It’s official, General Motors has declared bankruptcy.  In traditional terms, bankruptcy is a legally declared inability or impairment of ability to pay creditors.  In General Motor’s case, one could argue that financial bankruptcy was preceded by a bankruptcy of vision that lead to its current situation.

Ten years ago General Motors bought Hummer.  Exciting times.   Hummer was a unique brand.  Big, oversized vehicles.  Wealth on wheels.  John Wayne machismo.  A perfect fit for our ‘look at me’ society.  Sure Hummers used a lot of fuel and they were expensive.  But ten years ago crude oil prices were stable with inflation-adjusted rates about half what they were in the early 1980s.  Plus GM and other automakers had figured out the formula to offer low rate financing deals to drum up business.

So GM buys Hummer and proceeds to do what automakers do – ‘tell and sell’ by blasting the airwaves with sexy commercials (here’s one from the recent past, and another).  Life is good.  But beneath the surface were a couple of disruptive trends that with a little scenario planning could have changed the decision-making dynamic.

The first was the cost of fuel.  Crude oil supplies are finite and producers control output to maintain current price levels and reserves to generate future income.  At the same time, China, India and the emerging industrialization of the world was increasing demand for fuel.  Fast forward to 2008 and the forces of supply and demand collided, driving a huge price spike with the U.S. average per gallon hitting $4.00 in July.  The market corrected itself in late 2008, but prices are heading back up again and are likely to remain higher given the supply/demand correlation.  Throw in increasing government fuel standards, and it’s safe to say that wide demand for gas guzzling vehicles is a thing of the past.

The second major trend was an over-reliance on credit to buy things.  You can’t buy a Hummer unless you have money.  Lots of it.  A few years back a well-furnished H1 model (the epitome of opulence) would cost you about $100,000.  Not many folks could afford that – so GM developed slightly smaller sized Hummers (the H2) but those still ran $50,000 plus.  Even at that price, credit was easy to come by and enough people bought Hummers in the early part of this decade to make GM’s decision to buy Hummer look good.  Of course, we all know what’s happened to credit since the financial markets unraveled.  Sure GM tried to modify its strategy along the way by downsizing the car.  The H3 costs less (about $35,000) and gets better gas mileage (it claims to get 14 mpg in the city).  But even these changes can’t make GM’s initial decision to buy a brand that stands for expensive, gasoholic vehicles look like a good long term strategy when you consider the risks.  (Interestingly enough in GM’s bankruptcy filing the company announced it is shedding Saturn – which produces 25% of the seemingly valuable, fuel-efficient hybrid vehicles for GM).

Sure predicting the future is not easy.  Mistakes can happen and there’s lots of uncertainty in the world.  But even if you can’t accurately predict the future, sticking to the old adage, “never make a bet you can’t afford to lose” is a really good idea.  There’s no replacing the fact that some good old scenario planning helps you make better risk-informed decisions.  Imagine if GM would have asked, ‘what happens if fuel prices double’ or ‘what happens if people can’t get access to affordable credit’?  Starting with those questions drives you to dig deeper into the fundamentals of fuel prices (and the factors that could change) or the fundamentals driving the issuance of credit (and what could change in that environment).  Insight leads to better foresight.  And we sure could use some of that now.  In the meantime, let’s hope the Federal Government’s rescue plan is a bet we can afford to lose.  Just in case.