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U.S. Auto Industry: How Filing Chapter 11 Could Work

November 18, 2008

Union contracts strangling the Big Three automakers with unmanageable terms, CxO level management making VERY bad decisions with respect to product development, distribution channels, operations management, and negotiating with the unions (GM has 7,000 dealers while Toyota has under 2,000 where both have about the same 20% market share of the U.S. market), and clearly the red ink is so RED, it makes the rest of the American taxpayers wonder why they (with an average salary/benefits of around $40/hr) should pay to bail out three unprofitable companies, so severely mismanaged and unprofitable (with no prospect of getting out of the deep end), who pay their workers an average of $70/hr (salary/benefits).  It took the union leaders and Big Three management to get in this hole – they’ll need to look in the mirror and give up some of their “wants” just like anyone else in financial trouble.  Even those not on the production line, retired workers, or those forced to retire while keeping benefits and pay maintain unbearable fixed costs on the Big Three – costs they in turn must build into a decreasing demand for their vehicles.  John Gapper of the Financial Times makes the case for letting them enter Chapter 11 and restructure their obligations, the only sure way to actually get some concessions instead of a taxpayer handout … so they can emerge as profitable entities.

– AP

 

The view that the Detroit big three should be pushed into Chapter 11 bankruptcy, and not simply be bailed out by the US government, is growing.

The big three argument against this, apart from the general view that they only need a helping hand, is twofold.

One is that it is very hard to get debtor-in-possession financing at the moment to allow an orderly Chapter 11 bankruptcy to proceed. If they are not rescued, their argument goes, they face the harsher Chapter 7 bankruptcy, and chaotic liquidation.

The second argument is that any form of bankruptcy will be counter-productive because people will stop buying vehicles from any company in bankruptcy. They will not believe that any warranty or servicing agreement will be honoured in future.

The first argument is weak since the government could provide financing for Chapter 11 rather than trying to keep the companies going in the present form. That would provide more assurance that a big restructuring would take place.

The second argument has more weight, but not enough to be a barrier. Americans are already used to travelling on bankrupt airlines – although that involves a shorter-term contract – and, if all of the big three are thrust into Chapter 11 at the same time, any stigma would probably be reduced.

Andrew Ross Sorkin, the New York Times business columnist, comes down in favour of Chapter 11 this morning, and has an interesting analysis of how the restructuring of a combined General Motors/Chrysler might work.

It would involve shedding several brands, possibly including the Chrysler brand itself, and reducing capacity heavily. There are lots of entrenched interests that would fight that, notably GM and Chrysler dealers, but it has the ring of necessity.

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One comment

  1. […] horrible fiscal policy, and in some ways validate said fiscal irresponsibility.  Romney  and AP are with me, why isn’t […]



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