GENERAL MOTORS: THE 2009 STORY 1

General Motors: The 2009 Story

Prateek Gupta, Pujan Kumar Verma, Pulkit Khurana,
Sambit Roy, Sanchit Taneja, Shreyans Sharma
IMT Ghaziabad (DCP)

GENERAL MOTORS: THE 2009 STORY 2

Table of Contents
Abstract................................................................................................................................3
About General Motors.........................................................................................................4
GM in 2009: The Bankruptcy..............................................................................................4
Causes..............................................................................................................................4
Area of Focus.......................................................................................................................5
Leverage Analysis................................................................................................................6
Operational Leverage.......................................................................................................6
Financial Leverage...........................................................................................................7
Combined Leverage.........................................................................................................8
Competition Analysis...........................................................................................................9
Tesla Motors....................................................................................................................9
Tata Motors....................................................................................................................11
Summary............................................................................................................................12

GENERAL MOTORS: THE 2009 STORY 3

Abstract
This report concentrates on studying the operational and financial performance of
General Motors. This report is regarding the financials of the General Motors during and after
the bankruptcy filing. This was a trying moment for the company.
Through the financial instruments we come to know how the company was able to utilize
the government funding before they start making profit.
With the help of Operating and Financial Leverage we try to understand how and when
General Motors started taking risks and making high profits.

GENERAL MOTORS: THE 2009 STORY 4

About General Motors

General Motors is an American multinational company. They are commonly known as
GM. Their headquartered in Detroit and Michigan. They design, manufacture, market and
distribute vehicle and vehicle parts. They also sell financial services. The current GM was
founded in 2009 after bankruptcy of the old GM.
The company was founded on September 16, 98 in flint, Michigan as a holding company
for McLaughlin Car Company of Canada limited and Buick. It was then controlled by William
C. Durant. GMs co-founder Charles Stewart Mott was the largest single stockholder in GM. GM
later acquired Oldsmobile. In the year 1909, Durant brought in Cadillac, Elmore, Oakland and
several others. Also in 1909, GM acquired Reliance Motor Truck Company and Rapid Motor
Vehicle Company. In the year 1911 Durant started Chevrolet Motor Car Company. In 1916 GM
was reorganized into GM Corporation. Post-war global dominance of GM was led by Alfred P.
Sloan when seven manufacturing facilities operated by Chevrolet before GM acquired and began
operations. These were added to individual factories exclusive to Cadillac, Buick, Oldsmoblie,
Oakland and other GM acquired companies. The major growth GM saw was in the 1980s when
it employed 349,000 workers and operated 150 assembly plants.
They led the global vehicle sales for 77 years from 1931-2007and is currently worlds
largest automakers by vehicle unit sales. GM produces vehicles in 37 countries under thirteen
brands: Alpheon, Chevrolet, Buick, GMC, Cadillac, Holden, Hsv, Opel, Vauxhall, Wuling,
Baojun, Jie Fang, UzDaewoo. GM holds a 20% stake in IMM and a 77% stake in GM Korea. It
also has joint ventures in countries like China, Russia, Pakistan, Uzbekistan, India, Egypt and
South Africa. GM employs 212,000 people and does business in more than 120 countries across
the globe.
But in the year 2009, GM had to close several brands like Saturn, Pontiac, and Hummer
due to financial problems. GM is now divided into five business segments: GM North America,
Opel Group, GM International Operations, GM South America and GM Financial.
GM in 2009: The Bankruptcy
Causes
There were various mistakes that lead to General Motors file for bankruptcy. The company
which once sold half the cars in US now is operating on $20 billion in government aid and would
need more billions to reorganize. Few of the major reasons are:
1. Not filling for bankruptcy sooner: The filing for bankruptcy in the year 2005 would have
better for everyone as in the year 2005 the company was stronger and the economy was
going along well enough to absorb job losses rather than waiting for the filling to
accelerate due to market collapse. This would have also saved them from a lot more of
debts that they took.
2. Incentives: After 2001 terrorist attacks GM started giving consumers 0% financing on
loans up to five years. As newness of the deal wore off they started taking $3000 as
rebate. After a few years the deals kept coming but GM stuck with their model of low

GENERAL MOTORS: THE 2009 STORY 5

3.

4.

5.

6.

rates as they were praised a lot for it. But this was starting a downfall for them as prices
kept increasing and the effect had to be incurred by the company instead. They kept low
rates and increased rebates to $6000 and later to $8000. This caused the market to go
away from them as the sticker price was getting higher than the competition.
Killing EV2 electric program: They tried to compete with Toyota in the field of electric
car and launched a test fleet. Due to PR problems the test cars were reclaimed. The real
loss for the company was shutting down of the program and losing all the R&D done
behind it. They should have benched it for use in future which would have helped them
later as the consumers were looking for something greener and as their market was going
away they would have used it for earning more profit.
Selling control of GMAC: GMAC was the financial arm behind every car pushed out of
GM factories. They were considered equal to a bank for the GM group. But in 2006 due
to cash crunch GM sold off 51% of GMAC to Cerberus for 7.4 billion in cash and 6.6
billion in staggered payments. This crippled GM from starting any new project or even
taking risk in any existing project.
Mishandling FIAT- When GM bought 20% of the Italian company for 2.4 billion in GM
shares; the deal looked as a genius move. This would have given them dominance in
European market. The second clause was that FIAT could force GM to buy the remaining
shares. But in 2005 GM paid FIAT $2 billion to get out of the deal.
Overreaction to the truck boom: After seeing the booming market for trucks, GM
overcommitted themselves towards truck manufacturing especially from Hummer brand.
But when in 2008 the fuel prices hiked and as trucks were not fuel efficient, the market
tilted away from the trucks and the over commitment towards truck backfired.

Area of Focus
We are focusing on General Motors during and after they filed for bankruptcy. What
measures where taken which were either beneficial to the resurgence of the company. What all
measures and financial instruments actually help us evaluating if they are improving or they are
still during the same phase.
We also compare General Motors with other competitors like Tesla Motors from the
United States perspective and Tata Motors from the Indian perspective. This will help us analyze
if General Motors have actually improved and utilized its bankruptcy filings. We have chosen
this two companies because Tesla Motors and Tata Motors were in a very poor state after
recession hit the market.
With the help of the operating leverage we would like two show how the company went
into a shell and started consolidating before they thrust back and gave all in when they were
financially strong so that they could earn extraordinary profits.
Through financial leverage we would like to show how General Motors have used the
money provided by the US government to bail it out of bankruptcy. On whether they used the
money usefully or did they waste the money.

GENERAL MOTORS: THE 2009 STORY 6

Leverage Analysis
Operational Leverage
Operational Leverage is a measure how growth in revenue translates in to growth or
reduction operating income. If the company has a high positive degree of operating leverage,
then the company is making unprecedented operating profits. But if the company is making high
negative degree of operating leverage, then the company is making unprecedented operating
loses. Operating leverage is a double edged sword for a company with respect to the fact that if
the company is making profits, the higher the degree of operating leverage the higher will be its
profit but if the company is making loses then it will make huge amount of profits.
The main reason for this the dependency of companies on fixed cost. If the company is
incurring high amount of fixed costs, then the operating leverage will be higher. But if the
company incurs high level of variable costs then the companys operating leverage will be lower.
Below is the detailed data of General Motors Operating Leverage

Sales
EBIT

2014
155,42
7
1,530

2013
2012
155,92 152,25
9
6
5,131 -30,363

2011
148,86
6
5,656

2010
135,31
1
5,108

2009
57,474
-4,863

The sales and EBIT value is in thousands.

Percentage change in Sales and EBIT and Degree of Operating Leverage (year on year):

20142013
Percentage change
in Sales
Percentage change
in EBIT
DOL

-0.0032

20132012
0.0241

20122011

20112010

20102009

0.0228

0.1002

1.3543

-0.7018 -1.1690 -6.3683

217.993 48.457 279.652
9
8
1

0.1073

-2.0504

1.0709

-1.5140

The DOL or the degree of operating leverage is calculated by dividing the Percentage
change in Sales by Percentage change in EBIT. This gives us year on year change in DOL.
From the below data we can see that immediately after the year of bankruptcy the operating
leverage of the company was at -1.5. This could be due to less dependence on the fixed costs.
This could mean that they were trying to consolidate the company with the latest influx of money
from the US government. Even the following the year the the company had an operating leverage
of positive 1.07. This was again under the consolidation phase where the company was trying to
make profits but slowly.
It can be observed that in the year 2012, the company tried to go for profits but failed
miserably because it earned an operating loss of $ 30,363,000. It could be forgiven because the

GENERAL MOTORS: THE 2009 STORY 7

company had to try and start earning profits as the entire world was coming out of recession. But
as the company incurred losses the DOL was down -279. In the year 2013, we can see that the
company learned from the mistakes of 2012 and actually made profits of around $5 million. But
still this could not reduce the DOL to be on the positive side.
But in the year 2014, we can see that the there was a negative change in EBIT but also
there was negative change in Sales. This lead to a huge positive margin on degree of operating
leverage.
The initial years of low degree of operating leverage was due to the fact that they started selling
or phasing out brands that were making losses. For example, GM sold its brand Saab to a
Swedish auto maker Spyker Cars. Also the brands, Saturn and Hummer was declared defunct in
the year 2010.
These factors combined with the high operating leverage was one of the reasons that it
has paid of the bankruptcy loan and is valued as one of the top performing companies in the US.
Financial Leverage
Financial Leverage of a company is the practice of using the borrowed money from either
debt or equity to invest in an asset. This can have completely opposite impacts depending on the
investments. It may multiply gains if the right investment is carried out but it can also lead to
heavy losses if the investment goes bad i.e. if the asset prices become bearish.
Below is the detailed financial leverage of General Motors:
2014
2013
2012
2011
2010
2009

EPS
EBIT

1.75
1,530

2.71
5,131

3.1
4.94
-30,363 5,656

3.11
5,108

-3.58
-4,863

The value of EBIT is in thousands.

Percentage change in Sales and EBIT and Degree of Financial Leverage (year on year):
2014-2013 2013-2012 2012-2011 2011-2010 2010-2009

Percentage
change in Sales
Percentage
change in EBIT
DFL

-0.354

-0.126

-0.372

0.588

-1.869

-0.702
0.505

-1.169
0.108

-6.368
0.058

0.107
5.485

-2.050
0.911

The DFL or Degree of Financial Leverage is calculated by dividing the Percentage

change in EBIT by Percentage change in Sales. Higher the value of DFL higher is the return
from assets on which a company has invested in.
It is a common fact that General Motors had borrowed $ 20 Billion Dollars from the US
government in July of 2009 after its claim of bankruptcy was approved. We can observe that the
DFL value is almost one which shows that the assets invested by General Motors were relatively
safe in terms of profit. Also in its corresponding year the company had a healthy DFL of almost
5.5. This showed that the company was on the right track after borrowing from the US
government.

GENERAL MOTORS: THE 2009 STORY 8

It is to be noted that that in the following year there was a drastic drop in the DFL. This was due
to the losses incurred by the company. This meant that the assets had back fired and had incurred
losses for the company.
But the next two years after that the company has generally been having a healthy DFL
rate. These were the main reasons that the company was able to pay off the loan that it had taken
from the government during the bankruptcy by the year 2014. It had taken the company only 5
years to repay a loan of $ 20 Billion Dollar plus the interests.
Combined Leverage
Combined leverage summarizes the effect of the degree of financial leverage and the
degree of operating leverage. It is given as the percentage change of EPS with respect to
percentage change in sales.
It provides the investors the idea of the earning a company has per share with respect to
change in sales. If it has a higher and a positive degree it can be a good investment option.
For General Motors the Sales and EPS from 2009 to 2014 is provided as below

Sales
EPS

2014
155,42
7
1.75

2013
155,92
9
2.71

2012
152,25
6
3.1

2011
148,86
6
4.94

2010
135,31
1
3.11

2009
57,474
-3.58

The Degree of Total Leverage for these years are below:

20142013
Percentage
change in sales
Percentage
change in EPS
DTL

20132012

20122011

20112010

20102009

-0.003

0.024

0.023

0.100

1.354

-0.354
110.034

-0.126
-5.215

-0.372
-16.356

0.588
5.874

-1.869
-1.380

GENERAL MOTORS: THE 2009 STORY 9

Competition Analysis
Tesla Motors
Tesla Motors is a company which manufactures electric cars. It gained major traction during their
production of Roadster which was the first fully electric sports car. We have chosen this company
because in 2009, it was noted that the company was out of cash. It was only when Elon Musk the
CEO of the company had to invest his own cash to get the company out of the financial mess.
Below is the Companies DOL, DFL and DTL.
Operating Leverage:

2014
Sales
3,198,356
EBIT
-186,689
20142013
Percentage
change in
sales
Percentage
change in
EBIT
DOL

2013
2,013,496
-61,283
20132012

2012
413,256
-394,283
20122011

2011
204,242
-251,488
20112010

2010
2009
116,744
111,943
-146,838
-51,897
20102009

0.59

3.87

1.02

0.75

0.04

2.05
3.48

-0.84
-0.2181

0.57
0.554

0.71
0.95

1.83
42.65

GENERAL MOTORS: THE 2009 STORY 10

Financial Leverage:

2014
1.75

2013
2.71

2012
3.1

2011
4.94

2010
3.11

-186,689

-61,283

-394,283

-251,488

-146,838

Sales
EBIT

Percentage
change in Sales
Percentage
change in EBIT
DFL

2014-2013

2013-2012 2012-2011

2011-2010

2010-2009

0.14

2.81

-0.83

0.46

-0.40

2.05
0.07

-0.84
-3.32

0.57
-1.47

0.71
0.64

1.83
-0.22

2009
-3.58
51,89
7

Total Leverage:

2014
2013
2012
2011
2010
2009
Sales 3,198,356 2,013,496
204,2422012116,744 2011111,943
2014-413,256
20132010EPS
-2.68
-2.36
-0.62
-3.69
-2.53
-4.22
2013
2012
2011
2010
2009
Percentage
change in sales
0.59
3.87
1.02
0.75
0.04
Percentage
change in EPS
0.14
2.81
-0.83
0.46
-0.40
0.23
DTL
0.724
-0.812
0.611
-9.33

GENERAL MOTORS: THE 2009 STORY 11

We can see that for Tesla Motors, Except for the year 2010-09, it has had a very low
operating leverage and financial leverage. This is due to the fact that the the environmental cars
are not yet very common. So they are still going very slowly instead of going with full blown
risk. Tesla Motors did understand that as time passes they will have their time by increasing the
risks and hence start earning more profits.
Tata Motors
It is a subsidiary of the large conglomerate Tata Group. The Tata Motors was set up in
1945. It started building trucks initially, but in 1991 created the its first passenger vehicle Taat
Seirra followed by Tata Indica in1998 and Tata Nano in 2008. Also in 2008, it bought over the
famous British car manufacturer, Jaguar Land Rover(JLR).
Due to the launch of Nano and takeover of JLR there were some issues with its
financials. We are trying to depict should it first try to reduce its risk and concentrate on
consolidation or should it keep on continuing it riskiness.
Operating Leverage

Sales
EBIT

2015
38,651.22
-3,974.72

2014
37,209.56
-1,025.80

2013
46,581.32
174.93

20142013
Percentage

0.04

2012
54,919.24
1,341.03

20132012
-0.20

2011
47,718.51
2,196.52

20122011
-0.15

2010
38,173.39
2,829.54

20112010
0.15

2009
28,538.20
1,013.76

20102009
0.25

GENERAL MOTORS: THE 2009 STORY 12

change in
sales
Percentage
change in
EBIT
DOL

2.87

-6.86

-0.87

-0.39

-0.22

74.20

34.12

5.73

-2.58

-0.89

Financial Leverage

2014
1.75

2013
2.71

2012
3.1

2011
4.94

2010
3.11

-186,689

-61,283

-394,283

-251,488

-146,838

Sales
EBIT

Percentage
change in Sales
Percentage
change in EBIT
DFL

2009
-3.58
51,89
7

2014-2013

2013-2012 2012-2011

2011-2010

2010-2009

-15.15

0.09

-0.76

-0.86

-0.27

2.87
-5.27

-6.86
-0.01

-0.87
0.87

-0.39
2.22

-0.22
1.22

Total Leverage

Sales
EPS

2014

2013

2012

2011

2010

2009

38,651.22

37,209.56

46,581.32

54,919.24

47,718.51

38,173.39

-14.72

1.04

0.95

3.91

28.55

39.26

20112010

20102009

20142013
Percentage
change in sales
Percentage
change in EPS
DTL

20132012

20122011

0.04

-0.20

-0.15

0.15

0.25

-15.15

0.09

-0.76

-0.86

-0.27

-391.12

-0.47

4.99

-5.72

-1.09

GENERAL MOTORS: THE 2009 STORY 13

We can observe that the DOL of Tata Motors is pretty strong but the financial leverage of
the company is pretty weak. It leads to the fact that Tata motors has still not been able to invest in
the correct assets. It has faced issues regarding land acquisition in India which is one of the main
reasons for this.
Summary
We can see that the General Motors has actually performed exceptionally after it filled for
bankruptcy. It has been taken less risks in the initial years. It did not look to make huge profits as
they understood that it was the tax payers money and it had just one shot to success.
This lead to the slow but steady growth of General Motors to the initial glory days. By
2014 it was able to repay the entire $ 20 Billion plus the interest back to the government.
This shows that how a company can concentrate on reducing risks while consolidating
and later on once the financials and other strategies in place it can pick up drastically.
Currently the GMC is listed under Nasdaq and is trading around $35 per share. Also the
company is listed as one of the top 40 performing companies in Dow Jones ahead of some major
companies like American Express etc.