What Happens if GM Goes Bankrupt?

[Bill Blue]

I keep hearing on the Tube that bankruptcy is the best alternative for the GM. That is based on the success of the airline industry to survive the process. I just can't see it happening.

Before I retired, I spent a lot of time with the Indiana auto supply industry. These are generally small businesses, existing on razor thin profit margins, highly dependent on a continuous money supply. Detroit has squeezed them dry over the past ten years. Most of them supply parts for more than one manufacturer. While it is true the auto companies have more than one supplier for each part, all would all be facing the same situation. I'm afraid that if GM defaults, a lot of the suppliers will immediately vanish as their operating capital is low and there is no ready supply of loans to keep them afloat. The tooling is generally owned by the auto manufacturer, but they just cannot go into a bankrupt supplier, pick up the tooling and take it to another business to resume production.

The industry (including the transplants) depend on an incredibly tangled web of parts suppliers to exist. For instance, one of the last industries I inspected supplied fabricated tube parts that were body stiffeners. That's all they made, supplied them to 2 or 3 manufacturers. They go belly up, any of their surviving customers will have lost the ability to make any car using that part. Given that the industry operates on Just in Time Delivery, assembly could come to a very rapid halt. It would be a nightmare of unimaginable proportions.

I hear there is a large inventory of unsold cars, I would not be surprised if the inventory would be long gone before the domestic industry could resume production.

Bill

 

[buckalpine3]

GM

Certainly immediate pain especially for the suppliers who work on extremely short margins, but I hope they can hold out for the long term gain of a stronger industry. GM and the UAW have to change the mindset of $80+ hourly workers who work on the assembly line and who get paid whether they work or not. I know the work is mind-numbing but for goodness sakes they cannot compete with the world like this.

 

[66Tiger]

Certainly immediate pain especially for the suppliers who work on extremely short margins, but I hope they can hold out for the long term gain of a stronger industry. GM and the UAW have to change the mindset of $80+ hourly workers who work on the assembly line and who get paid whether they work or not. I know the work is mind-numbing but for goodness sakes they cannot compete with the world like this.

People always like to spout those inflated numbers. Do your research...

Hourly wages for UAW workers at GM factories are about equal to those paid by Toyota Motor Corp. at its older U.S. factories, according to the companies. GM says the average UAW laborer makes $29.78 per hour, while Toyota says it pays about $30 per hour.

GM says its total hourly labor costs are now $69 (I have also heard $71 to $74), including wages, pensions and health care for active workers, PLUS PENSION AND HEALTH CARE COSTS OF MORE THAN 432,000 RETIREES AND SPOUSES. Toyota says its total costs are around $48. The Japanese automaker has far fewer retirees...like several thousand???. I can't find the number right now but it's real small since they have only been producing cars here since the mid-1980s. They also have the advantage of government penisons and national health care in Japan. One thing you rarely hear about is how much the Japanese automakers are struggling in their own home markets.

Paul
(I love my country but fear my government)

 

[todd reid]

What Happens if GM Goes Bankrupt

Here is my $.02, as a professional accountant and resident of Nazareth, PA approx 10 miles from the former home of Bethlehem Steel.

I feel the auto industry is following in the footsteps of our domestic steel industry. The legacy costs of their retirees are a millstone around their neck. The combination of retirees living longer and the companies downsizing to get leaner and more competitive, eventually leads to a situation where the pyramid becomes inverted (at the end Beth Steel had 10 living retirees for every active employee). At that point, the situation becomes unworkable. IMO every domestic automaker in this county is going to have to go bankrupt to get out from under their legacy obligations (unless our government voluntarily assumes this burden) - the only question is when. Keep in mind that bankruptcy can mean two things: reorganization or liquidation.

If you take the inverted pyramid theory and apply it to Social Security.....


Now that I have cheered you all up, I hope you all have a Merry Christmas and a Happy New Year!!

 

[Bill Blue]

Todd, strange you should mention the retirement situation.

Up until about 1970, all manufacturers set aside money to fund their retiree obligation. Then someone decided it was much more effective to put this "idle" money to use. The retirement funds were gutted and the retirees were paid as a current operating expense. I remember having a conversation about this with one of my Purdue buddies. I said I felt it was not wise to bet your future on an unknown. He said that GM (yes, specifically, we were talking about the auto industry) would never go bankrupt.

I wonder if he remembers that conversation.

Bill

 

[Series6]

My 2 cents

Aside from the build side there's a concern for the "colatteral" damage. Yes, GM, Ford and Chrysler have way too many dealerships that fight each other for market share. There are plans to shut down a certain percentage of those dealerships. Similar to trimming a plant to grow healthier. So what do you do withthe sales people, parts specialists, detailers, parts runners, receptionists, parts houses, etc? Are they included in the "Million Jobs Lost"? There's always a shortage of mechanics/technicians so I assume they will assimilate better.

How do you train and intigrate those people into other work? Having been in automobiles and trucks for almost my whole professional life, I'm having a bear of a time finding work in other fields. I can't imagine a mass influx of people like me trying to adapt their skills into another business.

 

[Alpine 1789]

Everyone always talks about the parts suppliers, but few ever think about all of the other business that are dependent on the industry. I work for a 125 year old, $1.5 Billion company that employs about 4,000 people. We don't make anything for the car companies, but we supply them with many marketing services. We measure customer satisfaction so the OEMs know which dealers are representing them properly; we train the dealers in how to meet their customers needs; we provide reward and recognition services to the ones who succeed; and more. While all of our business isn't automotive (lucky us; the next largest sector is financial services) and we work for the Asian manufactures as well as the domestics, the loss of the domestic auto industry will be devastating for our company. I think we would survive, but as a much smaller business. Then, of course, there are all of our suppleirs who will also be affected.

I really doubt anyone knows the full impact of this, but fear that most have grossly underestimated it.

 

[Nickodell]

The parallels between the Big Three auto makers and the steel industry are obvious, and scary. Bethlehem Steel, in their Bethlehem and Steelton (PA), and especially Sparrows Point (MD) plants were my second-biggest customers in the 1990s. Trying to sell hi-tech stuff to the company was a constant fight against entrenched union obstruction, bloody-mindedness and even sabotage.

The company I worked for had originated and developed the most sophisticated vibration analysis instruments available. Without going into unnecessary detail, a VA instrument analyses vibration modes in motors, generators, shafts, bearings - in fact almost anything that rotates. An accelerometer (sensor) placed on the subject equipment passes signals to a computer, which is able to detect anomolies such as eccentricity, bearing wear/etc., unbalance, coupling misalignment, and so on.

The benefit is that it can predict, with uncanny accuracy, not only the problem but pinpoint where and what inside the machine is causing it, and also when the component will fail - hours, duty cycles, revs, etc. Amazing. By using one, catastrophic failures can be almost totally prevented.

Heavy industries like Bethlehem have, for a century or more, spent tens of millions of dollars each year either on unnecessry "preventive maintenance/replacement" (PM/R) of huge components, like 3,000hp mill motors, or on clearing up the damage and down-time when one of these things lets go. PM/R was all they had up to about 10 years ago. It was based on collecting data on a certain machine about how and when it was likely to fail, and replacing or repairing it before this happened, a wasteful non-science that was close to looking into a crystal ball and made no reference to fact that averages are just that. Many pefectly good machines were replaced months, or years, before they needed to be, while others failed catastrophically long before the PM/R data said they should.

We spent many days demonstrating to Bethlehem management how the purchase of, say, 30 of these VA instruments, at a total cost of less than $350,000 (including training), would pay for itself in preventing just two catastrophic failures - one if the failure happened during the rolling of a melt (which would have to be scrapped and recycled.) We even brought in an independent consultant company who projected a saving of tens of millions of dollars in the three plants over the next five years.

Unfortunately, the steelworkers,' electricians,' millwrights' etc. union's members had, for generations, been used to making 2 1/2 to 3X normal hourly rates in replacing the equipment, which was always done overnight or at weekends when production was at a minimum. A millwright or electrician could easily make $3,000 changing out a drive motor. Every meeting with Bethlehem management and technical people had to include the union management or shop stewards, who would nod and smile in the meetings, and every time kill the idea off as soon as we had left by threatening industrial action.

When we installed test instruments we would often come back the next day to find them damaged. Of course, nobody saw anyone doing anything. The management and union bosses would profess themselves shocked, shocked! that such a thing could happen.

The people who do this kind of thing even have a name: Luddites, named after early-19th-century English textile worker gangs who would smash mechanized weaving equipment because one steam-driven machine could do the work of 20 hand weavers.

Privately, the managers I met would confide that they knew the whole steel industry in general, and Bethlehem in particular, was a house of cards that would come crashing down in a few years, mainly because of the insupportable wages and benefits for workers and the unfunded liability for the retirees, with far more retired than on the payroll. They were just praying that they could put in the necessary years for full retirement bennies, which could amount to 80% of final salary and full medical for the family.

The only thing that can save the Big Three is to follow the example of, say, Delta Airlines, and declare Chapter 11 bankruptcy, which would allow them to get out from under the retirees' liability.

We try to keep away from politics in this forum, but sometimes it is inescapable. The current impasse in Congress finds the Republicans, rightly or wrongly, holding up a bail-out until the car companies get large concessions from the Auto Workers' Union, without which, they say, pouring more money into the Big Three will just delay the inevitable, and they will be back, cap in hand, for more billions in a couple of years. The Democrats, on the other hand, are tied hand and foot to the unions, on which they depend for their biggest campaign contributions and for much of their get-out-the-vote street activity, and are desperately afraid of antagonizing them.

 

[tony perrett]

There is a very real risk that the GM crisis will affect the viability of its subsidiary, Vauxhall, here in UK.

 

[mikephillips]

And now they say no consessions until 2010, hoping I guess that this mess will hang on unchanged until then. It never ceases to amaze me when you see situations where they appear to prefer forcing the company under to having a job. Not that the big 3 are blameless, they made their bed over the last half century without considering the long term consequences. Reminds me of the couple summers I spent in a UAW organized plant while in college during the 70s. They were a small supplier to GM and Ford, making seats and other foam components. As what might be thought of as community relations they brought in 10 or 12 college kids each summer to sweep floors, and do odd jobs and help where someone might be on vacation or sick. These jobs existed only for the 3 months or so of the summer and were not filled for the remainder of the year. Well, the UAW pitched an absolute fit over this and local members did everything they could to chase us out. Interesting considering some were even parents of the kids brought in. Being stubborn I stuck it out each summer, but never understood why they had such a problem with providing a little college money to local kids, which was not coming from their pockets. The last summer I was there they went on strike over pay issues unrelated to the summer help just as I was leaving. A union rep had apparently spoken to them and convinced the local leadership that they were being cheated because they weren't taking home the same hourly wages as guys in Detroit. Now this was small town Ohio and a small supplier, not GM, Ford or Chrysler. The strike nearly put them out of business, in fact to several years to recover.

 

[Nickodell]

Sure, the management is to blame too, but you have to understand that designing a new model of an existing line - compact, medium and large car; minivan; light truck; SUV; etc., takes several years. Someone once told me, IIRC, that from drawing, through clay model, to mockup, to prototype for field testing, into final production, takes from four to five years - and that is for existing types. A totally new design, such as a hybrid, takes longer.

Again, IIRC, a totally new engine takes even longer. All fine when things like oil and raw material prices are stable, and government mandated environmental/safety/CAFE standards don't keep changing. Today, they are faced with constantly changing conditions. Look at gasoline prices: $3.25 last year; $4.50 four months ago, now $1.60 and still dropping. Notice that nobody is screaming at the Big Three any more to make baby cars and drop the SUVs/trucks/full-size cars?

Other than the money, I'd hate to be the VP for Design at one of these companies. The government can change its mandates on a whim, and overnight. Gas can double, then drop by 60%, in months. If gas prices remain low the hybrids that everyone was yelling at them to build are now white elephants - their purchasers will not recover the extra $2,500 to $3,500 costs in ten years, if at all.

And then, on top of all this, the economy goes into melt down and nobody is buying any cars. Millions of unsold inventory are piling up, while overheads remain the same and the unions are giving them the finger.

It's easy to pour scorn on the management, to say "You bums should have planned ahead." How? Even the vaunted Japanese manufacturers are hurting, but at least their wage bills are much lower and they have infinitely lower unfunded pension and medical liabilities for laid-off and retired workers.

It's not even that Detroit makes poor cars any more. Guess what the Number One car sold in China is? Not KIA, Hundai, Toyota or Honda. It's Buick.

The Big Three should do what my old company did, build plants in Mexico (or Brazil) and take almost all its manufacturing there. Why not? Every Japanese manufacturer has a plant here in the USA. And even way back in 1973, my TransAm was built in Canada. What's the difference between Canada and Mexico (all part of NAFTA, remember)? Wages are 75% lower in Mexico.

What the unions here are doing, and have done, is exactly the same as they did in Britain. In the late 1940s through the early 1960s Britain was the second largest maker of cars in the world, and the largest exporter. Bloody-minded, communist-led unions, with their stupid demarcation rules, constant wage demands and strikes, did them in, the same way that they did the shipbuilding and steel industries.

 

[puff4]

All I can keep thinking every time I hear about this mess is "British Leyland". Same story, different characters.... and, sadly, likely the same outcome.

 

[Nickodell]

To illustrate the point about the difficulty of planning your future models, I found these data on the 10 best-selling vehicles in the USA in 2005:

OK, you're in charge of planning what your company will concentrate on producing in 2008 for the 2009 model year. You note that five of the top ten are light trucks and SUVs, representing over 70% of all vehicles sold. Would you scrap these most popular models and tell top management that your company should totally restructure its model lineup with compact cars and hybrids? Do you think that you would find yourself escorted to the door by security guards, or maybe men in white coats?

I should love to shove these facts down the throat of those who have been screaming at the Big Three CEOs that they "should have seen this coming, and planned accordingly."

 

[Series6]

Assuming they made the announcement in 2005 "OK,We looked intot the crystal ball and we're cutting our truck production by 33%" the stock holders would have revolted.

There's a pattern in this country to judge yesterday by today's standards as if to say "they should have known better". If you watch history programming about our founding fathers, their acheivements are always followed by "he owned x number of slaves". It's as if to say in spite of writing some of the most amazing documents in the history of man, and this grand experiment, it's all diminished by holding them up to today's magnifying scrutiny.

We may be living in more enlightened times, but so did the people of the past. As a people we all stumble but for the most part, most steps forward are steps up. Not all, but most.

Ok, I'm off the soap box...

 

[V6 JOSE]

As die hard Ford lover, I would mourn the loss of GM, because we wouldn't have any more Chevies to beat.

Seriously, if GM went belly up, it would be good for Ford, becayse it would open up the market a lot.

Jose

 

[Alpine 1789]

Seriously, if GM went belly up, it would be good for Ford, becayse it would open up the market a lot.

Jose

Don't bet on that Jose. I know you are just joking, but if GM goes belly up then many of their suppliers will not be able to survive on just Ford and Chrysler (assuming, for a moment Chrysler somehow managed to survive). At best, Ford would then see massive cost increases, pricing them out of the market when compared to Asian competition. More likely, the supplier bankruptcies would mean the end of domestic auto production, regardless of how much cash Ford had on hand at the end.

 

[lgurley]

Jim,
I understand what you are saying but I see it differently. I think if G.M. went under(and I hope they don't) that some suppliers would go belly up but the rest would fill the void and the remaining auto companies would be able to find plenty of supplies.

 

[skywords]

Brilliant
Let GM fail? No more parts for school buses, trucks, construction equipment etc.. Brilliant!
Detroit Allison/GM makers of transmissions and engines for the back bone of the US. No one is speaking of this disaster. They just want to bust the unions and we know which group of morons that is now don't we? Yes folks the same idiots that thought that importing product and exporting money and natural resources would be good for America. So what if the autoworkers want a living wage and retirement and God forbid health-care? Why must we model our economy and way of life after a third world sewer? That's where it's headed.

 

[Nickodell]

Rick; nobody is against auto workers making a "living wage." But the days when a semi-skilled worker could leave or drop out of high school and make $45+ an hour, and up, and six figures a year, have disappeared in virtually every other industry except where there is a high danger risk, like sand hogs or iron workers, or where the unions have the employers by the cojones. The auto makers agreed to every union demand for decades when they could sell every piece of junk rolling off the production lines, change the sheet metal a bit each year so that Smith could see that Jones had a new one and Smith's wife would bitch at him until they caught up with the Joneses, but not so much that Smith couldn't unload his heap on Robinson. Built-in lifespans ensured that there would be a constant turnover.

Then the Japanese, and later the Koreans, started chipping away at the 60% of the US market that GM had, and the 40% shared by the other two, with better cars and higher quality. But the unions still demanded, and got, such madness as the system where a worker gets full pay and benefits while "temporarily" laid off (there was one interviewed on TV the other day, who has been "temporarily" laid off for several years, and still getting more or less the same as when on the line), plus the incredible, unsustainable pensions and full medical bennies to the retirees.

What the union workers don't get (and didn't get in Britain) is that having no job at $45 an hour is worse than a full-time job at $30. And most retirees, and terminated workers, except in government and (in some areas) teaching jobs, which are also controlled by unions, or their white-collar equivalent, the civil service, have to buy their own bloody medical insurance until Medicare kicks in. Why should the auto workers be different?

 

[Series6]

Detroit/Allison

Brilliant
Let GM fail? No more parts for school buses, trucks, construction equipment etc.. Brilliant!
Detroit Allison/GM makers of transmissions and engines for the back bone of the US. QUOTE]

Rick,

Just to clarify..Detroit Diesel is owned by Freightliner and Daimler. Detroit isn't going anywhere.. Allison is still part of GM. GM hasn't been a factor in school bus market for years. Primarily Navastar and FCCC on the chassis side and Bluebird and Thomas on the body side..

Did you hear that Sterling is being discontinued? Just going to be Freightliner and Western Star on the Commercial Truck side. Thomas Bus and FCCC still viable.