The advocates of having GM and/or Chrysler file for Chapter 11 make their case often implicitly or explicit resting on certain assumptions. The fundamental notion is that Chapter 11 will produce less, or at least no more, economic damage than some combination of rescue funding and auto industry downsizing.
Now we are willing to grant that any future for the US automakers may be much darker than most are prepared to accept. One reader in comments today offered a back-of-the-envelope analysis for GM:
As a though experiment, I looked at GM’s November sales and tried to see what models would be worth saving (i.e. sales have not fallen off the roof this year).
This is what I found:
Although they are not selling well, you have to include the Silverado/Sierra in the mix — still the best selling vehicles in the US.
Almost all these vehicles are made in the US, except for the Vue (Mexico), VIBE (made in US at the joint plant with Toyota), HHR (Mexico), and Silverado (some Canadian production)
Based on that, I see the following GM plants surviving:
LANS GRD RIVER
Eyeballing it, it looks as we can expect GM to shut down 3/4 of their plants in the US.
That is massive hurt to suppliers, dealers, etc.
Remove the Pickups, and it is even worse.
Yves again. I’ll assume this is a good first order approximation. I have a sneaking suspicion that few in the financial community have gotten their minds around the notion that GM might shutter 3/4 of its production.
With that as context, the proponents of Chapter 11 focus on the potential (in their view) upside, mainly gutting UAW contracts, but also dealer agreements and (in theory) cramming down bondholders. But the flip side is that once a company files, the process is irreversible. And if things do not work out as expected, there is no way to go back.
Some of the main assumptions of the Chapter 11 advocates include:
The automakers will emerge in a thinned-down state, rather than having Chapter 11 morph into a liquidation
Non-core brands and foreign ops could be sold
Other participants in the US auto industry, such as foreign transplants in the US not suffer much (any) harm unaffected
A telling issue is that European car manufacturers, who in theory ought to welcome the elimination, partial or complete, of competitors, are instead very worried about the way damage to the Big Three could hurt them. From the New York Times:
Ferdinand Dudenhöffer, director of the Center for Automotive Research in Gelsenkirchen, Germany, warned that the indirect effect of a potential G.M. collapse for American parts makers would be severe. He added that German manufacturers in the United States, like Mercedes and Bayerische Motoren Werke, the maker of BMW cars, would have to rethink not just their American supply chains but their global ones as well.
“There would be no winners, only losers,” Mr. Dudenhöffer said. “This would create a huge mess around the world.”
Both G.M. and the Ford Motor Company were profitable in Europe last year and in the first half of 2008. But neither of their European operations is large enough to survive on its own, said Graeme Maxton, an economist who has long tracked the car industry.
“They’d need a parent of some sort,” Mr. Maxton said.
Other automakers may be reluctant to assume that role, given the slack sales of European giants like Renault, Fiat and Daimler. The tight credit markets would also inhibit any large deals.
“Two drowning men clinging together don’t make a good swimmer,” Mr. Maxton added.
Recall that the reason that an automaker bankruptcy is problematic for parts-makers is that they are unsecured creditors, and do not get paid until the Chapter 11 process would be complete, which one analysis says would not take place before late 2010. Even if a special facility could be devised to keep parts-makers on life support, that adds more taxpayer-borne cost and complexity to the Chapter 11 scenario.
And per the comments above, this is not a good time to be trying to unload car brands or manufacturing operations. The other big automakers all have their own survival worries.
Nevertheless, some options are under consideration. Back to the article:
Mr. Dudenhöffer said the image of Opel, G.M.’s German subsidiary, is suffering among German consumers because of bankruptcy speculation, and suppliers could become nervous if the talk persists.
Because of this, many analysts say they are skeptical that Opel can survive as an independent company if G.M. seeks bankruptcy protection. A more workable solution might be to combine G.M.’s entire overseas business, they said, which would produce roughly three million to four million cars annually.