Saturday, 11 July 2009

Company Focus – 'New' General Motors Company – All Change at the RenCen and Around the Globe.

General Motors has emerged from bankruptcy proceedings in a record time of 39 days -thanks to the 363 procedure - astounding investors, industry executives and indeed re-structuring lawyers given the minimum of 90 days expected. Justifiably the 'old' bond-holders will continue to feel marginalised given the 60.8% stake now owned by Washington – costing approximately $1bn for each 1.22% - the 17.5% by the UAW, 11.7% by the Canadian Government and remaining 10% left to 'old GM' MLC (Motors Liquidation Company) and by virtue its equity and debt-holders.

[NB. The 'old' GM free-float rallied on the 'exit' news from a fluctuating range of $0.35 to a close of $1.15 on Friday (10.07.09) giving it a MktCap of $702.25m].  

In another potentially conspired twist of fate, that will cause more old bond-holder consternation, GM has along with Chrysler & Nissan North America agreed to loan Ford monies that will be passed-on to the quasi-dependent but bankrupt Visteon (itself filing 28.05.09). That occurrence obviously entwines the US auto-industry and we suspect was done so at the behest of Steven Rattner's Auto Task Force Team, so as to ensure Detroit helps itself by creating a collaborative culture rather than the historically normal competitive one – a case of value creation rather than value destruction. This of course stabilizes Visteon and allows for the precedent that a greater emphasis on 'common systems engineering' will prevail which will reduce development costs, inventory count, manufacturing overheads & variables, and logistics costs.

Thus at last Detroit is creating a very loose kind of chaebol system, that being the crucial basis of previous Japanese and S. Korean operating methods that both reduced costs and allowed for quicker new model development programmes. This probably an outcome of the efforts by Senator Bob Corker that created the covenant-like 'bail conditions' for GM.

GM comes out of bankruptcy with what Frederick Henderson espouses as a new culture; one that purports to do away with the endemic inefficiencies of the old dinosaur corporation. Swathes of white-collar management, admin staff and production-line workers have been retrenched (27,000 compared to 2008) in a bid to create an entity that is “smaller, leaner, tougher” - one which can from Henderson's words return the US government's injected funding well before 2015. The new mantra being “customer focus” including an e-bay related initiative, and product management with “cost-revenue focus”. 

Beneath the rebirth spin, the question must be what does GM realistically have that can transpose the PR into successful achievement? Viewing from afar, it has a crop of 30-something/40-something managers who have been essentially elevated by this historic occurrence. No doubt Henderson et al will be pep-talking those people: paralleling their 'opportunity' to that of John DeLorean's rapid rise. So the chance to re-make GM, now focused upon a slimmer brand portfolio of Chevrolet, Buick, Cadillac and GMC, with much needed debt-reduction boosting the balance sheet massively

[NB. Debt down from $176bn to $48bn according to the WSJ vs the FT's report of $54.4bn to $17.3bn. GM itself states it as $11bn excluding $9bn of preferred stock and could - ie probably will - alter under new accounting terms].

Given the new heavy marketing stance, Bob Lutz is now saying how he is really a marketing man at heart, having 'illegally' spent the majority of his career in product strategy and development. All part of the usual staged corporate rally cry that Detroit has mustered at such times to bolster belief both internally and critically externally.

So assuming that the operational management has been appropriately cut-to-shape and does have the experience and competence, what of the new Board? An entity which must combine the balancing act of creating strategic futures will the task of cherry-picking the recommended operational initiatives? The WSJ yesterday reported what much of the new board will look like, those members who are departing and those to take their new seats. 

Under new Chairman Ed Whitacre, Henderson carries on his good work as CEO including the direct responsibility for GMNA, [Nick Reilly now with International Ops (GMIO)] whilst Bob Lutz takes a Vice-Chair post probably charged with running the smaller Auto-Strategy Board & Auto-Product Board, and critically building the confidence of the remaining US dealer-base and pepping-up critical BRIC+ regional business divisions. Other names come and go.

As mentioned in the previous post, Stephen Girsky plays a pivotal role given his ability to see both side of the management-ownership equation. Although former Kodak CEO George Fisher departs, six current Board Execs remain including: former Coca-Cola Chairman Neville Isdell, ex Northrup Grumman CEO Kent Kresa ex E&Y Chairman Phil Laskawy. The appointment by the Obama administration of former investment banker Robert Kidder to GM aswell as Chrysler demonstrates the ideal of sector inter-connectedness that Washington seeks.  

Thus the Board's remit is to both create a vision for tomorrow and simultaneously effectively dismantle and divest 'Liquidation Motors' of yesteryear. Whilst Whitacre, Henderson and Lutz perform much of the former - including a new e-bay based venture, the latter will probably be left to Whitacre, Isdell, Kresa, Laskawy & Kidder working with the investment banking community. The search to find suitable domestic and foreign trade and PE customers continues for the divested brands, product inventories, plants, tooling and land assets. Their job to create compelling 'Blue-Books' possibly for complete divisions but more probably on a part-by-part basis, the latter with the potential to release greater capital value generated by a wider audience.

Thus today even the New GM appears a world away from the long-term vision of 'General Mobility' – with concomitant new vehicle modes and business models - that it seeks under Whitacre. Many, including ourselves, will question the efficacy of the lightening-quick bankruptcy exit, but it must be assumed that although not formally 'pre-packaged' per se, the resultant animal is close in shape to the desired outcome by both Washington and GM itself. 

But whilst Henderson et al maintain the GM publicity machine of 'customer focus' and 'star products' that buoys consumer – indeed American – confidence, others from Wall St, the City, Moscow's Presnensky, HK's Choong Wan, Seoul's Cheonggyecheon, Shanghai's Lujiazui & Beijing's own financial district will all have representatives clammering over GM's remaining 'toxic assets'. Assets which if utilised by others with low cost structures should have surprising inherent value. Penske's bid for Saturn and BAIC's bid for Opel should start a stampede. 

Thus although the Washington – Beijing relationship has been tetchy in the recent past, this opportunity for bi-lateral and global trade which also aids the fragile US$-Renmimbi balance should be welcomed, as indeed will Washington glad to see immediate returns. 

Thus it should not be such a wonder that Motors Liquidation Company has attracted so much attention, much of it speculative in the short-term but arguably with such international interest providing longer-term sustainability. Especially so if seperated-off as a strategic holding company for unhurried investors. Thus MLC may have firmer grounds for market confidence than perhaps many presently think.

Sometimes it pays better to be rationally 'think small'.