Reliving Bankruptcy

As GM files for bankruptcy today, I can't help thinking about my own experience with corporate bankruptcy 22 years ago. The Chapter 11 filing of Texaco, Inc. in 1987 still ranks among the top five non-financial corporate bankruptcies in the US. After adjusting for inflation and the likely discount on GM's stated asset value they seem roughly comparable in scale. Although the causes were quite different--seeking relief from a crippling court judgment in one case, and the collapse of sales and cash flow on the other--the outcomes of Texaco's bankruptcy might provide some useful insights into what could lie ahead for GM.

This morning's Wall St. Journal included an example of the numerous recent articles speculating on the shape of a New GM that might emerge from bankruptcy this summer. Some of the elements are already evident: the sale of 65% of Opel and Vauxhall in Europe, along with the previously-announced decision to eliminate the Pontiac brand and sell or eliminate Saturn, Hummer and Saab. The new GM will be smaller and presumably leaner. That was true for Texaco, as well, which made a similar choice to sell mature assets in favor of retaining its growth platform in Asia-Pacific, in order to raise the cash to pay the $3 billion settlement with Pennzoil that allowed it to emerge from Chapter 11. So Texaco sold its German and Canadian operations, along with a 50% interest in its US refining and marketing business in the eastern half of the US. The latter formed the Star Enterprise joint venture with Saudi Aramco that later evolved into Motiva Enterprises LLC after a subsequent JV with Shell.

Even during bankruptcy, Texaco became leaner and nimbler. Corporate management was preoccupied with legal concerns, so local managers were empowered in ways that would never have been possible in the old, highly-centralized corporate culture. The company that ultimately emerged from Chapter 11 was lighter on its feet, more competitive, and less bureaucratic and paternalistic. It was also fatally flawed, in ways that took many years to manifest and that the architects of the future GM might do well to consider carefully.

The first problem was scale. Overnight, Texaco went from rough parity with its historical peers--other than Exxon, which was a giant, even then--to a sort of in-between status: much bigger than the second-tier integrated oil companies such as ARCO, Marathon, Conoco, and Phillips, but notably smaller than Shell, BP and Chevron, and consequently less able than these to participate in every market or new opportunity. The company struggled in this role for a dozen years, until the aftermath of the oil-price collapse of the late 1990s set up the industry consolidation in which Texaco was acquired by Chevron in 2001. The new GM might face a similar outcome. It will be much smaller than Toyota and possibly even smaller than Ford, and it must be nimble indeed to end up on the right side of the global car industry consolidation that many experts see coming. It would be truly ironic if GM, which in its first decade consolidated half the US car industry, survived Chapter 11 only to be gobbled up in a few years by a bigger fish.

Europe was a particular problem for Texaco, and it could be for GM, as well. Texaco hung onto its strong, integrated UK business, Texaco Ltd., along with marketing operations in the Benelux countries, Scandinavia and Spain, but the sale of Deutche Texaco put it at a permanent competitive disadvantage to the European majors and Exxon. It also left the company without an effective springboard into Eastern Europe once the Iron Curtain fell, and the shrinkage continued with a series of one-off asset sales. GM faces different challenges in Europe. Aside from the sheer size of the European market, it is the only place in the old GM's universe that already meets fuel economy restrictions as tough as the ones just imposed by the US administration. Although it will retain a 35% interest in Opel and Vauxhall, I anticipate that GM will struggle to extract technology and share model platforms with the alliance led by Magna International, which also supplies parts to GM's competitors. Ford and Nissan/Renault should have a clear edge in this regard.

I learned a lot about such alliances, when I led Texaco's alliance management group from 1994-97. Texaco's JVs in the US and Asia-Pacific enabled it to fight above its weight, giving it a much bigger footprint than it could have maintained alone. Our stake in Caltex allowed us to enjoy the financial gains from the rapid growth of Asian "tigers" S. Korea, Singapore and Thailand, along with near-tigers such as the Philippines. However, this came at the expense of quick decision making, cohesive brand management, and periodic turf wars and self-defeating instances of competing with ourselves. Even in a 50/50 relationship with another oil company, creating consensus wasn't easy. I can only imagine what this might be like dealing as a minority holder with a Russian bank and a car-parts maker, neither of which are likely to have much in the way of common interests to build on.

My sympathy goes out to the GM employees and managers today. The personal uncertainties of working for a company in Chapter 11 will be nerve-wracking, even if they've been anticipated for the last year or two. For their sake, I hope GM's ride through Chapter 11 proves smooth and quick--more like Chrysler's and less like the year that Texaco spent there. At the same time, as one of the 155 million new "shareholders" in GM, I would prefer that the company not put a higher priority on achieving a hasty exit from Chapter 11 than on ensuring the New GM can compete effectively in a global car industry and market for the long run. That means building reliable cars that consumers will be eager to own, and not just because they meet the new corporate average fuel economy and tailpipe greenhouse gas emissions standards.