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 Felix Salmon paints an accurate picture of the woes facing General Motors Corp. in a blog post for Portfolio.com. But his suggested remedy, a GM bankruptcy filing with a Chevy spinoff to shareholders, seems needlessly complicated and in fact might do little to solve what ails the automaker.
Though GM, which could burn through as much as $15 billion in cash in coming years as it retools its factories toward more fuel-efficient cars and restructures its North American operations, could eventually be forced to consider Chapter 11, a filing would be no panacea and is better left as a last option. While a filing would offer some leverage and protection against creditors and dealers, a General Motors bankruptcy would rank as the largest and perhaps the most complex in U.S. history, as The Deal newsweekly explained when speculating about the enormous fallout a GM bankruptcy could have three years ago. GM has witnessed first hand how things can go wrong in a reorganization, as it watches former subsidiary Delphi Corp. grapple with would-be investors as it continues to try to emerge from Chapter 11 more than two years after it filed. More specifically Salmon's plan, which includes a suggestion that GM spin out Chevrolet before a filing to preserve a brand that the author suggest could have more value alone than GM as a whole, seems full of holes. In making that statement he is dismissing the power and value that some of the General's brands have overseas, including Buick's strong sales in China and the success of the Opel and Holden nameplates in Europe and Australasia, respectively. And besides, his Chevy spinoff would negate one of the biggest benefits he sees to a filing: thinning the U.S. dealer ranks. "The dealers," as Salmon correctly notes, "hold all the cards, right now, and are preventing GM from slimming down. But if the company were to declare bankruptcy, a lot of the leverage currently held by the dealers would evaporate; they would simply join the long queue of creditors." Ignore for a moment the heavy risk GM would take by using a filing to create an adversorial relationship with the partners who sell its products. If GM spins out Chevy, its largest unit in terms of dealership relations would be powerless to make the changes in bankruptcy that Salmon says are necessary. GM has made great strides in recent years in bringing down labor costs and building better-quality products. What the automaker needs more than anything right now are designs that finicky consumers want to buy. The challenge is daunting, and it remains far from certain GM or any of the U.S. automakers will be up for the task. But unfortunately for GM management, there are no easy answers, bankruptcy included. - Lou Whiteman See Salmon's post at Portfolio.com CategoriesComments
From: David,
As one of those "finicky consumers" let me enlighten everyone on what I want in an automobile. I want one like the Toyota Camry V6 I had for 7 years that never needed a single repair. That's why last year when I bought a new car I didn't even consider GM or any of the other US manufacturers. Let me explain further how good that car was; after 145,000 miles it never needed to have oil added in the 5000 miles I drove it between oil changes. Never. The paint didn't peel off of it like my Dodge Neon did after 5 years of garage-kept ownership. The cylinder head didn't warp after 96,000 miles necessitating an expensive repair like my Dodge Neon's did (and that was only one of the expensive repairs that the Neon required during the time I owned it - we won't even talk about my wife's Dodge Caravan). The original brakes lasted over 100,000 miles. Ditto the spark plugs. My most recent purchase, a Nissan Maxima, has 26,000 miles of repairless driving. So, if the US car manufacturers want me to buy American again, then let them make true quality cars.
Posted on:
July 16, 2008 11:08 PM
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What Salmon also fails to take into account is the buyer of a new automobile has other, non-economic criteria in mind, among the most important of which is the buyer's expectation of future warranty service. Buying a toaster that craps out after the manufacturer has gone banko is one thing; you throw it out and buy a new one. But laying down thirty or forty large for a new car, you want to have some internal comfort with believing you'll be able to get the ride fixed when the transmission falls out two years down the line - particularly if you're familiar with the less-than-stellar reliability record of General Motors products
This is why, in the last round of contraction in the U.S. auto industry, the mere whisper of bankruptcy was enough to doom grand old nameplates like Studebaker, Packard, Hudson, and Nash. Yes, there were other reasons, but consumer reluctance based on fear of being stranded with an orphan make made customers turn to more stable brands.
As a bankruptcy attorney, I know that in any reorganization, the debtor would obtain court approval to continue providing warranty service for pre-petition buyers, but the majority of consumers won't know this. That's why I think that GM (and Ford and Cerberus-Chrysler) aren't likely to file until they've got both feet over the edge of the cliff and are hanging on by their toenails. Unless they're irrationally exuberant, upper management has to know that the instant they file, they're going to lose a huge percent of sales - my guess would be between a quarter to a half. We'll see.