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GM bankruptcy would be complex, painful

If General Motors follows Chrysler into bankruptcy court, as many are now expecting, experts say it is likely to be more painful for both the carmaker and the U.S. economy.
Image: General Motors headquarters
GM's headquarters rises above a  old and mostly abandoned warehouse district in Detroit, Michigan. Can the automaker rise above its financial woes?Rebecca Cook / Reuters file

If General Motors follows Chrysler into bankruptcy court, as many are now expecting, it is likely to be far more painful for both the carmaker and the U.S. economy than its smaller rival’s bankruptcy filing of a few weeks ago.

GM's vast scale and complex network of partners make the ramifications of a bankruptcy highly unpredictable, especially given the uncertainty about the global economic conditions that pushed the auto industry to the breaking point in the first place.

“The biggest difference is scale: GM is a much larger company,” said Stephanie Brinley, senior manager of product analysis for the consultancy AutoPacific.

GM has more plants, nearly five times the number of employees and twice as many dealers as Chrysler, whose own bankruptcy proceeding is not guaranteed to run as smoothly as the promised lightning-fast timetable of 30 to 60 days would suggest. In addition, GM's larger footprint means that auto parts suppliers are more reliant on it.

“When you look at … all of the, let me say, tentacles of General Motors on a global basis, you know it’s going to be much more complex than Chrysler,” said Dennis Virag, president of The Automotive Consulting Group Inc.

GM also has a broad network of international operations, including its troubled Saab and Opel units and a cadre of other overseas facilities. That means a potential GM bankruptcy filing could have a broader international ripple effect than Chrysler’s bankruptcy filing did.

Stephen J. Lubben, a law professor at Seton Hall Law School, said the bankruptcy proceedings themselves could hurt the company’s global operations by making it difficult for them to get the cash they need to keep doing business.

Lubben said another key difference is that Chrysler went into bankruptcy with a plan to emerge in partnership with Italian automaker Fiat. He thinks Chrysler will benefit from having Fiat offer a fresh perspective on the company’s operations.

“At least we can have a little confidence that an outside person has taken a look at this and deemed it a viable plan, whereas in GM’s case we don’t have that check on the process,” Lubben said.

But Brinley, of AutoPacific, offered the opposite view, saying she thinks GM would benefit from not having another automaker in the mix during the already complex bankruptcy process.

“I think that’s an advantage. GM, in one way or another, is in a little bit more control of their own destiny,” Brinley said.

Brinley also said she thinks GM doesn’t need a partnership such as the Fiat one because it already has smaller, fuel-efficient cars in its product line. One key reason Chrysler pursued a deal with Fiat was to expand its product lineup.

Still, a bankrupt GM would have to answer to a bankruptcy judge and perhaps the U.S. government, if the bankruptcy were structured similarly to Chrysler’s.

George Magliano, IHS Global Insight’s director of automotive industry research for North America, said that could cause problems if GM clashes with government officials over how best to run their business, including what products to focus on and where to put limited funding.

“Companies will run themselves with the view that they have to please their new partner,” Magliano said.

Already, U.S. taxpayers have more at stake than in Chrysler’s case because GM has received much more government aid than Chrysler — about $15.4 billion, compared with $4 billion for Chrysler.

Broader dealer, supplier woes
The U.S. economy as a whole also could potentially feel a bigger hit from a GM bankruptcy than a Chrysler bankruptcy.

Because GM is much larger, its potential bankruptcy could hit auto suppliers harder, especially if they are forced to drastically renegotiate contracts. Virag said he worries that Delphi, a major supplier which is already undergoing bankruptcy reorganization, could be forced to liquidate if GM enters bankruptcy proceedings.

GM also has a much larger dealer base, of around 6,000 dealers, and hopes to slash 2,600 of them, far more than Chrysler has so far. GM so far has notified 1,100 dealers that it plans to shut them down, while Chrysler has asked the bankruptcy court for permission to shutter 789 of its 3,200 dealers.

Paul Taylor, chief economist with the National Automobile Dealers Association, said he is concerned that if those closures occur under bankruptcy, many dealers will lose some of the normal protections franchisees get. That, in turn, could mean an even bigger financial hit to dealers, their employees and the communities that depend on them for tax revenue and other economic help.

A bankruptcy filing also could crimp business further for existing dealers, Taylor said, since customers may be wary of doing business with a bankrupt company or worried that their dealer will close, too.

“It creates uncertainty in the minds of the consumers,” he said.

Brinley said the sheer number of dealers GM hopes to close also could add to GM’s troubles, especially if many of them try to contest their closing.

On the other hand, one advantage to GM of filing for bankruptcy could be that they are able to avoid the hefty payments they would normally be forced to make to compensate closed dealers.

“If GM does file they have a lot more flexibility to do what Chrysler’s doing now,” Brinley said.

Despite the potentially harsh consequences, Lubben said he thinks it is almost inevitable at this point that GM will file for bankruptcy, because it has not been able to work out so many of its financial problems outside of bankruptcy court.

“There’s just too many pieces left unsolved,” he said.