Wednesday, December 17, 2008 2 comments ++[ CLICK TO COMMENT ]++

Opinion: Difficult to see how the Big Three can survive without restructuring in a bankruptcy court

I can't see how the Big Three--that's GM, Ford, and Chrysler for foreign readers--can survive without restructuring within a bankruptcy court. Any restructuring would require two items to be addressed: employee costs and reduction in brands. I don't see how those issues will be solved without bankruptcy court help.

The right tends to scream about the high employee costs and suggest that lowering wages will fix everything. Of course, this is nothing more than simplistic thinking akin to claiming that tax cuts will solve all the economic problems. The fact of the matter is that wages are high--way too high--but they only make up around 10% of the cost of a car. The New York Times illustrates the case of Ford, which has total costs of around $71 per hour (includes benefits, pensions, etc) versus $49 for Japanese companies. However, the Big Three cut deals with the UAW in the last few years to lower costs in the future. Ford is expected to have a cost of around $53 per hour in the future.

But even if wages were brought in line with the Japanese manufacturers, there is still the other big problem.

The other problem is that these companies need to shrink. I'm not an expert on cars but my impression is that there is overcapacity in automobile manufacturing. Too many car companies producting too much--and we haven't seen any Chinese or Indian manufacturers enter the market either (they may in 10 years.) Furthermore, the American manufacturers are losing market share and will likely never get it back. The American car companies used to dominate but that's not the case anymore (GM had the largest market cap in the world in the 60's if I'm not mistaken. Right now, ExxonMobil has the largest market cap and imagine when GM was as dominant as modern-day ExxonMobil.) As the author of the NYT article alludes to, Americans just stopped buying their cars in the same quantity:

That’s because labor costs, for all the attention they have been receiving, make up only about 10 percent of the cost of making a vehicle. An extra $800 per vehicle would certainly help Detroit, but the Big Three already often sell their cars for about $2,500 less than equivalent cars from Japanese companies, analysts at the International Motor Vehicle Program say. Even so, many Americans no longer want to own the cars being made by General Motors, Ford and Chrysler.

My own family’s story isn’t especially unusual. For decades, my grandparents bought American and only American. In their apartment, they still have a framed photo of the 1933 Oldsmobile that my grandfather’s family drove when he was a teenager. In the photo, his father stands proudly on the car’s running board.

By the 1970s, though, my grandfather became so sick of the problems with his American cars that he vowed never to buy another one. He hasn’t.

Detroit’s defenders, from top executives on down, insist that they have finally learned their lesson. They say a comeback is just around the corner. But they said the same thing at the start of this decade — and the start of the last one and the one before that. All the while, their market share has kept on falling.

It would be difficult for these companies to drop brands outside bankruptcy courts since dealers and suppliers would not want to downsize. Dealerships depend on certain brands and it would not be in their interest to give up their livelihood. Only in bankruptcy can you force parties to negotiate.

Whatever happens, the situation is going to be painful for everyone involved. The Big Three are a big chunk of the economies of states such as Michigan and provinces such as Ontario (Canada). With or without bankruptcy, there are going to be massive layoffs all along the supply and retail chains.


2 Response to Opinion: Difficult to see how the Big Three can survive without restructuring in a bankruptcy court

December 17, 2008 at 5:13 PM

Speaking as a lawyer who's been there and done that, it is perfectly possible, and usually desirable, to settle even really big messes outside bankruptcy as long as you can get people to realise that they will only lose more in bankruptcy.

As mentioned in numerous articles on blogs and in papers the big problem with a big auto bankruptcy is that it ma not be possible to reorganize orderly and it ends up as a messy chapter 7 liquidation setting of a chain reaction through US industry, including transplants.

December 17, 2008 at 7:19 PM

I think what will happen is halfway between what you are suggesting and a full bankruptcy. Namely, some sort of pre-packaged bankruptcy, with the government providing DIP financing (and possibly taking on some of the retiree obligations.)

Regardless of what happens, all this is going to be very messy. There are so many parties that even a bankruptcy procedure could drag on. I mean, I didn't even mention it but how much are the bondholders going to compromise? What happens to warranties, replacement parts, and so on? This will probably end up being the biggest set of bankruptcies in US history. I"m not an expert on any of this but we have had some complex airline bankruptcies but those are going to look like a joke compared to any of this...

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