Blog: Thoughts on Chapter 11
Dave Leggett | 1 June 2009
Not so long ago a GM bankruptcy seemed to many – including myself - like an outcome to be avoided at all costs. It's a measure of the speed with which the crisis in this industry is unfolding that it has seemed in recent weeks like the only way forward. And here we are on June 1: it's finally happening.
But this is a pre-packaged Chapter 11 bankruptcy. The idea is that GM enters in an orderly way, on the back of massive government financial support, gets itself slimmed down quickly and emerges as a leaner and fitter company in North America. The good stuff flies free, unencumbered, while the bad or redundant assets are eventually liquidated.
Only it's not quite that simple - there's sure to be considerable pain along the way.
As Rob Golding recently put it, there can be long debates as to whether Chapter 11 is either fair or desirable. Certainly it contravenes the principle of survival of the fittest and constitutes a form of unfair competition. A company that goes in wipes the debt slate clean. Others that work their nuts off to stay out are, by implication, at a disadvantage. I recall Valeo's former CEO Thierry Morin – while casting a critical eye on Delphi - complaining loudly about that.
At a time when auto industry leaders all over the world - and prominently, Sergio Marchionne of Fiat in Europe - are calling for controlled capacity cuts, a system that preserves capacity is arguably out of line.
But the politics of recession is taking over from business logic and the workings of markets. The political driver to events is becoming more obvious.
GM has a chance to get its house in order and the Obama administration is acting to retain as many jobs as it can under the guise of a 'new Chrysler' and a 'new GM'. It is intervening proactively to avoid a messier bankruptcy that leads to wholesale liquidation and the loss of many more jobs.
In Europe, GM's Opel/Vauxhall unit has been parcelled off in a deal with Magna that looks suspiciously like it had more to do with preserving jobs in Germany than anything else.
As Marchionne has said, overcapacity is the big issue for this industry at a macro level. It has been an issue for a long time, but the recession is bringing it into sharper focus.
For 'new GM' – in Europe and in North America – the big challenge will remain being profitable. It means having the right cost structure, sales footprints, vibrant brands and, of course, the right product.
The right cost structure means removing excess capacity. If it doesn't go now, it will continue to weigh on the bottom line. It could just be that GM in America, by dint of the US Chapter 11 rules and a less politically complicated international structure, is better placed than GM in Europe to achieve that.
History certainly appears to suggest that you cannot buck the market for ever. This recession is taking industry volume down to frighteningly low levels. The burden of excess capacity will weigh heavily on firms that don't adapt sufficiently. But politicians are interested in solutions that retain jobs and politicians everywhere tend to think short-term.
Short-term survival is obviously critical, but the car companies also need visionaries who can map out a longer-term future. Where will GM and Opel be in ten years time? There's a question that deserves serious debate. Sergio Marchionne, at least, has been looking further ahead than the end of his nose.
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