GM, Pillar of U.S. Manufacturing, Files Bankruptcy

General Motors Corp., the 100-year-old pillar of American manufacturing, has filed for bankruptcy.
GM, Pillar of U.S. Manufacturing, Files Bankruptcy
General Motors CEO Fritz Henderson announces that General Motors Corp., the world's largest automaker for 77 years, filed for Chapter 11 bankruptcy today, at a news conference June 1, 2009 in New York City. (Spencer Platt/Getty Images)
6/1/2009
Updated:
10/1/2015
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General Motors CEO Fritz Henderson announces that General Motors Corp., the world's largest automaker for 77 years, filed for Chapter 11 bankruptcy today, at a news conference June 1, 2009 in New York City. (Spencer Platt/Getty Images)
NEW YORK—General Motors Corp., the 100-year-old pillar of American manufacturing, filed for bankruptcy on Monday morning in an attempt to emerge as a stronger competitor in the changing marketplace for automobiles.

In a press conference at the White House, President Barack Obama touted the government-led bankruptcy as a step towards “the end of the old GM and the beginning of a new GM.”

The company filed its petition with the U.S. Bankruptcy Court for the Southern District of New York after being unable to meet the June 1 deadline of providing the Obama Administration a viable profitability plan.

GM, a member of the Dow Jones Industrial Average since 1915, will be replaced by networking giant Cisco Systems Inc. in the key index.

GM’s bankruptcy follows numerous efforts by the U.S. government to inject capital into the Detroit company to avoid an economic catastrophe. GM is one of the leading employers in the Midwest United States. The event also paves the way for the U.S. Treasury to take a majority stake of reportedly up to 60 percent.

Company and government officials hope for a speedy bankruptcy proceeding, as the United Auto Workers union and more than half of GM’s unsecured creditors have already agreed to the company’s restructured terms.

GM last week secured approval from its UAW members on key cost and cash savings to “eliminate the wage and benefit gap with its competitors,” the company said. It also announced the closure of more than 2,300 U.S. dealers by 2010.

GMAC, GM’s financing arm also under federal funding, said it would continue to service and provide new auto loans.

“I know that the Obama Administration, the GM leadership, and Ron Gettlefinger and the United Auto Workers strived to make this process as straightforward as possible,” Rep. John Dingell (D-Mich.) said. “I am hopeful that General Motors, like we are seeing with Chrysler now, will soon emerge from the ‘quick-rinse’ bankruptcy swiftly, with a clean balance sheet and in a much stronger competitive position.”

In bankruptcy, GM will shed its unprofitable business units and emerge as a new company with core brands of Chevrolet, GMC, Cadillac, and Buick. It will also shut down more than 11 factories across the country.

“I am absolutely confident that if well managed, a new GM will emerge that can provide a new generation of Americans with the chance to live out their dreams, that can out compete automakers from around the world,” Obama said at the White House.

Obama also sought to address concerns from many Americans and lawmakers that the U.S. government is meddling with private enterprise. “We are acting as reluctant shareholders because that is the only way to succeed,” he added. “What we are not doing, and what I have no interest in doing, is running GM.”

Steady, Long Decline

The fortunes of GM were declining as early as 2005 when it slowly became evident that the U.S. automaker’s reliance on SUVs and pickup trucks and its onerous cost structure were unsustainable.

Japanese and European automakers built state-of-the-art assembly plants in the Southern United States and hired non-union workers. They also did not have to pay for generations of retired union workers, who received generous benefits from Detroit’s “Big Three.”

But as gas prices skyrocketed and smaller, more environmentally-friendly vehicles gained popularity, GM scrambled to cut costs, close plants, shift its product line and develop smaller—and less profitable—alternatives.

And then came the recent U.S. recession. GM realized that it couldn’t cut costs and restructure quickly enough to stave off the speed of the global economic recession—faced with sinking demand for new cards, GM burned through more than $2 billion in cash each month.

GM received $19.8 billion in loans from the U.S. Treasury. The government would provide an additional $30 billion in bankruptcy financing. Canada is also expected to contribute $9.5 billion.

Bankruptcy’s Significance

Some analysts believe that besides its symbolic significance, GM’s long, steady decline means that its bankruptcy wouldn’t matter to the U.S. economy.

At one point the biggest employer in the United States and the largest car manufacturer by market share, GM has long become a shell of its former self. Today, the company only makes one-fifth of the cars on U.S. roads.

According to Bloomberg, GM’s U.S. employment peaked in 1979 at 618,365, when it was the nation’s largest private employer at a time when auto manufacturing accounted for 4.1 percent of the country’s GDP. At the end of first quarter 2009, the auto industry was 1.5 percent of the economy, and GM had 88,000 U.S. workers.

There are more foreign automakers with market presence in the United States today, and to some, the most noticeable effect of GM’s restructuring is the upcoming disappearance of Saturn and Pontiac vehicles from dealer lots.

GM is the third-largest U.S. company by assets to file for bankruptcy, trailing Lehman Brothers Holdings last year and WorldCom in 2002.