Obama’s Magic Bullet For The Auto Industry: The Case For Bankruptcy

There is a reason we have bankruptcy laws...
There is a reason we have bankruptcy laws...

http://www.cnn.com/2009/POLITICS/04/06/nerad.general.motors/index.html

http://www.cnn.com/2009/US/04/06/gm.dealer.outlook/index.html

Since last fall, I and others have said that Chapter 11 Bankruptcy would be the best course of action for GM and Chrysler’s bid to survive the current financial turmoil.  Both car companies, as well as our former and current President, disagreed and felt that bailouts to give time for the car companies to restructure would be preferred.

It appears they were wrong.

Restructuring car companies like GM is a gargantuan process.  It is like turning a oil tanker at sea; you know where you want to go, but it takes a long time to get there.

So in the process, including the cash promised for the next couple months, this entire endeavour will have cost taxpayers around $25 Billion…which was for all practical purposes flushed down the drain, and accomplished nothing.

Now, people saying that the car companies have been treated differently than financial firms have a point…but for the wrong reason.  It is true that the Obama Administration has been more proactive in taking on the financial companies and giving them money.  But it is for a simple reason; they are vital to the active process of capitalism.  Credit is the lifeblood of the free market, and without it, life in these United States come to a standstill.  The same cannot be said for the auto industry.  Sure, there would be a lot of pain and suffering if GM and Chrysler went under, but would the entire economy stop?  No, it wouldn’t.  So survival for these companies is a much simpler question:  when can they be self-sustaining entities?  And that is something no one has been able to answer.

Bankruptcy is the normal process for insolvent corporations.  Many companies go through it; numerous airlines, manufacturers (including Chrysler), banks, etc. have gone through the process.  So why should GM and Chrysler be any different?  Politicians and leaders of auto companies have both been living in a dream world, that GM and Chrysler somehow are unique in the business world, and that they should be able to avoid bankruptcy while other companies must face that legal hurdle.

The real reason is a political one.  The Unions would lose all their bargaining power under Chapter 11; the court would take over.  Years of strikes, hard bargaining, and negotiations would basically be wiped away in an instant.

Dealers are another group that are likely to take a hit.  It is unrealistic to believe the current dealer network can survive.  There are simply too many dealers for too many auto makes.  Not to mention, there is a clear difference in quality standards between dealers for American versus foreign automakers, one of the key reasons people are reluctant to buy American cars.  This has to change, both in perception and reality.

But frankly, there may be no alternative.  GM and Chrysler are on the brink.  And although Ford is slightly better off, there days are numbered as well.  The US auto industry cannot survive as is.  That is a simple fact.

Only a system wide restructuring of the industry has any hopes of success.  And there is hope.  Especially for GM and Ford, who both make competative cars that could succeed in the market place, if up front costs were contained.

Those that want manufacturing to survive in this country should be pushing for bankruptcy.  It will be painful in the short run, no question.  But the choice is clear.  We either take the short term pain in order to take the chance of saving the auto industry, or draw the pain out for many years, and ultimately watch this most classic of American manufacturing industries slip away.