Blog: Dave LeggettChapter 11 thoughts

Dave Leggett | 15 October 2008

Contrary to popular belief, I don't spend my time sitting in some sort of ivory tower ruminating on the issues of the day with the sole objective of posting in here. Unfortunately, I have a bigger job to do as just-auto's editor with overall responsibility for all the content you see on the site and this is also, at the end of the day, a business that has to pay its way. We've been a bit busy lately and I haven't had much time to post. Tough times for everyone, I'm sure.

I found myself in a meeting yesterday describing the outlook for the global auto industry. There have been quite a few of those over the past few weeks. The discussion, inevitably, moved to the North American business landscape and the outlook for Detroit's finest.

If the US demand outlook has worsened over the last couple of weeks, what does that mean for certain companies' liquidity position in '09? GM's Fritz Henderson told me in Paris that GM's current liquidity plans were based on a 14m-unit US light vehicle market this year and next. Well, JD Power has just revised its forecasts down again to 13.8m for this year and 13.2m for 2009. Is the chest big enough at the rate of cash-burn to get through next year without resort to more borrowing? And if there is more borrowing will it not be costly? And what if the US market fails to recover in 2010? How are the turnaround strategies looking?

At what point does the idea of Chapter 11 protection from creditors start to sound attractive? Bankruptcy in the US is very unlike that in the UK, at least under Ch 11. It's not a liquidation of assets. In UK, the administrators are in pronto, selling off what they can, often breaking up the company, working on behalf of out-of-pocket creditors. In US, under Chapter 11, the company carries on in a kind of limbo with cost reduction and restructuring measures undertaken under the direction of the courts. The idea is that a leaner and fitter corporate entity eventually emerges and that the outcome is a gain for the economy.

And operations outside of the US continue largely unhindered.

The downside is that corporate strategy is derailed (there's not much scope for raising cash or borrowing to fund new projects), the courts are in charge (creditors getting a say in things, too) and shareholders take a very cold bath - I expect the sensible ones get out long before the filing. The emphasis is on cost reduction wherever possible, also not exactly a fun thing for the employees left manning the ship. And for a car company, what would being bankrupt say to consumers?

But would the pain be worth it for the gain? Would companies be able to get things done - principally on the cost side -  that they otherwise cannot force through? Could they actually come out in good shape, the process able to achieve things that the board/management cannot?

How bad would Chapter 11 really be for GM or Ford? I'd be interested to hear views on that.   


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