GM bankruptcy would be complex, painful
Size, other issues could make Chrysler process seem simple by comparison
By Allison Linn
updated 7:41 a.m. ET, Mon., May 18, 2009
If General Motors follows Chrysler into bankruptcy court, as many are
now expecting, it is likely to be far more painful for both the carmaker
and the U.S. economy than its smaller rival’s bankruptcy filing of a few
GM's vast scale and complex network of partners make the ramifications
of a bankruptcy highly unpredictable, especially given the uncertainty
about the global economic conditions that pushed the auto industry to
the breaking point in the first place.
“The biggest difference is scale: GM is a much larger company,” said
Stephanie Brinley, senior manager of product analysis for the
GM has more plants, nearly five times the number of employees and twice
as many dealers as Chrysler, whose own bankruptcy proceeding is not
guaranteed to run as smoothly as the promised lightning-fast timetable
of 30 to 60 days would suggest. In addition, GM's larger footprint means
that auto parts suppliers are more reliant on it.
“When you look at … all of the, let me say, tentacles of General Motors
on a global basis, you know it’s going to be much more complex than
Chrysler,” said Dennis Virag, president of The Automotive Consulting
GM also has a broad network of international operations, including its
troubled Saab and Opel units and a cadre of other overseas facilities.
That means a potential GM bankruptcy filing could have a broader
international ripple effect than Chrysler’s bankruptcy filing did.
Stephen J. Lubben, a law professor at Seton Hall Law School, said the
bankruptcy proceedings themselves could hurt the company’s global
operations by making it difficult for them to get the cash they need to
keep doing business.
Lubben said another key difference is that Chrysler went into bankruptcy
with a plan to emerge in partnership with Italian automaker Fiat. He
thinks Chrysler will benefit from having Fiat offer a fresh perspective
on the company’s operations.
“At least we can have a little confidence that an outside person has
taken a look at this and deemed it a viable plan, whereas in GM’s case
we don’t have that check on the process,” Lubben said.
But Brinley, of AutoPacific, offered the opposite view, saying she
thinks GM would benefit from not having another automaker in the mix
during the already complex bankruptcy process.
“I think that’s an advantage. GM, in one way or another, is in a little
bit more control of their own destiny,” Brinley said.
Brinley also said she thinks GM doesn’t need a partnership such as the
Fiat one because it already has smaller, fuel-efficient cars in its
product line. One key reason Chrysler pursued a deal with Fiat was to
expand its product lineup.
Still, a bankrupt GM would have to answer to a bankruptcy judge and
perhaps the U.S. government, if the bankruptcy were structured similarly
George Magliano, IHS Global Insight’s director of automotive industry
research for North America, said that could cause problems if GM clashes
with government officials over how best to run their business, including
what products to focus on and where to put limited funding.
“Companies will run themselves with the view that they have to please
their new partner,” Magliano said.
Already, U.S. taxpayers have more at stake than in Chrysler’s case
because GM has received much more government aid than Chrysler — about
$15.4 billion, compared with $4 billion for Chrysler.
Broader dealer, supplier woes
The U.S. economy as a whole also could potentially feel a bigger hit
from a GM bankruptcy than a Chrysler bankruptcy.
Because GM is much larger, its potential bankruptcy could hit auto
suppliers harder, especially if they are forced to drastically
renegotiate contracts. Virag said he worries that Delphi, a major
supplier which is already undergoing bankruptcy reorganization, could be
forced to liquidate if GM enters bankruptcy proceedings.
GM also has a much larger dealer base, of around 6,000 dealers, and
hopes to slash 2,600 of them, far more than Chrysler has so far. GM so
far has notified 1,100 dealers that it plans to shut them down, while
Chrysler has asked the bankruptcy court for permission to shutter 789 of
its 3,200 dealers.
Paul Taylor, chief economist with the National Automobile Dealers
Association, said he is concerned that if those closures occur under
bankruptcy, many dealers will lose some of the normal protections
franchisees get. That, in turn, could mean an even bigger financial hit
to dealers, their employees and the communities that depend on them for
tax revenue and other economic help.
A bankruptcy filing also could crimp business further for existing
dealers, Taylor said, since customers may be wary of doing business with
a bankrupt company or worried that their dealer will close, too.
“It creates uncertainty in the minds of the consumers,” he said.
Brinley said the sheer number of dealers GM hopes to close also could
add to GM’s troubles, especially if many of them try to contest their
On the other hand, one advantage to GM of filing for bankruptcy could be
that they are able to avoid the hefty payments they would normally be
forced to make to compensate closed dealers.
“If GM does file they have a lot more flexibility to do what Chrysler’s
doing now,” Brinley said.
Despite the potentially harsh consequences, Lubben said he thinks it is
almost inevitable at this point that GM will file for bankruptcy,
because it has not been able to work out so many of its financial
problems outside of bankruptcy court.
“There’s just too many pieces left unsolved,” he said.