Sunday, August 3, 2008

Carnage at General Motors

"Stunning," "staggering," "horrendous" -- you don't have to look beyond the first sentence of press reports detailing General Motors' $15.5 billion second-quarter loss to get a sense of how bad the carnage was.

Everything that could go wrong did go wrong.

The most obvious disaster is the collapse of SUV and truck sales, contributing to a $10 billion drop in GM's North America sales figures compared with last year. But as Tom Walsh reports in the Detroit Free Press, rising gas prices weren't GM's only problem.

Other charges include a $3.3 billion hit for the cost of GM's own buyout programs to reduce its head count; a $2.8 billion reserve for costs related to the Delphi Corp. bankruptcy; a $1.3 billion drop in the value of GM's 49 percent interest in the GMAC financing unit; and $340 million in accounting changes due the recent contract settlement with the Canadian Auto Workers union.

All this brings to mind former GM president Charles Erwin Wilson's famous quote, delivered behind closed doors during Senate hearings in 1953 after his nomination for secretary of defense by President Eisenhower. Wilson was asked if, in his capacity as secretary of defense, he would be able to make a decision that might hurt the interests of General Motors.

(This was no idle question. During World War II, General Motors became the mightiest industrial colossus on the planet, producing, according to Time magazine, "a quarter of the tanks and armored cars, nearly half of the machine guns and carbines, [and] three-quarters of the diesel engines used by the U.S. armed forces during the war. You want to talk military-industrial complex? General Motors defined the concept.)

Wilson told the senators that, yes, he'd be able to make such a decision, but that it was hard to imagine, "because for years I thought what was good for the country was good for General Motors and vice versa." The quote was subsequently mangled into its much more famous version: "What's good for General Motors is good for the country."

But what about what's bad for General Motors?

GM had to make some very big mistakes to get itself into its current predicament. Perhaps most telling, the company devoted itself primarily to cashing in as profitably as possible on the American infatuation for the biggest, most luxurious, most gas-guzzling automobiles ever built. It lived in the moment, and failed to prepare for the future.

And for a while, the living was pretty good. But now one of the biggest corporations in the richest country in the world is fast approaching a point where the possibility of bankruptcy does not seem like an unreasonable scenario. If there was ever any truth to Charlie Wilson's analogy between General Motors and the United States, this newest earnings report sends an unsettling message.

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