GM's Pension Fund Problems

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Case Details:

Case Code : HROB077
Case Length : 21 Pages
Period : 1995 - 2005
Pub. Date : 2006
Teaching Note :Not Available
Organization : GM
Industry : Automobile
Countries : US

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"The company's market share doesn't support its size. They have too many plants, too many workers, too many models, too many dealers and their employee benefits are too high." 1

- Stephen Girsky, Chief Auto Analyst at Morgan Stanley,2 on the problems at GM.

"It's strange. When I joined GM 28 years ago, I did it because I love cars and trucks. I had no idea I'd wind up working as a health care administrator." 3

- Rick Wagoner, Chairman and CEO of GM, on rising healthcare costs at the company.


For the third quarter ended September 30, 2005, GM lost US$ 1.6 billion on net sales of US$ 47.2 billion, the largest quarterly loss reported by the company since 1992 (Refer Exhibit I for GM's financial performance). With this loss, GM, the world's largest automobile manufacturer, had lost US$ 4 billion for the first nine months of fiscal 2005.

GM's financial performance had been severely affected by its rising pension costs, employee and retiree healthcare costs and decreasing market share in the US market. The company's US market share fell to less than 25% in 2005 from nearly 40% in 1986 (Refer Exhibit II for GM's US market share in the last two decades). The increase in fuel prices had also hit GM's top selling sports utility vehicle (SUV)4 business (Refer Exhibit III for oil prices in the US between 2003 and 2005). And there were still more problems. GM's position as the world's largest automobile manufacturer was under severe threat from the Japanese auto major - Toyota Motor Corporation5 (Toyota). Toyota had already overtaken Ford Motor Company6 to take the second position in worldwide automobile manufacturing in 2004.

In May 2005, Standard & Poor's Ratings Services7 downgraded the corporate credit ratings of GM and its wholly-owned financial subsidiary, General Motors Acceptance Corporation (GMAC)8 to junk status; this led to an increase in borrowing costs for GM and reduced its fund raising options. GM was thinking of selling off some portion of its 51% stake in GMAC to raise money and to help GMAC improve its credit rating.

Another major setback for GM occurred in October 2005 when Delphi Corporation (Delphi),9 the leading auto component manufacturing firm spun-off by GM in 1999, filed for bankruptcy. Under the spin-off agreement, GM was liable to pay US$ 12 billion in post-employment benefits to Delphi. Analysts said that the bankruptcy filing by Delphi increased the chances of GM having to file for bankruptcy. GM and GMAC's consolidated debt was more than US$ 300 billion at the end of 2004.10 Analysts were already speculating as to the possibility of GM itself filing for bankruptcy; Kevin Tynan, group analyst at Argus Research11 was even willing to put a time frame on it, saying, "I wouldn't say two years, and I wouldn't say five years."12

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1] Ed Garsten, "GM's Dire Outlook Jolts Auto Industry,", March 17, 2005.

2] Morgan Stanley was founded by Henry S. Morgan, Harold Stanley and others in New York on September 05, 1935. In 2005, the New York-based Morgan Stanley was one of the world's largest financial firms with businesses in investment banking, brokerage, and credit cards. For the year ended November 30, 2004, its revenues were US$ 39.5 billion.

3] George F. Will, "What Ails GM,", May 01, 2005.

4] A SUV, also called four wheel drive, 4wd or 4X4 (four by four), is a passenger cum load carrying vehicle specifically designed for driving on bumpy roads. Apart from being rugged and having a macho image, SUVs are preferred due to the greater cabin space inside the vehicle, high comfort and safety levels and high pickup.

5] Toyota, one of the world's leading automobile manufacturers, was founded in Aichi, Tokyo in 1933. It sells its products under brand names such as Toyota, Hino, Lexus, and Scion. For the year ended on March 31, 2005, Toyota's net revenues were 18,551.5 billion Yen and net income was 1,171.2 billion Yen.

6] Ford Motor Company was founded by Henry Ford and incorporated in 1903 in Michigan. It sold its products under the brand names Ford, Volvo, Aston Martin, Jaguar, Mazda etc. For the year ended December 31, 2004, the company's total revenues were US$ 171,652 million and net income was US$ 3,487 million.

7] In 1941, Standard Statistics merged with Poor's Publishing Company to form Standard & Poor's. The company was acquired by McGraw-Hill in 1966. It publishes reports of financial research and analysis on stocks and bonds. It gives credit ratings to the debts of companies and is recognized by US Securities and Exchange Commission. Its investment grading starts at AAA, given for the best companies, moves to AA, A and BBB depending on the increase in the risks. For badly performing companies, its non-investment grade or junk bonds starts from BB, given for companies which are more affected by market changes, moves to B, CCC and to finally D (for defaulters) and NR (Not rated).

8] GMAC was started in 1919 to finance car buyers after the World War I. It sold commercial and automotive financing, real estate services and insurance and mortgage products.

9] GM established Delphi in 1995 and spun-off it in 1999 to reduce the number of workers under its payrolls. Burdened by increasing labor costs, Delphi lost US$ 4.8 billion in 2004 and filed for bankruptcy in October 2005 after GM declined to give US$ 6 billion help.

10] "GM: $300 Billion in Debt,", March 17, 2005.

11] Argus Research is an independent investment research firm which offers forecasts and ratings on the interest rates, US economy and hundreds of leading blue chip companies.

12] Sharon Silke Carty, "GM Woes Shake Stock, Rattle Wall Street,", November 10, 2005.


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