If you happen to be looking for a quick fix to GM's and Chrysler's myriad woes, the closest you'll come to a silver bullet is good old Chapter 11. But Rick Newman of US News And World Report's Flow Chart blog seems to think a quiet little housecleaning bankruptcy isn't even an option any more. Newman argues that unlike, say, airlines, the automakers can't declare bankruptcy and still expect consumers to buy their expensive, warrantied products. He cites a CNW Marketing Research study which shows that 80 percent of respondents would suddenly lose interest in a brand if it declared bankruptcy. Then there's the chance that Washington D.C. could just decide that Detroit had the bad times coming and not make with the bailout. And unlike the recently-rescued financial giants, GM or Chrysler wouldn't bring the whole economic party crashing down around them if they did fail. Finally, Newman reckons Detroit's complex issues can't be solved with a simple reorg. After all, GM and Chrysler are slashing costs and squeezing suppliers in the status quo. The real issues, argues Newman, are revenue and products, neither of which will be fixed by bankruptcy. Taken together, the arguments seem convincing, but there are a few details being left out. Like the epic cash burn, the need to slash dealer franchises, and Washington's apparent openness to a hefty bailout. I, for one, am not completely convinced that (at least for GM) a Chapter 11 filing isn't the way to go. Chrysler, on the other hand, should just be taken out back and shot (Chapter 7). What say you?
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I think the statement that the US auto market may not need three domestic automakers is really the root of the story – GM is too big not to fail. Its a company of products, brands and capacity geared for 50 percent of the market. The market has fragmented with the introduction of new companies and GM is too big to compete as currently constituted. Somehow, GM needs to get down to only its Chevrolet and Cadillac brands to make viable a 20 percent share, which seems darn near impossible outside of Chapter 11 protections.
a Few states would turn into absolute crap holes if the Domestics went down. I live in Michigan, and would rather not have my state be one large Flint. The Leaders of the Domestics simply stopped being innovative with their products, simply just wanting profits.
I’m for Loans/bailout, but i’m not sure it will fix anything if the morons in charge (mainly at GM) know what to do. Any other time in history the Domestics have tried to make fuel efficient cars, they’ve pretty much failed (vega, Pinto), or ruined them shortly after (Saturn). And anytime they’ve re badged a true import to sell as their own, they’ve pretty much failed.
The fact is they ignored small cars since the early 90’s. In the 80’s and early 90’s they had small cars coming out of every orifice. Now they have nothing and this bad management shouldn’t really go with a pat on the back here’s some money to keep the lights on for a few more years, but yet Car makers are too important to certain states to just let them fail.
I’m having trouble with the whole bankuptcy protection concept. Perhaps my understanding is wrong but forgiving firms and their executives for mismanaging finances is wrong. Eitherway, investors and taxpayers lose in that whole thing.
I’m having trouble with the whole bankuptcy protection concept.
It’s important enough to actually be in the Constitution. The founders understood that for a market economy to work, businesses need incentives and support to take risks. That sometimes means screwing up. Bankruptcy provides a net for potentially viable enterprises to get a fresh start.
I differ somewhat with the article’s reasoning. In my view, the problem with bankruptcy today is the timing, given the context of the greater economy. The lenders and Wall Street can’t take the hit, and consumers are too skittish to take any risks, which includes buying a product with questionable support.
Five years ago, the bankruptcies would have made a lot of sense. Right now, they would turn to Chapter 7 without government intervention. I’m personally less concerned for GM than I am for the NYSE and NASDAQ.
I can’t believe that we all don’t know that an effective bankruptcy is a viable business tool.
As far as a bailout? Just the stigma of a huge company like GM failing, could signal the demise of the entire economy to the rest of the world. Poor health or weakness and the vultures circle. Fast. Investment pulls out and the spiral quickens.
It’s not what it actually is, but how it appears to be that matters most.
What’s this Chapter 13 business?
Pch101, you took the words right out of my mouth.
While I agree with the timing issue, I also agree for the most part that C11 would have horrendous consequences for any automaker. After all, owning a car is a much more long-term investment than buying a plane ticket, with thousands of more dollars and issues involved if one eventually fails.
I, for one, wouldn’t even consider buying a car from a bankrupt automaker:
1. Depreciation would be exponentially worse for a car from a bankrupt company.
2. If Chapter 11 failed, Chapter 7 would equal potential for no dealership support, including warranty work.
3. Explaining to friends/relatives/etc. my reasoning for buying from a bankrupt company.
Of course, you could probably replace “bankrupt” with “American automotive” in the above points and be correct today! Ha – ha!
C11 would be a death kiss for Chrysler (no one seems to be buying their cars anyway), but, as stated many times before, has potential to help GM shed brands and dealerships, which could help “right the ship,” so to speak. But the social stigma attached to the possibility of owning an orphaned car make would be enough to keep me away.
I think the article makes some valid points. I wouldn’t buy a car from a company that’s in a bankruptcy situation not only for fears of service and warranty,but also for the smell of loosing and uncool that surrounds the products of a failing car manufacturer. If costs are already cut to a minimum like the article suggests chapter 11 wouldn’t accomplish much. I’m not sure this is the case for GM though. But the biggest problem with GM is their lack of vision for their product range. They are betting the farm on their Volt which is looking to become the most pointless car in the history of car making. Rather than to resurrect the old all electric EV1 they can’t resist their old habit of sticking you with an IC engine into the bargain. Fitting electric drive and an IC engine makes the car so expensive to build that it’s more expensive than the Cobalt it’s based on + all the gas it will use during it’s life time. They want to build 120k of them by 2012 (provided they are still around by that time of course)which would be a little over 1 % of their total output so I don’t see how this car could safe them. It’s too little, too late. If GM wants to have a future they need to accept that BEV’s are the future, like all the other carmakers that plan to come up with one at this point. If not I don’t see much of a future for this tired old general.
I think the question of bailouts really boils down to whether or not your party needs Michigan to win the presidency. I think Obama needs MI, hence he’s open to bailouts. I’m fairly sure McCain thinks he can win without MI, hence his reluctance to promise money for Detroit.
Bankruptcy – the interwoven and tainted bureaucracy will only get cleaned if the entire upper levels of management at GM get shown the door and competent and unbiased new talent comes in and sets things right. Giving them $40B won’t do shit for them as they made 5x that in profits over the past 15 years on SUVs and look what still happened. Sorry but if you run your company into a soon to be obsolete niche…my tax dollars shouldn’t save your ass. You need to be canned and have someone smart take over that job.
Giving them $40B won’t do s**t for them as they made 5x that in profits over the past 15 years on SUVs and look what still happened. Sorry but if you run your company into a soon to be obsolete niche…my tax dollars shouldn’t save your ass.
I think that this summary is incorrect on a few levels.
For one, if this was done properly, the taxpayers would not pay a dime. Banks would loan the money, and the government would effectively act as a cosigner.
For another, I think that you will find that government would be unwilling to guarantee loans without strings attached. Their financial circumstances will get reviewed, and it will be very obvious that these loans, by themselves, wouldn’t be enough to save the company.
There are many precedents that suggest that the feds are unlikely to simply give the automakers exactly what they are asking for. The US government doesn’t tend to make direct purchases of companies in trouble. Unlike some foreign governments that are likely to intervene directly, the feds tend to works with the private sector to put deals together. I would not assume that an actual deal would resemble this current pie-in-the-sky version of a proposal.
Hypothetically, if Chrysler did go C11, what would be the going price of, say, a new Challenger R/T?
Pch101: Actually, they are talking about a direct loan and not load guarantees because Wall Street has finally awakened to the fact that GM, Chrysler and Ford are circling the drain.
Actually, they are talking about a direct loan and not load guarantees because Wall Street has finally awakened to the fact that GM, Chrysler and Ford are circling the drain.
It’s highly unlikely that they would actually get direct federal loans. They are asking for the works, so that they can compromise and meet somewhere in the middle.
A bankruptcy may not be the final solution. A morphing or conglomerating of companies: FGMC (ford, gm, chryslr. As they stand there is no way humanly possible for any of the Detroit 3 companies to continue as a stand alone. Allow me to offer my vision:
a.They have no value left in them of any sort, generally speaking. The debt loads they carry finish off any value.
b.There is virtually no brand equity. Americans in general have moved on either in the metal or partially so in the mind.
c.Industrial manufacturing is so costly with no possibility of genuine profit. And will only get more costly. Resulting in: they make them in China and Detroit sends them over here as Fords, Chevs, Dodges, etc.
d.Soon there will be an international corporate entity that will, as they do in Europe, speak for and regulate all nations.
As for Chrysler being taken out back and shot. No way, she is a noble auto, allow her some dignity. Perhaps to just die in agony and defeat.
I read a couple articles recently in the news about the focus at Chrysler on genuinely making the company complete this turnaround. I dont think the domestics are “finished”. I dont see a huge difference between the domestics and Toyotas and Hondas in overal asthetic values or value in general. The interiors of the Toyotas are AWFUL. Chrysler on the other hand does need some work on overall design and interior’s. Bad. But, the new guy, Giles, I believe clearly has a sense of style as evidenced in the new 09 Ram. I for one am not ready to give up the industry we americans made so great.
Although most Americans know the difference between Chapter 11 and Chapter 7 bankruptcy, the way the media will portray things, it might as well be chapter 7. Sure Chapter 11 gives you the opportunity to reshuffle and reorganize, but all of that means nothing when the general population hears the ‘b’ word and avoids them like the plague.
Chapter 11 is the falling of the guillotine just as much as Chapter 7.
“automakers can’t declare bankruptcy and still expect consumers to buy their expensive, warrantied products”
Anyone paying attention to the big 2.8 right now wouldn’d go near the expensive, warrantied products right now–before C11.
If they really cleaned house with C11 (debt, unions, pensions, management, dealer network), they would be much stronger then they are now. That would make their warranties more likely to survive. Existing warranties could survive C11; in fact, it might be good marketing to specifically state that existing warranties were being kept while the management was being thrown out.
Could you slash the golden parachutes in a C11?
What GM has needed for years is effective management. What they need now is that plus money. Bringing in effective management is a job for the BoD on behalf of the stock holders. Obviously the current board has no clue, and even beating them with a big whip isn’t likely to make them any smarter, but I’d like to see it anyway. The stock holders are ultimately (ir)responsible and they’ve supported the board and management during the years-long decline.
The BR court could appoint another Steve Miller, but they just collect their package, sling some bullshit and go over the hill.
So the only hope I see is for some private investor getting involved with near total control and some serious skin in the game without high leverage. Maybe then a fed bailout might be beneficial, but only if failure causes a big hit on the investors. Assuming anyone smart and energetic enough to make it work is interested, the potential payout would have to be immense, and the risk very high (the money invested).
Sorry to say the more likely scenario is some kind of short-term half-assed game that delays the end and gives the politicians some cover and the desperate workers some false hope for a couple of years while they go through the stages of grief and get to acceptance.
The D3 can get rid of brands/dealers w/o bankruptcy, but it will cost billions. Is this what the bailout is for – to buy out dealers as was done when Olds was killed?
I don’t think they can do much with the union w/o Ch11.
So, yes, I think they need to file 11. They’ll have a couple bad sales years until they get their houses in order, but every year they are slipping anyway. They need to become profitable. I don’t see them doing that w/o 11. They should take one on the chin now, and come back swinging.
They need to spend the bailout money developing products people want to buy. If they became profitable, they could afford to stand behind their product and increase consumer confidence.
I think the biggest problem right now is that a lot of people (remember not everyone is reading TTAC) have no clue how bad the financial position of the D3 is. Filing 11 will anounce to the world that they are in trouble, but not filing won’t change the eventual outcome, and only TTAC’s B&B will be ready for it.
No one is going to buy from them?
What’s the big deal?
No one buys from them now.
Get rid of the entitlement whores in management, at dealers and especially the union, and maybe we buy from them again.
Bailing them out will just turn the last few people against them.
Start from scratch.
There is only one correct way to handle this bailout.
1. All three must declare bankruptcy. There is no other workable way.
2. The federal government honors all warranties from all three domestic automakers. If you have a GM product with a 5 yr/100,000 mile warranty, the government will back it for the full five years or 100,000 miles, whichever comes first. That will inspire some confidence from consumers, and give them a risk-free investment, something like what FDIC is to banks. Insurance insurance, if you will.
3. Current management–all of it–is forced out.
4. New management–made up of outsiders to Detroit–is put in their place.
“The real issues, argues Newman, are revenue and products, neither of which will be fixed by bankruptcy.”
No the real issue is the lack of intelligent and effective management, but bankruptcy can’t solve that either.
billc83:
I, for one, wouldn’t even consider buying a car from a bankrupt automaker
If the price is right, you’d be in the vast minority. Think about well equipped 4×4 Silverados actioned via internet starting at $8K.
I’m still trying to get my head around exactly what problem is solved by loaning GM money.
The problem is that not enough people are buying their stuff. Moreover, with no compelling products in their pipeline to propel them forward, there is no reason to believe an additional $40B will do anything other than perpetuate the foolishness that got them here in the first place.
It may be that bankruptcy cannot solve GM’s problems. It may be that GM cannot solve those problems without bankruptcy, but the core problem at GM still is the management’s lack of marketing awareness.
For fifty years, GM has built cars incidentally to being a financial company. It didn’t make a profit on the car, it made the profit on the financing of the car. It did not compete on quality, because the ability to turn the lease or installment contract was the key to making money. Similarly, it did not worry about the size of the dealer network anymore than a life insurance company cares about having too many agents. They were all selling sales contracts, not cars.
GM comes up with reorganization plans on a regular basis, none of which ever address streamlining product development, producing vehicles which are more varied, or attempting to get the production decision process closer to the consumer level.
The genius of GM was, until the sixties, the notion that divisional General Managers were close to the market, and made the go or no go decisions on what was built. GM has rejected that model ever since the Roche days, and the current Wagoner approach is no different than any other management model since.
Bankruptcy could create an opportunity for GM to become a viable company, but not without a very dramatic change in the structure of the company and its decision-making process. That’ won’t happen as long as Wagoner is around, nor will it happen if any of his subordinates remain in the company. As things stand, the culture in the company is the biggest enemy to its survival, and that culture seems to have completely absorbed management, the board of directors, and many of the large institutional shareholders that have tolerated both.
It can always be argued that current GM management had no choice, that the bloated labor and other commitments, such as Delphi, left it no wiggle room and that they’ve done all that could be done. It might even be true.
But if GM goes into Chapter 11, it is an exercise in futility if it does not use that opportunity to completely change the company’s structure and culture. There is no reason to believe that Chapter 11 is likely to cause that to occur.
Can somebody explain to me what banks can actually lend money to Detroit? I guess most of you failed to notice that Wall Street titans are going around the globe hat in hand begging for bailouts themselves anybody who will listen. They already got something from the “friendly” Arab Sunni petro-regimes, Singapore, those enemies of freedom and democracy the Chinese; Lehmann is currently begging in South Korea. In fact the only untapped source are the Russians and I think it won’t be long before the proud capitalists land in Moscow. In any case how is one failing industry supposed to bailout another even more failing line of business? They truly would have to be crazy to even try.
Well, I have been in the airplane business. Many airplane companies have gone bankrupt, and it’s much worse for their owners than it is for car owners. Yet, they usually bounce back, their plane values bounce back, and the world does not end.
The real losers are people who sold their plane at half value rather than wait to see if the company reemerges.
Most GM and Ford parts are readily available and built by other companies anyway.
What do you think the value of a modern car warranty actually is? Maybe $3,000? Okay. Why would you worry about 3k when you will likely be able to buy the car for half price if the maker is bankrupt?
The “safe” solution would be for GM to sell off Chevrolet and Cadillac to another company, thus preserving the two decent brands while GM disappears overnight.
Wagoner could even sell it to himself, telling the GM board to take it or leave it (and get nothing via Chapter 11).
No one is going to buy from them?
What’s the big deal?
No one buys from them now.
Thats very true. Sadly but truly they had cheated too many folks. Vega, Corvair, Oldsmobile/Cadillac Diesel, spark plug missiles Triton engnes, Pinto, Ford Exploders. s getting too long to list.
Surprisingly someone telling me a fellow ran a rental shop in a Canadian air port, says the Pontiac has very little trouble, wheras Cry-slur were real Remons.
If the products are good it will sell by itself.
Just like Hondas, they almost need no salesman, all the customers knew how good they are.
SO far only Ford has seen some light in the tunnel, hope is not another on coming freight train!
Bailout is using good money chasing after bad money.
Let them expire is not the case of throwng the baby out with the bath water.