Running On Empty: GM's Fate Is Debated
Wednesday, November 12, 2008
As General Motors burns through cash, edging its way toward possible financial collapse, a growing number of analysts have said bankruptcy might be inevitable. GM insists such a move is out of the question, and as the debate roils, people on both sides point to two past scenarios for lessons.
One is a story of success. Several major U.S. airlines have operated under Chapter 11 bankruptcy provisions. United Airlines has been through it. US Airways and Continental Airlines filed twice. Both Delta Air Lines and Northwest Airlines, which are in the process of combining operations, emerged from bankruptcy court protection last year. Labor contracts were renegotiated, and everyone, from baggage handlers to pilots, took pay cuts. Yet through it all, travelers continued to book tickets to fly.
But another was a disaster. Daewoo Motor -- South Korea's equivalent of Chrysler -- could not stay afloat during the Asian financial crisis. In 2000, burdened by $16 billion in debt, it filed for bankruptcy. About 7,000 workers lost their jobs, and many suppliers buckled. Daewoo was sold off in pieces to other automakers, including GM. Because GM's purchase did not include Daewoo's U.S. distribution network, many dealers lost their franchises. Its global brand all but disappeared.
GM said it is trying to stave off such a fate. The automaker's plight is one reason House Speaker Nancy Pelosi (D-Calif.) said the House would convene next week to vote on a plan to rush $25 billion in loans to the ailing industry.
Without a loan, GM is in danger of running out of cash. It is going through $2.3 billion a month, up from $1 billion a month earlier this year. The automaker is taking a variety of steps to conserve cash -- including scaling back production, cutting jobs and benefits, putting divisions up for sale. It still expects to have barely the minimum amount of money necessary to operate its business through the end of the year. Next year looks even bleaker.
GM is lobbying for enough money to tide it over until 2010, when it shifts the multibillion dollar annual cost of retiree health benefits to an independent trust as part of an agreement with its labor unions. In the meantime, it is exploring all options to prevent a bankruptcy filing.
"We're convinced that the consequences of bankruptcy would be dire and extend far beyond General Motors, and therefore, we are going to take every action we possibly can to avoid it," GM chairman and chief executive G. Richard Wagoner Jr. told investors Friday after he reported that GM burned through $6.9 billion in the third quarter.
A GM bankruptcy would reverberate through the U.S. economy, GM supporters contend. One in 10 American jobs is related to auto manufacturing. Automakers are the biggest buyers of U.S.-manufactured steel, aluminum, iron, copper, plastics, rubber and electronics.
Tens of thousands of suppliers and dealers depend on the automakers. Bankruptcy could push suppliers into bankruptcy as well, hurting other automakers who depend on them for similar parts.
A failure at GM, which represents about half of the U.S. auto industry, could eliminate 2.5 million jobs and $125 billion in personal income in the first year, according to a report published last week by the Center for Automotive Research. In three years, the government's tax loss could total more than $108.1 billion.
"On a strictly cash basis, it's less expensive to keep industry moving than have it shut down," said Dave Cole, chairman of the Center for Automotive Research.
A bankruptcy filing could scare off buyers worried about who would honor warranties and supply parts when repairs are needed.