Risk Management Within General Motors Company
Risk Management Within General Motors Company
This research looks at the General Motors Company and what led to company failure and filing of bankruptcy in 2009. The American automotive industry was poorly managed for years and was almost eliminated when the economy crashed in 2008. Without the help of the U. S. government, General Motors and Chrysler would not have been able to survive. How did GM, as the number one auto manufacturer and seller, go from being at the top to almost ceasing to exist? This kind of financial mess usually takes years of poor decisions and does not happen to a large company overnight.
To come to my conclusion I analyzed four books written by people with inside knowledge of the company, as well as magazine articles and a couple of online websites. As a result of my research, I believe that the problems that GM faced stemmed from poor risk management. Rick Wagonner, former CEO, made several poor business decisions that did not take into account any future risks or market changes. A new management team and a fresh perspective were able to turn the company around and put them back at the top of the automotive industry. Risk Management within the General Motors Company
General Motors has been in business since 1908 and currently employs 202,000 people in 157 countries world-wide. It is a well-known fact that GM took government bailout money and filed bankruptcy in 2009. How did one of the largest companies in the world fall to needing financial assistance and declaring bankruptcy? One of the largest issues within the company was the lack of risk management practiced by leadership. How did the company then bounce back from declaring bankruptcy to being the auto manufacturer who sold the most cars world-wide in 2011 (Rosevear, 2012)?
It is quite a project to overhaul a company, and the end result was more than likely helped by good project management. There were several smaller projects involved in the large project of overhauling the company, including marketing projects, new car model development, forming risk management plans and paying back the government loans to name a few. Problems within the Company The issues that caused GM to lose their money did not happen overnight; years of poor business decisions led them to where the company stood in 2008.
Several executives were very short-sighted in their decision making; they failed to set long-range goals and objectives which are important for successful strategic project management. In 1970, GM and the United Auto Workers (UAW) entered a new contract after a sixty seven day strike over wages. The most notable change with the new contract is that it allowed employees to retire after thirty years with the company with a full pension after the age of 57. At the time their full pension was $500 a month, but with inflation and wage increases, this number was much higher more than three decades later.
They believed that early retirements would create new jobs for young people entering the workforce. Another strike occurred in 1973. This one resulted in a contract change that employees had the right to retire at any age with full benefits after thirty years working with the company ( Ingrassia, 2010). Men and women were now able to take full retirement at as early as the age of 48. Union members who decided to retire early would also receive extra pension pay until they were able to draw from Social Security. By 2003, GM had over 460,000 retirees and spouses, which outnumbered current employees almost three to one.
All of these were collecting pension and healthcare, and the UAW members were still just as well off. The 1970s was the decade that undid GM; it set the stage for the financial hardships that the company would face with the downturn of the economy in future decades (Lutz, 2011). Another large money eater for the Detroit automotive companies was the union job banks, which were created as part of the 1984 labor contract. The goal for the program was to be a temporary option for laid off workers so that they could be retained for new positions when they opened; it was a sense of job security.
Naturally, employees first went on unemployment when being laid-off. The UAW contract then required GM to give additional payments that would guarantee an employee 95% of their prior wages for forty eight weeks. Once this time period was over, an employee would enter a job bank. Here they would stay, while being paid, until their old plant reopened or a job became available at a factory within a fifty mile radius. Because nearby positions rarely opened, people would remain in the job banks for years. The requirements for staying in the job bank included volunteer work for company approved rganizations and programs.
Or, employees could punch in at their empty building and pass the time by watching television, reading the newspaper, sitting on a computer, or playing Scrabble. The only stipulations were that they had to punch out to use the bathroom or go on their lunch break, and they could not sleep or play cards. Eventually, this program was costing GM an estimated $1 billion a year to compensate their employees who were not even working (Vlasic, 2011). In 2000, Rick Wagoner was promoted to the position of CEO of GM. He immediately instituted several changes throughout the company.
He flew to Italy in March of that year to negotiate with Fiat because GM needed their diesel engine technology for their GM Europe divisions. GM obtained 20% of Fiat Automobile by paying Fiat $2. 5 Billion in GM stock (Ingrassia, 2010). In December of the same year, Wagoner announced that GM would be closing their 103 year old Oldsmobile division. This was a wise move since Oldsmobile sales had fallen almost 75% in the fifteen years leading up to this point. Wagoner hired John Devine, the former financial officer of Ford, to be GM’s new CFO, and in August of 2001 he hired Bob Lutz, who had redesigned Chrysler’s product line in the 1990s.
To help the economy and sales after the 9/11 terrorist attacks, Wagoner offered interest-free financing on every GM vehicle. Naturally, people flocked to the dealership showrooms to take advantage of this deal. Because of this, GM’s factories remained open, and money flowed to parts suppliers, dealerships, and ad agencies. Wagoner received praise from media throughout the country. However, an internal audit in mid-2001 showed that the company was not in as good of shape as the general public was led to believe. The analysis decided that GM had too many brands, too many dealers, too many factories, and too many workers.
The report recommended that GM make cutbacks while times were good, but when this was presented to Wagoner he made a poor business decision and ignored the findings. In 2004, National Geographic magazine wrote an article titled “The End of Cheap Oil. ” When Wagoner saw this, he once again ignored the facts. He was under the assumption that profits from SUVs and pickup trucks would continue to be strong- they probably would have if gas had stayed under $2 a gallon like it was in 2003 and 2004. Wagoner made several poor business decisions during his tenure as CEO of GM which led to the company needing help from the outside.
In 2005, Jerry York was hired to analyze what was going wrong with the General Motors Company. He gave several ideas to get GM out of the financial crisis that they were in. At the time, GM still had enough cash to turn around the company. York suggested that the company well off Saab and Hummer. He also recommended cutting GM’s annual dividend in half to one dollar a share instead of two (Lutz, 2011). GM also could have cut the pay of their board members, senior executives, and mangers, and could have worked with the UAW to cut the healthcare costs that GM was paying to workers.
On January 26, 2006, the board of directors heeded Yorks warnings and cut the dividends in half, cut executive pay, and eliminated several upper level bonuses. They also elected York onto the board. Another gentleman, Steve Girsky, did a six month analysis of the company in 2006. He estimated that out of the 107 vehicles in GM’s lineup that were produced in North America, 71 of them were unprofitable (Vlasic, 2011). Girsky suggested that GM spend their money on fewer but better products, cut production capacity and employees, be accountable for their goals, and acknowledge that GM was in serious trouble.
This last suggestion would not be heeded for a couple more years. GM executives were not ready to admit that they were in over their heads. Heading into 2008, GM as a company was optimistic about the upcoming year. Many new vehicles were being produced or were being considered, and the new Chevy Malibu was named North American Car of the Year, GM’s second in a row since the Saturn Aura won in 2007 (Lutz, 2011). The company had quite a bit of debt, but this did not worry the executives.
The first quarter of 2008 brought the collapse of the subprime mortgage market, followed by the financial crisis, failures from banks, and many home foreclosures. These episodes took hundreds of billions of dollars out of the U. S. economy instantly. By July, GM was making layoffs, suspending its dividends, and eliminating health benefits for retired managers and executives over the age of sixty five. In the second quarter of 2008, GM reported $15. 5 billion in losses ($181,000 a minute). With the bankruptcy of the Lehman Brothers Holding Firm came a standstill in automotive sales.
Lehman Brothers was the fourth largest investment bank in the U. S. at the time, and when the financial giant declared bankruptcy, the public began to fear for their own finances and worry about the financial situation of the whole country. This is also when banks began to implement more strict policies about who they loaned money to and on what terms. The public was afraid to buy cars, and bankers were afraid to give loans. GM approached Ford asking for a merger, but Ford was not interested; they were the only automaker in Detroit that was still treading water. GM then approached Chrysler about a merger, but the deal never took place.
By November, just after the presidential election, General Motors and Chrysler both admitted that they would run out of money by the end of the year (Ingrassia, 2010). A business tradition that hurt the company for years was that GM had cars in the U. S and Europe that looked alike on the outside, but shared nothing on the inside- causing high production costs. Several foreign companies such as Toyota, Honda, Volkswagen, and Audis all have only one headquarters, as well as one engineering and design staff; their vehicles are the same across the world no matter where they are purchased.
GM expanded overseas before WWII and through the years acquired the auto companies of Vauxhall in the UK, Opel, and Holden in Australia. Having these manufacturing facilities made it possible for GM to product cars in several different countries. For a long time, this factor was an advantage to GM; brands stayed close to their target markets and the cards that Europe demanded were very different from the cars that American desired (Lutz, 2011). Beginning in the 1980’s, several other car brands were quickly being recognized throughout the world.
Federal fuel economy regulations came into the picture, which caused the size of U. S. cars to decrease and they began to look like cars throughout the rest of the world. By this point in time, it easily cost $700 million to engineer a new car design; GM found it hard to create a lineup of competitive vehicles within a reasonable amount of money. The company also lacked innovation in their products. The company was moving quickly, but the competition was far ahead of GM in terms of innovation, especially in the area of fuel economy. The General Motors Company had several poor project management habits in place.
When Jerry York joined the board of directors, he was firm with Wagoner. He believed that the CEO worked for the board, and the board represented the shareholders, who owned the company. He too believed that GM was a poorly managed company (Vlasic, 2011). The top management was only concerned about making money, and the board of directors was too afraid of failure. There seemed to be very little (or no) risk management; all of the predictions that Rick Wagoner and the company made about future customer demand were based on the assumption that gas prices would stay at one dollar a gallon indefinitely (Vlasic, 2011).
The executives and board of directors were also afraid of aggravating the UAW, which led to billions of dollars of wasted money, overpaying workers and paying for employees who were not even working. GM at one time was the largest company in America; they did not know how to effectively minimize their costs when the economy took a nosedive, nor did they conserve resources for the chance that anything bad would happen to the American economy. Responses to Company Problems The first task on the agenda was finding money to keep the company running.
The auto industry needed to ask Congress for money, but it was a tricky time because the country was just about to shift presidents. Neither president (Bush or Obama) wanted to deal with the car companies on their tenure. The Big Three combined were asking for $25 billion of government loans. The CEOs flew into D. C. on their private company jets and then proceeded to be humiliated by the politicians. Eventually, GM and Chrysler were given $14 billion in emergency loans. In order for the companies to receive this money, they have to cut their debt by two-thirds by convincing bondholders to take a stock-for-debt swap.
The UAW would have to take stock in GM and Chrysler instead of cash for half that the auto companies owed the VEBA (Voluntary Employee Beneficiary Association) trusts, and the union would also have to immediately level their wages with those of the Japanese automotive plants that were in America- including their benefits. This last requirement was the breaking point for the UAW; they refused and argued that the UAW had already given enough to the auto companies in the last few years. Instead, within days President Bush gave $17. 4 billion from the $700 bank rescue package to keep the companies running for three months (Ingrassia, 2010).
Bush’s requirement was that the companies needed to submit “viability plans” on February 17th, which would describe what the companies planned to do to return to being profitable. When President Obama took the office, he created the Automotive Task Force to investigate the American automotive industry and to suggest changes to be made. The task force decided that GM was a company that knew how to build great cars but did not have the necessary ability to market them. In early 2009, plans were drawn up to eliminate Saturn, Pontiac, Hummer, and Saab from GM’s lineup, for a future emphasis on Chevrolet and Cadillac).
In April of 2009, GM made the announcement that they would exchange $27 billion of unsecured debt for GM stock. This was how they chose to try to drop the 90% of their debt that the Automotive Task Force was requiring, in hopes to avoid bankruptcy. This did not go as planned, as GM stock was at a low price and did not appeal to their investors. Because of this, the last option was for the government to buy the remaining stock. The government gave $30 million and now owned 60% of GM’s stock (Ingrassia, 2010).
Subject: General Motors,
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 11 October 2016
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