U.S. Could Have Let GM Fail on Its Own

GM logoIn the light of a decision by the U.S. Treasury to sell the remainder of its shares in General Motors Co. (NYSE: GM) at a loss of $12 billion to taxpayers, proponents of the bailout once again have pressed the aged theory that a collapse of the largest American car company would have devastated employment in the Midwest. Nothing could be further from the truth. The likelihood that a foreign car company would have bought GM's operations, and those of Chrysler, were very high.

The total amount of the bailout of GM cost the government $45.5 billion. Many experts believe the action was more than worth it. The New York Times reports:

The Obama administration has long argued that the rescue was always about saving the American auto industry, not making money. On Wednesday, Treasury claimed to have saved more than one million jobs through the bailout.

Although the car industry was in dire straights during the recession, when nationwide annual sales fell from more than 16 million in 2005 to less than 10 million in 2009, the long-term value of the GM facilities, R&D and brands were extraordinarily high. Some of the GM brands were nearly a century old. GM was granted more than 1,000 patents in 2011, part of a long string of innovations that allowed for the grants of hundreds of patents each year. These patents continued to give GM intellectual property advantages over competitors from Europe and Japan.

GM had a U.S market share of more than 20% when it went into Chapter 11. It was also one of the sales leaders in the Chinese markets, a position of huge value as the People's Republic has become the top car market in the world. Its operations in Europe were as troubled as they are today. But bankruptcy might have let GM restructure its businesses within the European Union to make them more financially viable.

Surely many large foreign car companies would have bought GM in whole or in parts. Each of these would have needed to maintain GM's manufacturing and management operations, as well as GM's army of suppliers. A case can be made that, because of the needs of a new owner, very few, if any jobs would be lost. A look back at the Daimler takeover of Chrysler in 1998 offers some evidence that these observations about GM are accurate.

First among the possible buyers of GM assets was Volkswagen. While the huge Germany manufacturer had high market share in Europe and China, it owned less than 4% of the American market, a hurdle to its goal to become the number one car company in the world. Several luxury car producers could have bought Cadillac. Nissan's Infiniti brand needed more luxury sales in America to increase its modest presence. So did Honda Motor Co. Ltd.'s (NYSE: HMC) Acura line.

The most valuable part of GM was almost certainly its top-selling Chevrolet brand. A sale of it to an international giant could have included VW, Toyota Motor Corp. (NYSE: TM), and Daimler likely would have given GM's bond holders at least a modest price for their paper. U.S. antitrust officials might have attacked a Toyota deal because it already had a 15% market share in America. In the case of Daimler and VW, this would have been less likely.

The belief that a government bailout of GM was necessary is based on the false assumption that the company had little value if it went into Chapter 11 and would have needed to shed hundreds of thousands of jobs and shutter dozens of factories. Actually, there would have been a number of car companies anxious to takeover what were very valuable parts of GM.

Douglas A. McIntyre


Filed under: 24/7 Wall St. Wire, Autos, Bankruptcy Tagged: featured, GM, HMC, TM

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thosholzel

Purchase of GM by foreignors was only one (distant) possibility. The much more likely event would have been that GM would have continued doing busines as usual, except withiout having to pay the crushing burden of its many debts. The compnay could have thrived--as it has now and then come out of bankruptcy free and clear--woith NO government involvement.

But, you know Uncle Sam--more expert than businessmen at running businesses.

December 23 2012 at 9:53 AM Report abuse rate up rate down Reply
Harun Ar-Rasheed

I think that the government's auto bailout was a good move. Let's not forget the US Government would have been liable for the bankrupted auto pensions. The auto bailout was the best option if you consider the alternative expense of funding the outstanding auto pensions.

December 23 2012 at 8:37 AM Report abuse rate up rate down Reply
nick

gm should have went belly up

December 23 2012 at 6:24 AM Report abuse rate up rate down Reply
floppypawltd

Way to go Obama thats 12 BILLION you added to the fiscal cliff YOU and the DEMOCRATS created! Not Bush not the Republicans but YOU! Democrats held both houses and instead of curbing spending they rubber stamped everything then when Obama took office they had the trifecta and went on a spending spree like a crackhead...

December 23 2012 at 12:33 AM Report abuse rate up rate down Reply
lindacharliebb

7000. dollar bonuses to every employee , and the taxpayer loses 12 billion $'s . what a deal. what a govt.

December 22 2012 at 11:21 PM Report abuse +2 rate up rate down Reply
Kenny

Only buy vehicles made in right to work states. Superior quality without supporting Union thugs!!!!

December 22 2012 at 11:01 PM Report abuse -2 rate up rate down Reply
Denney

HINDSIGHT IS 20/20. MY ICE CREAM STAND IS GOING UNDER. WHERE'S MY BAILOUT. WHAT THE HELL IT'S ONLY MY TAX DOLLARS. ONE LESS $1200.00 HAMMER OR TOILET SEAT FOR THE PENTAGON. YEAH AND WE SEND ALL NAVY SHIPS OVERSEAS FOR REFITS BECAUSE IT'S CHEAPER. GUESS THOSES JOBS DON'T COUNT. SAME OLD SAME OLD

December 22 2012 at 10:44 PM Report abuse -1 rate up rate down Reply
gkurran

Obama knows nothing about business. It was all about helping the unions & he could care less about shareholders or taxpayers.

December 22 2012 at 10:20 PM Report abuse rate up rate down Reply
godfather82190

this is absolute insanity. people are crying like it's nobody's business because the government lost 45 billion by saving one of the biggest automakers in the world. we spend over 1 trillion in defense alone in one year (a huge part of the 3.5 trillion in total US spending), yet people are whining and complaining about a sum of 45 billion which is insignificant compared to the bigger picture. this is why this country is knee deep in you-know-what. people concentrate on these stupid small monetary losses meanwhile we unnecessarily spend a colossal amount of money in comparison on things like defense, which is just about as good as burning the money. search for a comparison of the US defense spending with the defense spending of the rest of the countries around the world. when you see those figures just ask yourself, is this really necessary??? suddenly you will find this measly, one time spent 45 billion to be a seemingly unimportant part of our huge spending diet, which in actuality, really is unimportant. in order to make a noticeable and positive monetary difference, you have to tackle the big issue first, worry about the small later.

December 22 2012 at 9:38 PM Report abuse +1 rate up rate down Reply
2 replies to godfather82190's comment
home

Do you know most of the bailout went to China. GM CEO said they build 70% of their product in China, and he wants to increase that. They also spent OVER 1 BILLION dollars building the WORLDS best proving grounds IN CHINA! Chinas ONLY car of choice is the Caddy.

December 22 2012 at 11:42 PM Report abuse +2 rate up rate down Reply
gary

Are you kidding we need a good military! Cut the money to them and any stupid country out there will think it's ok to attact! GM is a company like any other if it goes down because of bad ideas or products then so be it. Wht should america spend 45 billion to save it! But our brave and ready militry are here to keep your ass safe!

December 23 2012 at 5:24 AM Report abuse rate up rate down Reply
scotmccwyo

Maybe the bail-out was necessary - maybe not. In terms of American consumerism - the bail-out was vital. We (the American people at large - not the multi-millionaires out there) view our major corporations and sancro-sanc. To bail out GM (even though they screw us in light of their stockholders) made sense to our back bone as a nation.

December 22 2012 at 8:36 PM Report abuse rate up rate down Reply