By Kendra Marr and Sholnn Freeman
Washington Post Staff Writers
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.
Earlier this year, a CNW Marketing Research survey of new car buyers found that 80 percent would avoid an bankrupt automaker. In a market full of alternatives, there is little allegiance to Detroit's automakers, said Art Spinella, president of CNW Marketing Research.
Others, however, argue that bankruptcy would not be nearly as traumatic as Detroit insists.
Under the protection of bankruptcy, GM could trim health and pension benefits, whose costs have been dragging down Motor City's cost competitiveness versus foreign automakers. The process would allow GM to shrink its network of dealerships, overriding state laws that would otherwise make such a reduction an expensive headache.
GM could then take steps to retool plants and slash unprofitable brands.
If all these terms could be arranged ahead of time, in a prepackaged bankruptcy, GM could soldier on without skipping a beat, analysts said.
Rod Lache of Deutsche Bank said in a note last month that many U.S. auto suppliers could survive bankruptcies of the Detroit Three but that their long-term earning power would significantly weaken.
Michael E. Levine, a former senior airline executive and a lecturer at New York University School of Law, said troubled airlines often move quickly when they file for bankruptcy to honor their frequent-flier commitments and find money to pay their credit card processing bills. Similarly, he said a bankrupt GM would probably seek to honor its vehicle warranties and make sure financing for car purchases was still available.
Levine, who has worked as a consultant for bankrupt airlines, said American consumers can handle bankruptcy of a large iconic U.S. company, just as they overcame the fear that an airline bankruptcy would lead to smaller budgets for maintenance or safety.
"It is quite possible the auto industry is not thinking in truly contemporary terms," he said. "Consumers have lived through a lot of bankruptcies over the last 10 or 20 years. A couple of generations ago, the word bankruptcy meant liquidation. Now it very often means reorganization. That can be quite transparent from a consumer perspective."