups intended for use as passenger cars rather than as light commercial vehicles. Pickups
and SUVs together accounted for 43% of total light vehicle unit sales in the US in 2006 (this year is chosen so as to
reflect the situation prior to the recession). GM had 53% of its unit sales in this segment.
These products tend to be less efficient than smaller passenger cars in their fuel consumption on a miles-per-gallon
basis. Figure 5 shows the relative fuel efficiency of vehicles produced by the seven leading players in the US. It is based
on the median miles-per-gallon (combined cycle) across all vehicle models manufactured by each company, without any
weighting for the unit sales volume of each model. Data is from the US Department of Energy, and refers to 2006. When
measured on this basis, it can be seen that the US-based companies offered less fuel-efficient vehicles than the more
recent Asian market entrants.
US drivers are accustomed to gasoline prices that are low in comparison with other developed countries. However,
prices began to rise around 10 years ago after remaining flat for several decades. The trend is shown in Figure 6. In a
society where alternatives to automobiles such as public transport may be unavailable or inconvenient, it is difficult to
avoid the impact on household budgets. Purchasers of new automobiles are likely to pay more attention to fuel efficiency
now than in an era of consistently cheap fuel, and manufacturers product lineups should reflect this.

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Figure 5: Top seven auto makers in the US, ranked by average fuel efficiency of product lineup, 2006

'
' (
%
)

&

US DEPARTMENT OF ENERGY

Figure 6: Rising gasoline retail prices in the US and the UK, 19782012
"#

"-

US ENERGY INFORMATION ADMINISTRATION, UK DEPT OF ENERGY & CLIMATE CHANGE

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Employee benefits were costly to maintain


In common with many companies, GM found in recent years that its legacy employee benefits (specifically, pensions and
healthcare) were becoming costly to maintain.
In most cases, the original commitments had been made many years earlier. While pension schemes offered during the
past 20 years or so are generally defined contribution, earlier schemes were often defined benefit. This means that the
employer promised a retired employee a particular level of pension, for example based on a percentage of final salary. A
combination of longer life expectancies and lower stock market returns and interest rates from 2000 onward meant that
defined benefit pension funds were often underfunded. According to a study by Credit Suisse First Boston, defined
benefit single company pension schemes for companies in the American Standard & Poor'
s 500 index were underfunded
by around $165bn even in 2004, with airlines and car manufacturers accounting for a large proportion of this shortfall.
The US is unusual among developed economies for the contribution to healthcare funding made by employers rather
than the state or individuals. As of 2004, GM was paying the healthcare costs of an estimated 1 million retired
employees. Such costs were high and unpredictable.

The recession led to a sharp fall in demand for cars and trucks
Sales of passenger and commercial vehicles generally decline during recessions. Consumers are less willing to spend
money or take out loans to buy big-ticket items such as automobiles at a time of job losses and insecurity; businesses
that might otherwise spend on their fleets tend to rein in capital expenditures and focus more rigorously on costs.
The impact on US sales of new passenger cars (excluding trucks and similar vehicles) was severe during the recent
economic contraction. From its 2007 value of $229bn, the market had declined by 24% overall by 2009. Even in 2011,
the market had barely recovered to 2007 levels. For any auto company already operating on tight margins, such market
conditions were almost certain to affect its top line, and thus its profitability.

Figure 7: US new car market value ($bn), 200511


#

./

*
*
*
*

MARKETLINE NEW CARS IN THE UNITED STATES INDUSTRY PROFILE

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In 2009, GM filed for bankruptcy


GM Corporation filed for Chapter 11 bankruptcy in June 2009. This process, which takes its name from the relevant
section of the US Bankruptcy Code, is designed to allow an insolvent company to remain in business while it works out a
recovery plan with creditors under the supervision of a court. GMs recovery involved changes in company ownership,
employee benefits, and product lines.

The ownership of the company drastically changed


GM Corporation had been a public corporation, and therefore owned by private sector investors. As part of the
bankruptcy proceedings, the assets of GM Corporation were purchased by a new entity, New General Motors Company.
As of December 31, 2008, total assets were $90bn. The scale of the transaction was so large that state funding was
required, and as such New General Motors Company was initially owned 61% by the US government, 12% by the
Canadian federal government and provincial government of Ontario, 18% by auto workers unions, and the remainder by
existing owners of GM bonds. Existing shareholders effectively lost all their investment.
In 2010, the company returned to the stock exchange in an initial public offering. The relaunch raised $15.8bn through
sales of common stock, and reduced the US governments stake in the company to 33%.

Employee benefits were altered


GM changed the terms of its pension scheme for employees hired before 2001. These workers retain their existing
pensions, but future payments will be into a 401(k) plan: in other words, a defined contribution scheme rather than a
defined benefit scheme.
The company also altered the healthcare insurance offered to its employees. From 2012 onward, its 24,000 salaried
employees are offered a choice of two consumer-driven plans with high deductibles. Retired employees eligible for
Medicare (federally administered state health insurance for the over 65s) no longer receive healthcare benefits from GM.
At the same time, the company was reducing its commitments to pre-Medicare-entitled retirees.
These reductions should ease the companys long-term commitments. Furthermore, by reducing uncertainty about the
future demands made on its finances by pension funding, it should make the company more attractive to investors.

Fewer marques were to be produced


GM decided that it would scale back the number of marques it offered in North America from eight to four.
Maintaining Buick, Cadillac, Chevrolet, and GMC as its core brands in the region, GM sold its Saab business in H1 2010.
Hummer, Saturn, and Pontiac began to be phased out, with these operations wound down by the end of 2010. The
reason in some cases appears to be profitability; for example, in a 2009 statement reported by CNN Money, GMs CEO
said that Pontiac was less profitable than Buick and GMC. By winding down or selling them, GM is able to focus its
resources on its four profitable brands.

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Table 1: GMs marques in North America, 2008 and 2011


2008

2011

Buick

Pontiac

Buick

Cadillac

Hummer

Cadillac

Chevrolet

Saturn

Chevrolet

GMC

Saab

GMC

GM ANNUAL REPORTS

The company aimed for a flatter management structure


Just after the companys exit from bankruptcy, its then-chief executive officer Frederick Henderson was quoted by the
Wall Street Journal as saying:
Business as usual is over at GM [] Everyone at GM must realize this and be
prepared to change, and fast."
He stressed that the company would become leaner, with greater focus on customers and willingness to take risks.
Layers of management were to be eliminated, with the loss in the US of 35% of managers and 20% of salaried
employees. Two committees of senior managers, the Automotive Strategy Board and the Automotive Product Board,
were replaced by a single executive committee that was smaller and convened more often to discuss operations and
strategy.
One manifestation of this cultural change was the 2010 restructuring of a combined sales and marketing team into two
separate organizations, both reporting to the president of GM North America, Mark Reuss. He commented:
Its become extremely clear to me since taking this role that there is a better
way to structure this organization. The premise of the structure is simple a
clearer marketing focus to sell more vehicles, and freeing our sales and
service experts to focus on customers and dealers.

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Since emerging from bankruptcy, GM has posted two


successive profitable years
There had clearly been problems building up within GM for several years, and yet after a little over one month in Chapter
11 bankruptcy the company had implemented some drastic changes. These have resulted in improved profitability.

Financials
In 2010, GM reported net income of $4.7bn. Some of this may be attributed to higher revenues in that year, with sales of
$150.3bn back to levels previously seen in 2008. Further increases in revenue and net income were seen in 2011.
GM, like all automotive companies, will have benefited from the increase in demand seen in the new car market as the
economy pulled out of recession. According to GM'
s figures, in 2010 and 2011 the North American light vehicle market
grew in volume by 9.9% and 9.8% respectively. The future is unlikely to see such buoyancy maintained.
Perhaps more importantly in these atypical market conditions, profit for the year equated to a net margin of 3.4%, higher
than the 1.8% average during 19982006. This indicates that GM is now more capable of converting revenue to profit, an
improvement that will strengthen profitability even if sales return to more normal growth rates.
Q1 2012 results show that revenue increased by 4.4% and earnings before interest and tax by 10% compared with Q1
2011. On the other hand, net income attributable to common stockholders was down by 69% on Q1 2011.

Table 2: GM'
s financial performance before and after bankruptcy
2008

2010

2011

Revenue, $bn

149.0

135.6

150.3

Net income, $bn

-30.9

4.7

7.6

-20.8%

3.4%

5.0%

Net margin
GM ANNUAL REPORTS

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CONCLUSIONS
Will a brief bankruptcy result in long-term change?
The problems facing GM when it filed for bankruptcy in 2009 were major. Market share in the US had been falling as new
entrants reinforced their own positions, commitments on employee pensions and healthcare taken on in a more
expansive age had become costly burdens, and rising gasoline prices were making GMs reliance on fuel-hungry SUVs
and pick-ups appear questionable. Even before the recession, with its catastrophic collapse of demand for automobiles,
GM had suffered several loss-making years. By 2009, it was clear that it could not continue as before.
The period in Chapter 11 bankruptcy, although only lasting a few weeks, seems to have concentrated managerial minds.
A recovery plan was put in place. Existing investors were wiped out, and governments and unions became major
shareholders in GMs new incarnation. Unprofitable divisions were sold or wound down. Employee benefits were altered
to reduce the cost to GM. New management structures were established. In 2010, the company was relaunched on the
New York Stock Exchange in an initial public offering.
The signs so far have been promising. GM has posted two successive years of growth in revenue, net income, and net
margin. In fact, its net margin is currently higher than in its most recent period of profitability, which ended in 2006. Going
forward, growth for GM may be more difficult, as the US automotive market will no longer be in its post-recession
recovery and demand may show lower growth rates. It may be that the current product range still assumes gasoline
prices that are low compared with many other developed economies. The portfolio will require further adjustment if they
continue to rise in line with crude oil prices. However, with an enhanced management structure, lower costs, and perhaps
also some painful memories of the past few years, GM is likely to be better placed to respond swiftly to customer demand
and remain profitable.

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APPENDIX
Definitions
Chapter 11 bankruptcy A form of bankruptcy available under US law that allows a company to remain in business while
negotiating a rescue plan with creditors.
Marque Equivalent to brand in the automotive industry. Also referred to as nameplate.
Net margin Calculated as (net income) / (revenue).

Sources
GM market share, financials, and similar: GM Form 10-K filings with the Securities and Exchange Commission
Other share data: www.carofthecentury.com/answer_to_gm'
s_market_share_plunge.htm
Fuel prices: www.eia.gov/totalenergy/data/monthly/query/mer_data_excel.asp?table=T09.04
www.decc.gov.uk/en/content/cms/statistics/energy_stats/prices/prices.aspx
Fuel efficiency: www.fueleconomy.gov/feg/epadata/06data.zip
Pension funds: http://www.pensionresearchcouncil.org/pdf/news/20.pdf
Organizational structure:
http://media.gm.com/media/us/en/gm/news.detail.html/content/Pages/news/us/en/2009/Jul/0710_NewGMLaunches.html

Further Reading
MarketLine (2011) Industry Profiles: New Cars in the United States (October 2011)
MarketLine (2011) Company Profiles General Motors Company (June 2012)

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