Here's Why GM Went Bankrupt

It's said that dominance breeds confidence, which in turn leads to complacency. The same can be said for General Motors (GM), which, for much of the 20th century, dominated the auto industry, as the Harvard Business School noted. Controlling nearly 46% of the U.S. market in the 1950s is no small feat, and GM did exactly that by offering "a car for every purse and purpose." But that led to the automaker becoming a little too comfortable at the head of the table. 

GM's long decline stemmed less from a single mistake than from a sustained failure to do what once made it great: closely tracking consumers, responding to competitors, and aligning structure with strategy. While GM chose to stick with what worked in the past, namely large cars and trucks, consumers started moving away from its offerings. Instead, buyers were gravitating towards smaller, more fuel-efficient vehicles, and Asian automakers rose to heed the call. 

GM, on the other hand, could not keep up with the shifting trends, which is hard to wrap your head around now when it's the second-largest EV maker in the U.S. What didn't help was the fact that the company organization was ripe for conflict. Resources were scarce and multiple layers of management and divisions were competing for whatever they could get, instead of working together.

GM's cost structure was one of the biggest problems it faced. It had some of the highest healthcare and pension costs of any automaker. Labor agreements from the 1950s might have been sustainable at the time, but the debt eventually became too much. GM simply could not compete with foreign rivals, who had lower overheads and, thus, could offer lower prices. Bankruptcy helped reduce their healthcare and debt obligations, which led to some pretty sad stories of employees losing their pensions. This brought their labor costs down and helped them be more competitive.

Forbes reported that by the time GM entered bankruptcy in 2009, it carried $173 billion in liabilities. GM lost more than $80 billion between 2005 and 2009, as per Reuters, and according to Forbes, by 2008 alone posted a staggering $30.9 billion loss. Before filing and negotiating concessions with the United Auto Workers, GM had already let go of more than 140,000 of its workforce. That didn't help because GM was still supporting too many brands, plants, and dealers under its name for a market that had already shrunk. 

The Great Recession exposed GM's problems with brutal speed. Business Insider says that U.S. auto sales collapsed from more than 17 million units annually to fewer than 10 million. Even Chrysler had to be bailed out, eventually merging with Fiat and Ford barely avoided a restructuring by mortgaging the company. Fuel prices played a critical role. As gasoline surged to record highs in 2008, buyers moved sharply toward smaller, more efficient vehicles, many offered by Asian competitors. GM's strength in full-size trucks and SUVs, long a profit engine, briefly became a liability.

By late 2008, GM was dependent on emergency federal loans simply to keep operating. As the Guardian reported at the time, the company had already drawn $19 billion in government assistance and would require tens of billions more. The prospect of bankruptcy was looming. Then-CEO Rick Wagoner believed the company would not survive one and that no one would buy a car from a bankrupt automaker. But options were running out fast.

GM filed for Chapter 11 protection on June 1, 2009, in what became the largest industrial bankruptcy in U.S. history. The filing covered $82 billion in assets and $173 billion in liabilities, placing the future of 235,000 employees worldwide under court supervision. President Barack Obama described the restructuring as "tough but fair," emphasizing that sacrifice was unavoidable.

The government backed plan aimed to avoid liquidation through a rapid, "surgical" bankruptcy. Using Section 363 of the Bankruptcy Code, GM split into two entities. Valuable brands and operations were transferred to a new company, while liabilities remained behind in what became Motors Liquidation Co. The process took just 40 days, far faster than most observers expected.

Brands such as Pontiac, Saturn, Hummer, and Saab were eliminated — just a drop in the ocean when one considers the number of car brands GM has killed over the years, though. Dealerships were cut by nearly 40%, according to Al Jazeera, and tens of thousands of jobs disappeared. Yet without bankruptcy, GM likely would not have survived at all.