GM and Chrysler: Is Avoiding Bankruptcy Avoiding the Inevitable? 14 comments
an article to
-
Font Size:
-
Print
- TweetThis
Here is a quick update on Chrysler and GM's restructuring plans as they head towards the February 17, 2009 deadline.
It appears (for the moment) that both are sticking with an attempt to restructure their way out of trouble as opposed to filing bankruptcy. While any attempt to cut costs and restructure operations is a step in the right direction for these companies, I think it's just delaying the inevitable, as only bankruptcy offers the needed agility as far as breaking old commitments, shedding dealerships, cutting back on debt, etc.
The other issue is that avoiding bankruptcy in the short-term not only delays the inevitable, but it wastes precious resources that could be better utilized if put towards revitalizing a post-bankruptcy GM or Chrysler.
However if the rumors are true, GM's bid to avoid bankruptcy may be helped by a group of bond holders who are willing to swap debt for equity in a newly restructured company. Considering that these bond holders own 62% of GM's debt ($28 billion), it would be a significant step towards turning GM around.
In my view the potential deal with the bondholders is just one leg (albeit a very significant one) of a stool that includes restructuring labor agreements, shedding dealers, consolidating brands and removing other long-standing liabilities. Still, while I would prefer to see this deal as part of a bankruptcy restructuring I can't deny that it would be a rather positive step in the right direction.
Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Joseph L. Sha...
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
I pray for GM to get more TARP money and stay solvent. I looked at the gcars for 2009 and they had great hybrids and are working on an electric car. Instead of writing this kind of article I suggest you buy a GM car this year.
Keep in mind that this number doesn't include dealer support and other liabilities related to long-term leases on factories they don't use, money paid to municipalities related to same, pension liabilities, etc.
And since I'm sure some people are curious:
I don't intend on buying a new car from anyone in this economy because the one I have works just fine, and I'm sure I can get another 2-3 years of worry few driving out of it.
But if I did buy a new car it would be German, sorry but this is America and I have the god given right to buy any car I please. I'll admit that Detroit is putting out far better vehicles than they were five years ago, but they still don't like them as much as vehicles produced by certain Bavarian companies.
If Detroit is going to survive it has to be able to survive in the free market, not via people trying to guilt their fellow citizens into buying GM just because it's American.
On Feb 17 08:12 AM nyc female lawyer- bondholder wrote:
> I am happy about the progress with the bondholders. Shame on you
> for recommending bankrupcies. The large law firms take tremendous
> fees and the stockholders suffer in bankrupcies.Also,the GM workers
> would lose their jobs and the National unemployment will rise to
> 15%or 20 % due to a GM bankrupcy
>
> I pray for GM to get more TARP money and stay solvent. I looked at
> the gcars for 2009 and they had great hybrids and are working on
> an electric car. Instead of writing this kind of article I suggest
> you buy a GM car this year.
--->
----> "But if I did buy a new car it would be German, sorry but this is America and I have the god given right to buy any car I please. I'll admit that Detroit is putting out far better vehicles than they were five years ago, but they still don't like them as much as vehicles produced by certain Bavarian companies. " <----
Last time I looked, GM has quite a few cars based on German design and engineering [Opel---> Saturn Aura, Saturn Astra, Chevrolet Malibu] and Saab is also partially GM owned but is Swedish. Also, let's not forget all the great Chrysler cars that still have components and design from Daimler .
Alas, you are correct, this is America and if you must have your status symbol who are we..... It simply amazes me how people can get behind our brave soldiers participating in dubious war actions [ no disrespect intended and I am a vet] and support them, but the same people will look down, berate, and refuse to support American products and companies.
I don't buy German cars simply because they're German I buy a particular German car based on the way it performs on the road, followed by the level of luxury.
Nothing in Chrysler's line-up is comparable as far as overall performance even though some do compare as far as straight line acceleration. The other issue is that they're using the same interiors as were in my college roommate's Dodge Neon, the resale value is abysmal and I find their cars to be gaudy at best.
Not to mention the fact that the "parts sharing" between Mercedes and Chrysler is minimal at best, and if you drive both back to back it's a vastly different driving experience.
Saturns and Malibus being based on Opels doesn't change the fact that (again) the cars don't compare to the German cars I like. I've driven plenty of GM products whilst traveling for work and I simply didn't like the car. I was always much happier when I was given a Japanese car instead.
It's not about Status symbols or wanting something just because it's German, it's about spending MY hard earned money on the car that best suits my tastes. I'm not choosing to support Germans over Americans, I'm choosing to buy the products that I enjoy the most.
It's more than a little ridiculous to claim that I would enjoy driving a Malibu as much as my BMW, simply because the former is based on an Opel I wouldn't buy either.
Buy American is not the way to help Detroit, the U.S. automakers should help themselves by producing better products.
Furthermore this discussion is rather moot since GM already sells enough cars to be profitable, they're just too inefficient to be profitable with their current level of marketshare. Hence the reason Honda is profitable with a fraction of GM's marketshare.
No offense but the high-horse approach of chiding people for choosing the products they like the most, (especially when we're talking about the product that represents people's 2nd largest expenditure) is a non starter.
"I'll admit that Detroit is putting out far better vehicles than they were five years ago, "
My point is, in these economic times, there certainly must be American made Big 3 vehicles that would satisfy most people, if they really compared and gave up the notions they've had forced upon them by years marketing hype and car reviews. The truth is, many foreign brand cars are high maintenance, costly for parts, and no more reliable than most American brands. Perhaps American brands would enjoy better retention values if people didn't succumb to lavish ideas of being amoung the elI'm not sure about "high horse" , but it seems to me coming from you it's a bit of "who is calling the pot black" here. No offense.
This is America a nation where we believe in the free market, Detroit can be strong again by putting itself in the customer's shoes and understanding what leads them to make the decisions they make.
They can also be strong again by fixing their efficiency issues since they already have enough market share to be profitable.
However Detroit cannot fix itself by taking the approach that the customers who buy foreign are just making a misinformed mistake.
My objection to your comment has nothing to do with me, and everything to do with the fact that I believe it's the kind of thinking that got Detroit into this mess in the first place.
Better check the Ron Harbour reports from the last few years in particular.
GM, Chrysler, & Ford were on their way, reducing resources, eliminating some redundant products, reducing manpower, etc. All this recent negative attention to the auto companies is due to the irresponsible financial gurus who got greedy offering "creative financial products" and other dubious practices. The American car companies were on their way and got blind sided by this. Credit was cut off for raw materials, parts, inventory, and the day to day money flow that keeps any company running. Not to mention financing for customer loans.
My response to your comment has everything to do with your perception and statement of "particular German" cars and the kind of thinking that keeps some Americans from seeing the hype involved in marketing. Many people, like most who choose to drive a foreign brand, are caught up in the status of it regardless of what you say. You "have certain tastes" in performance and luxury. OK. It appears to me you are using your taste in cars and status to be unduly critical to GM. I believe, like the misleading auto magazines and their journalists, that folks get caught up with that kind of thinking.They think they have "arrived", and refuse to admit it. IMO most, and I say most, Americans would find an American brand auto to their liking. You show no support, only want to deride GM, Chrysler for the way they managed and made product choices, etc. This is old news. They were changing and making progress. Look at the down sizing they have done especially over the last 5 to 8 years. It's as though you want to say, "Told you so!" The attitude seems to be, "I didn't like them, now they're down, now I can kick them, and build up myself , my perspectives and validate myself, my status, and my thinking.
IMO this kind of thinking is arrogant and shows no support for what GM and the Big 3 have been trying to do. before this financial crisis.
If you were to go back and read my past writings on Detroit you'd notice that I've been making the efficiency argument for going on two years now. In fact the main thesis of the one you just read is that renegotiating with some of their bondholders isn't enough to give GM the efficiencies it needs to be profitable.
If I'm noting things that I think GM should do in order to be more successful, you can't characterize it as criticism for the sake of criticism. In fact in every article I've ever written critical of Detroit I've always presented my ideas on how they should do things differently, so that they can be successful in the future. It's not about criticizing GM for fun, it's about presenting my view on how they should proceed in order to be successful.
After all didn't I write in a prior article: "There is actually a good car company under the morass that is GM, and a Chapter 11 filing could allow that company to breathe without being crushed by the weight of liabilities and debts the company can't possibly service. "
seekingalpha.com/artic...
I don't advocate bankruptcy to destroy the company, I advocate bankruptcy to save it. GM without its myriad liabilities could be profitable within a short time, while the viability of its constant restructuring plans is a crap shoot at best.
Based on my own personal preferences the Germans (especially the ones from Bavaria) make cars that best suit my needs, and my preferences aren't something that can be argued, especially since I'm not obligated to buy American. In a free market the customer has the right to choose that which they like the best, and companies who would like their business should try and figure out why they're making the choices they're making, as opposed to the view that people are obligated to buy certain products over others.
Better yet I think Toyota is a great car company but I'm not interested in their products because they don't appeal to me, ditto for Honda.
I'm no longer interested in debating this with you because you seem more interested in ad hominem attacks as opposed to having a constructive debate. After all isn't it your view that people who don’t prefer American cars are in fact shallow and/or not intelligent enough to form their own opinions outside of the automotive press? If you're not willing to acknowledge my right to choose which car I spend my money on, or to admit that a foreign car may better suit what I want there is no point in discussing the topic with you.
I think I do understand your position, but do not think you have a real appreciation of how GM in particular, has grown to the size it is, and how difficult it is for it to simultaneously adjust production, product mix, man power , mileage and pollution requirements, and a myriad of other issues in the midst of a financial crisis not of their own doing. Your position doesn't seem much different or better than the financial people who precipitated this mess.
You seem to want the quickest path to improvement, damn the consequences, and get it done. As the first poster noted, Chapter 11 would likely result in more damage than good. Not mention the effects of sales on a bankrupt company. If you or others wouldn't buy a GM product now, why do you think anyone would buy one when it has gone bankrupt? Everyone would be "waiting" to see if it would recover. Your excuse then would likely be, " GM isn't recovering fast enough and they aren't developing the products people want " [ your opinion ]. It is amazing to me that GM has had, until recently, the lead in world wide sales, and people will say GM doesn't make products people want.
In addition, I also disagree with the cut throat idea that it's best to "get rid of" legacy costs and push them off onto the government. Not only for obvious reasons of a social integrity nature, but it's exactly this kind of old school business school teaching that got us here. These are not "usual" conditions or circumstances.
I am sorry you feel "attacked". That is the nature of this kind of forum. It is interesting that you are so sensitive to my comments. It isn't the content of your article, however misguided, that interested me. But the comments you interjected about your choice of car and your rights. You made yourself "fair game" by doing that.
The assertion here is that the actual benefits are not very significant compared to the out-of-court restructuring benefits, while adding on the high costs and risks; a better approach would be to coach and coax GM, UAW and players to take the haircuts and cuts, but critically, get on with it now without the risks and "loss of control" that a bankruptcy will produce.
(this repeated from another post, but useful in this discussion stream):
There is an assumption with many commentators and analysts that a bankruptcy process would cause some short-term pain and loss of sales, but that pre-pack or cram-down plans come with a much higher guarantee of GM being positioned to be efficient and profitable again.
It would be useful to challenge these assumptions and back them up with realistic expectations.
The pain of a bankruptcy is unlikely to be short term - the loss of sales, based on past experiences of receiverships of one sort or another in automobile industry, tends to be extreme and nearly permanent.
Given that the automotive manufacturing business model (unlike airlines and many other industries and/or smaller sized businesses) is high capital intensive and volume driven, any break-even or profits extremely dependent on sales volume and revenues. (repeat: the sensitivity of volume & sales to the automotive company business model is critical to understanding the choices - commentators and many analysts have not appreciated and understood this properly to date).
GM is unlikely to be an exception to this past experience. The result of this is that any form of bankruptcy will likely simply end up in liquidation, and there is little assurance that GM would emerge, if with a pre-packaged process. Moreover, the disruption to the supply chain already on the brink leads to many, many other consequences - again, most analysts and commentators have not really done their homework and looked at the numbers, sensitivities and likely outcomes.
It would be useful if these assumptions were checked and included more fully in the commentary and analysis to provide a total picture.
The examples and data are limited, but also quite striking. See Appendix L of the GM restructuring plan submitted to Treasury.
Given GM's size and situation, plus their need for even higher volume break-even points, it appears that GM is more likely to end up in liquidation in such a process.
The other assumption that needs testing is whether GM gains very much with a bankruptcy process of any sort vs out-of-court restructing. Again, looking at the numbers, there really isn't much more to be had. Perhaps $2-4 billion more if the unsecured bondholders were completely bought in vs 80% buy-in they might receive in their current settlement. The other secured bondholders are the same banks that Treasury is asking to pony up DIP financing - not much to gain there. The health care obligaions are already being moved off the books, as well as being essentially cut in half - so there isn't much more to gain there. Ditto for the retirement - what's funded won't be taken away by a bankruptcy judge, and other shortfalls would just be transferred to the government i.e. the taxpayer; this really isn't the big issue.
The big issue is that any reduction in business model expenses and liabilities, including the debt and bonds, are just being replaced by DIP debt, and at even higher levels!
And this with less volumes and sales expected. It simply doesn't add up.
Again, the result is a very high expectation of eventual liquidation.
In the big picture, if one tests the assumptions and goes through the analysis thoroughly, is that it is liquidation, with the loss of most of the American automobile industrial base - or - an assessment of the national interest on whether the US needs or wants a heavy industrial manufacturing base and industry.
That's both a national security issue, and an economic consideration.
A nation that over-consumers and under-produces, like USA does, and a nation that still carries a very, very large and unsustainable trade deficit, will end up quite the sorry and sick case within a generation, if it is not close to that already.
The consideration is: let GM, Chrysler and much of the productive industrial base go and deal with the (un)expected consequences and unintended consequences, or - decide as policy that fixing, building up and maintaining the capabilities are worth the investment.
In this scenario, GM, UAW, and all the other players such as dealers, suppliers, bondholders, etc will need to take their cuts and haircuts and hard medicine - but they are doing most of that already if one reads the GM restructuring plan. The cuts and plans are dramatic.
Perhaps the treasury panel can squeeze a bit more out of UAW, dealers, management, etc, etc, but frankly, all the efforts to spend time there, beyond what is already quite dramatic, is likely ineffective or without much consequence relative to the small gains to be made, compared to what is already in the plan.
The choice ultimately, requires GM to execute all the cuts and haircuts in the next months, with the out-of-court restructuring as envisioned (but with due diligence and monitoring), and begin to build a consensus on a national policy for our industrial base, keeping the competences we have, building the competences that are missing but needed, and willing to cut out or deemphasise the waste or parts that aren't essential.
There is a lack of vision of what that could and should be.
The alternative vision, America with a greatly reduced heavy industrial base with all of the development, engineering, process, and technical skills, is not just devastating to the GDP and economy in the long run, but with the trade deficit and other imbalances, quite detrimental to America as a first rate first world country.
Not checking the assumptions, and not understanding the consequences within the context of the big picture, does not portend well for our national debate