Individuals and companies alike, no one loves to file for a Chapter 11 or Chapter 7. Any entity that thinks of this is rubbished as a negative thinking moron. That said, situations at times just don't favor the healthy survival of companies resulting in them filing for bankruptcy. Surely, companies like GM, Lehmann Brothers (Both huge companies in their own right), wouldn't have bargained to be called bankrupt companies!
On proper analysis of the situation and taking all the facts into consideration, I believe the three reasons mentioned below drive companies to file for bankruptcy.
1. High salary costs - Any company that pays a salary having more than 50% in fixed component to all its employees, is flirting with danger. Not only does this increase the costs of the company, but it also puts the company in a predicament when it starts experiencing a loss in business. Fixed salaries work for a certain time, but for the company to evolve itself and keep excelling, the compensation must have a high degree of variable (Pay for performance) initiative.
2. High overheads - Establishing spanky new offices was surely the trend for the companies in the late 90s moving into the start of the millennium. These places just don't come for free, do they? Chances are that companies would have been paying a lot of money as rent. This again is feasible when the going is good, but when it turns sour, every penny spent comes back to haunt you bad.
3. Diligence in business practices - Seriously, I need convincing that banks (and reputed ones) managed to slip into Chapter 11! After all, they are the ones supposed to lead the way in the economy. Shortsightedness showed by not one, not two, but all banks has led to a potentially despairing situation for people as well. And yes more and more banks are coming up with the notice "bankruptcy filed".
Companies may have good bankruptcy plans. They call it restructuring plans. But the question is - Was bankruptcy avoidable anyways? If yes, who was responsible for it? Companies blame the economy, lack of credit etcetra, but how many of them actually look inwards and take the blame.
Not many, I would believe!
Tuesday, June 2, 2009
Monday, June 1, 2009
GM Bankruptcy - Reasons demystified
As the world's most admired car-maker and definitely the pride of America files for Chapter 11 bankruptcy, one needs to ask this question, "Why GM after all?" Insiders who have been following the fortunes of this company ever since the economic downturn ever started claim that this day was pretty much on the anvil.
Yet, something would have gone horribly wrong for GM to file bankruptcy.
GM Bankruptcy is a clear case of three factors
1. Spiralling costs of labor
2. Increase in fuel prices
3. Credit Freeze
4. Drop in the purchasing power of the average American
After all, GM with 92,000 employees on its board and serving a 100-year old rich history of producing top-quality cars was doing well until quite recently. It really was a lethal concoction of all these three factors that resulted in General Motors Bankruptcy.
Let's understand how each of them contributed in their own way to GM Bankruptcy
1. Labor costs - The protesting workers' unions at GM have been for long, protesting against the management to provide them lifetime retirement benefits to their members. GM agreed, and experts believe this was their first foot on the axe. At the time of filing for Chapter 11, GM, in honoring its commitment, was paying wages to people who were not even a part of the company.
2. Increase in fuel prices - With gasoline prices touching new highs almost every other week, people did not feel it worthwhile to buy any car, leave alone the GM car. Of course, some needy people still bought cars, but such people were far and few between.
3. Credit Squeeze - In these economically challenging situations, imagining banks to lend credit to any flagging company is unthinkable. Thus, when GM was running short of funds and when it was expecting a short bailout from the Government, the Government and institutions cited lack of credit and tough market conditions for them not being able to provide financial assistance.
4. Drop in purchasing power - The recession definitely has done its bit in bringing down the purchasing power of Americans. The same GM car that were affordable units some years back, are now considered to be out of reach for a lot of people. Over the last few years, this has been one of the reasons new sales of cars taking a beating.
GM Bankruptcy really means two things
1. It doesn't matter how big as a brand you are. If your Sales drop and if your costs shoot up, you will be amongst the bankrupt companies, sooner than later.
2. Brand name is important, but managing the brand is critical.
The fact that GM pays about $1,500 per car as extra benefits to people, who don't even work with GM anymore, is the final nail in the coffin.
GM Bankruptcy definitely is a sledgehammer for the auto industry in the US, which is already reeling heavily under the onslaught of unfavorable market conditions. It remains to be seen how their competitors fare against these messy times.
Yet, something would have gone horribly wrong for GM to file bankruptcy.
GM Bankruptcy is a clear case of three factors
1. Spiralling costs of labor
2. Increase in fuel prices
3. Credit Freeze
4. Drop in the purchasing power of the average American
After all, GM with 92,000 employees on its board and serving a 100-year old rich history of producing top-quality cars was doing well until quite recently. It really was a lethal concoction of all these three factors that resulted in General Motors Bankruptcy.
Let's understand how each of them contributed in their own way to GM Bankruptcy
1. Labor costs - The protesting workers' unions at GM have been for long, protesting against the management to provide them lifetime retirement benefits to their members. GM agreed, and experts believe this was their first foot on the axe. At the time of filing for Chapter 11, GM, in honoring its commitment, was paying wages to people who were not even a part of the company.
2. Increase in fuel prices - With gasoline prices touching new highs almost every other week, people did not feel it worthwhile to buy any car, leave alone the GM car. Of course, some needy people still bought cars, but such people were far and few between.
3. Credit Squeeze - In these economically challenging situations, imagining banks to lend credit to any flagging company is unthinkable. Thus, when GM was running short of funds and when it was expecting a short bailout from the Government, the Government and institutions cited lack of credit and tough market conditions for them not being able to provide financial assistance.
4. Drop in purchasing power - The recession definitely has done its bit in bringing down the purchasing power of Americans. The same GM car that were affordable units some years back, are now considered to be out of reach for a lot of people. Over the last few years, this has been one of the reasons new sales of cars taking a beating.
GM Bankruptcy really means two things
1. It doesn't matter how big as a brand you are. If your Sales drop and if your costs shoot up, you will be amongst the bankrupt companies, sooner than later.
2. Brand name is important, but managing the brand is critical.
The fact that GM pays about $1,500 per car as extra benefits to people, who don't even work with GM anymore, is the final nail in the coffin.
GM Bankruptcy definitely is a sledgehammer for the auto industry in the US, which is already reeling heavily under the onslaught of unfavorable market conditions. It remains to be seen how their competitors fare against these messy times.
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