GM Bankruptcy to be Swift, But Risks Remain

A fragile supply base and a weak economy are risks to a quick emergence from bankruptcy.

General Motors has set the stage to emerge swiftly from bankruptcy protection as a smaller, more focused automaker, but analysts say its success remains hostage to the weak economy and stability of a fragile supply base.

GM entered the bankruptcy process with a detailed restructuring plan, billions in government financing and agreements already in place to restructure the bulk of its debt and slash labor costs. The plan is to sell GM's best performing assets to a new company in a matter of 60 to 90 days so the long, costly process of winding down its liabilities will not hamper its operations. That process allowed Chrysler to win approval for the sale of its assets on June 1 after just a month in court protection.

While GM is a far more complex company than Chrysler, the legal structure allows for a speedy process, said Stephen Lubben, a bankruptcy expert at Seton Hall University's law school. "I think they will ultimately push through this sale quite quickly and leave a lot of the difficult parts for later so they can get the good parts of GM running again very quickly," Lubben said. "While this is a process that's going to cause some pain especially in the short term to dealers and some employees the pain would have been much greater in liquidation."

The new GM will emerge as a significantly smaller company, shedding several major brands, 14 factories, 47,000 workers worldwide, and 40% of its U.S. dealer network.

The aim is to slash operating costs so that GM's break even point will be lowered by 40% so it can be profitable when overall U.S. industry sales reach 10 million vehicles per year. The market is currently running at a rate of about 9.3 million vehicles after topping 15 million from 1996 through 2007.

"It's going to be a much smaller, leaner company but the industry in general is going to be a far more profitable industry with all the capacity that's been removed," said David Cole, chairman of Michigan's Center for Automotive Research. GM has the opportunity to "be profitable really quickly" once auto sales recover and has a solid plan and strong product portfolio, Cole said. "The way they are managing this, this is probably going to be very clean and neat but there is a finite risk that it goes out of control," Cole said.

"If one or a few of the key suppliers collapse then everything is over with and we're in for a really serious problem," said Cole. Two major suppliers -- Visteon and Metaldyne -- sought bankruptcy protection last week and scores more remain at risk due to low production volumes even if GM gets permission to continue to pay suppliers during its restructuring. The U.S. automotive industry is so highly integrated that the loss of just a few key suppliers could grind production to a halt not only at the Detroit Three but also at the U.S. plants of Japanese and European carmakers.

"The government is extremely concerned about this. They know the risks are high of a collapse," Cole said. "That could trigger a really serious problem for the economy and potentially drop the economy into a depression ... (because) the industry is large enough to have a very serious impact on the overall economy."

Another major concern is that the U.S. government -- which will obtain a 60% stake in the new company in exchange for providing $50 billion in emergency loans -- will interfere in GM's operations. "We're concerned about significant government involvement when it comes to product development," IHS Global Insight auto analyst Rebecca Lindland said. "If you don't understand the buying motivations of the American public you're going to get yourself into a lot of trouble."

President Barack Obama said on June 1 that the government has no intention of running General Motors and wants to "get GM back on its feet, take a hands-off approach, and get out quickly."

But it will be at least six to eight months before GM's new shares go public, Lindland said, who is concerned that the government will try to influence product lines towards more environmentally friendly vehicles.

"As gas prices have gone back down, we're back to 50% trucks -- you can't give a hybrid away."

Copyright Agence France-Presse, 2009

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