The Campaign Spot

GM’s Restructuring Plan, Giving Off a Whiff of… Lemon

Evan Newmark of the Wall Street Journal, among others, casts doubt on GM’s restructuring plan.

The company writes:

Both the Baseline and Downside Scenarios outlined in this submission assume that consumers will consider GM products and services on their merits, and without regard to concerns relating to the company’’s viability. If this assumption is not true, and concerns regarding the company’s viability continue to weigh on purchase decisions (as they clearly did in November 2008), the company expects that first-quarter 2009 cash outflows would be materially worse  than even the Downside Scenario. As such, clarity and prompt action adds real value to the company and to consumers.

The only way consumers will not have concerns about the company’s viability is if the government comes out and says, “no matter what it costs, the United States taxpayer will always provide GM with whatever money it needs to make ends meet.” Short of that, GM will always be at risk of running out of cash. What are the odds that consumers stop worrying that GM will be around in a year, or two, or five?

Clearly, even GM deep down thinks those issues will be around in the future. Arguing against bankrupcy declaration, the company writes:

On this latter point, it cannot be emphasized strongly enough how much a bankruptcy will depress sales of an auto manufacturer’s products due to consumer fears of long-term warranty, resale value and service-related issues. The company, as noted above, is already experiencing the effects of such speculation today.

But a government-financed bailout/loan is going to reassure consumers? Would you buy a GM car, knowing the company is begging Congress for billions to prevent it from shutting its doors? If they get those billions, will you then think, ‘okay, clearly they’re through the woods, and the company will be around for a long while’? Or will you think that it’s just postponing the inevitable?

Even if consumers were assured that GM would be around for the next decade, the U.S. is headed into a deeper recession. A car is a big-ticket item, and consumers are wary about making big-ticket purchases when they’re feeling the squeeze. There are little or no savings that car buyers could dip into. The abysmal sales environment that the company faced in November could last for quite a while. How long until they burn through the $18 billion they’re asking for from Uncle Sam?

By the way, they’re also aiming for a bit of the bank bailout money:

GMAC is currently pursuing approval to become a bank holding company (BHC) by converting its industrial loan company subsidiary into a full service, FDIC-insured bank. If GMAC is approved as a BHC, GMAC Bank would have an increased retail deposit focus, which is expected to provide a more stable and lower cost funding source to GMAC. As a BHC, GMAC would also have the ability, at the discretion of the Treasury, to participate in recent Government-sponsored liquidity and capital programs.

Is it really reassuring to tell Congress that you’re going to be expanding into the last industry that they had to bail out?

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