According to early news reports, General Motors will file for bankruptcy one hour from now, at 8:00 am Eastern Time this morning. GM was officially born as a company on September 16, 1908. Its long history is a reminder that no company will survive forever regardless of its performance; like humans, corporations are mortal and if you want to see one fail, you just have to wait long enough.
Bankruptcy isn’t truly death, however. General Motors has the opportunity to restructure, shedding its poor performing businesses. Thanks to a massive government bailout, GM can renegotiate with its creditors. The government will own 60%, a controlling share, of the new General Motors. With this massive restructuring, you can expect a new GM that will look and and operate quite differently, and the changes will affect many different people throughout the world. Here is how GM’s bankruptcy might affect you.
General Motors employees and retirees
By the end of next year, General Motors predicts it will cut 20,000 jobs. 2,400 dealerships and 12 plants across the country will be closed. This is after the company has been reducing its staff consistently throughout the decade. 300,000 employees at dealerships will be affected by the cuts.
General Motors retirees will see their benefits, such as health insurance, reduced.
Suppliers and other companies that rely on General Motors will also be affected. There will be job reductions throughout the entire automotive industry.
General Motors vehicle owners
Not much will change for General Motors’ customers. Warranties will continue to be valid, with a government guarantee for back-up insurance. Maintenance and other service might be more expensive with fewer parts suppliers and dealerships available to provide competition in the marketplace.
GM will eliminate a number of its brands to focus on the vehicles that show a potential for profit. The company will have to be more aware of the marketplace and remain as flexible as possible to respond to market demand. This could mean some new, more fuel efficient cars if this remains a priority. With the Administration pushing for tougher regulations in the automotive industry, this may be a necessity regardless of popular interest.
General Motors stockholders and bondholders
If you own GM’s stock, you have already been affected by the anticipated bankruptcy. The stock price, currently trading at $0.75 per share, has fallen 95.74% over the past year. Any investment held in General Motors will only be recovered if the restructuring is a success and the government relinquishes its equity.
During the bankruptcy, GM’s stock will likely be unavailable to trade. Standard & Poors will likely remove General Motors from the S&P 500 and the same fate is predicted for GM’s inclusion in the Dow Jones Industrial Average. The company was already removed from the S&P 100 last year. This presents one drawback of index investing: failing companies are often represented as thee value of their shares fall to zero, but fast-growing companies, which would normally balance out those that fail, are not picked up by the index until they have already experienced their greatest growth.
If you invested in a corporate bond from GM, you will lose your investment. Your bond rights will be replaced by a portion of stock in the new General Motors.
Overall thoughts for the consumer
With any luck, General Motors will emerge from bankruptcy and from government control a leaner company ready to compete in the automotive industry. General Motors’ current state shouldn’t be a reason to drive potential customers away from their vehicles. GM’s cars should continue to be evaluated on their performance, safety features, fuel economy, cost to own, and pleasure, just like any other vehicle produced by any other corporation.
I have been helping my girlfriend shop for a car during the past couple of weeks, and we’ve noticed in the dealerships we have visited that there is very little in stock. Lots are half empty, and this does not apply to General Motors only, or even only “domestic” automotive makers. The prices for what we can find are somewhat competitive right now, but I expect prices to rise over the next few months as the industry reacts to the loss of jobs, suppliers, and competition.