Blog: Dave LeggettA big week for the Big 3

Dave Leggett | 2 December 2008

This week is a pretty big week for the Detroit 3. That may be an understatement. They are fighting for their lives and have to present plans to convince lawmakers in Washington that they are a reasonable bet for loans that are pretty much the only alternative, in GM's case certainly, to filing for Chapter 11.

It is perhaps just worth remembering that the present liquidity crisis has been provoked by a collapsed market. Detroit was moving in the right direction, but now finds it has to run simply to stand still. Fairly or not, this crisis has brought all the underlying issues surrounding Detroit's long-run competitive status at home (where the financial losses are concentrated) to the surface. There is, now, nowhere to hide, no fudged deal to be done.

After the poor reception they got a few weeks ago, the CEOs have some ground to make up. Not arriving in corporate jets will be a start, at least, in terms of the message sent out about attitude.

More importantly, the business plans have to positively drip with credibility in order to sway the sceptics who weren't even remotely swayed by the 'do it or else' approach tried last time. That means being realistic about the scale of further required cost cutbacks, rationalising brand and product offerings, as well as containing commitments from key actors such as the UAW to renegotiate terms. In GM's case, swapping creditors' debt for equity and a new capital structure may also be a vital part of it. Executive compensation will be another
area under scrutiny. It all needs to scream 'fresh start'.

If it all hangs together, there's a chance that funding will be approved. But if it doesn't, then GM is staring Chapter 11 full in the face. How bad would that really be? It's debateable. Rick Wagoner believes it should be avoided at all costs. People won't be inclined to buy cars from a bankrupt automaker, he says, and it would make recovery even more difficult.
Many, particularly outside the industry, are not so sure and also believe that Chapter 11 could deliver the serious medicine Detroit needs because it has proven itself utterly unwilling or unable to properly reform itself.

Those 'path to viability' plans and arguments need to be very, very well prepared. If they're not, then the CEOs and boards of the Detroit 3 will lose the case to manage the next phase of industrial restructuring themselves. And, one way or another, massive restructuring is coming because the depleted US light vehicle market - and what that means for projected cash flow - simply cannot support things carrying on as they are. It's a brutal truth from which there is no escape.

Listen to Leggett on RTE (16/11/08) - US car industry seeking bailout


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