The End Of The Big Three In North America

The next two months could prove to be the last for General Motors and Chrysler. On April 13, The New York Times reported the U. S. Treasury Department is directing General Motors to set the groundwork for bankruptcy in June. General Motors is publicly protesting this move, arguing it will soon present a viable reorganization and business plan to the President Obama’s automotive task force. The problem is no one believes this, not even, according to some insiders, even General Motors’ own officials.

The plan seems to be for General Motors to enter into what is rather oddly called a ‘surgical’ bankruptcy which will allow the car maker to restructure while protected from creditors, to split the company into a good/bad GM. Supposedly, the ‘good’ GM will get in and out of bankruptcy quickly while the ‘bad’ GM will limp along until it settles things with creditors and finds a way to handle the healthcare obligations for the company’s workers, the liquidating of assets and fending off lawsuits that will likely result.

Things don’t look much better for Chrysler which had its own restructuring plan rejected by the President Obama’s task force and continues to work with greater desperation towards cobbling together some kind of merger agreement with Fiat. Fiat is demanding very deep cost cuts before it makes any kind of deal with Chrysler.

There are few options left for General Motors or Chrysler. The problems for both companies run deep and can’t be addressed by simply cutting worker’s pay, throwing out pension and health benefits, or going to the government for more money. Susan Helper, AT&T Professor of Economics at the Weatherhead School of Management with Case Western Reserve University and writing in The New Republic took at close look at the troubles of the auto companies and made two very perceptive points. The first is the North American auto makers have not made an honest appraisal of why people have shunned their cars, even when priced similarly or better than their competitors, or how to fix it: “Or to put it another way, why do Detroit Three’s cars sell for $2,000 less than a comparable Japanese models? This is the key issue — not labour costs, which including the legacy costs account for less than 10 per cent of the cost of a car.” On top of that, neither company has addressed how it will deal with its suppliers. According to Helper, who has had a close look at the numbers, half of General Motors’ costs — US$50 billion per year — come from parts purchases from suppliers. The costs are likely similar with Chrysler. Neither company has said how it will deal with the suppliers many of whom are in desperate financial straits, others in bankruptcy protection already, and are not going to drop their prices any more just to help the automakers.

The groundwork is now set for one or both of these automakers to go bankrupt and with only one likely to come back in reduced circumstances. No matter what happens, the next few months will see a profound change in the automotive landscape in the U. S. and Canada, and long-term consequences for independents.