Why GM failed: 1. Bad financial policies
May 31st 2009 9:51AM
Updated Dec 4th 2009 11:09AM
Why did General Motors (GM) fail? The first reason is bad financial policies. As I posted, for too many years GM used cheap cars as razors to sell consumers a monthly package of razor blades -- in the form of highly profitable car loans. GM has been a finance company that happened to sell cars.
In 2005, GM limited its $6 billion in vehicle operating losses due to the $2.2 billion it made financing those vehicles. Naturally, the two Harvard MBAs who drove GM to bankruptcy -- Rick Wagoner and Fritz Henderson -- both rose up from GM's finance division -- rather than its vehicle design operation.
But financial engineering ended up driving GM into bankruptcy years ago -- a look at its balance sheet over the last decade reveals that GM has been bankrupt -- in that its liabilities have exceeded its assets -- since 2006. And this condition has gotten worse every year from a negative net worth of $5.4 billion in 2006 to a negative $91 billion net worth in the first quarter of 2009.
For all five reasons why I think GM failed, click here.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.