With General Motors teetering at the edge of insolvency, the company’s backers argue that a bankruptcy filing would basically wipe out the entire U.S. auto industry. All of GM’s 125,000 employees would supposedly lose their jobs, along with many times that number at suppliers, dealerships, and other companies. A congressional analysis suggests that nearly 4.9 million jobs could be at stake. I guess we should start hoarding food and fuel, because the entire U.S. economy might implode.
At least that’s the dreadful scenario that auto executives, union leaders, and the Michigan congressional delegation say justifies a government bailout that would start with $25 billion and surely go up from there—with dubious provisions meant to ensure that the sprawling automaker somehow gets religion and becomes a competitive car company.
It’s virtually certain that there will be fewer jobs at GM in three years than there are today. But that will happen regardless of whether GM declares bankruptcy. The U.S. auto industry has the capacity to build at least 5 million more cars each year than Americans want to buy right now, and much of that overage is at GM. If people aren’t buying cars, jobs are going to go away no matter what. Unless, of course, Congress decides to pay GM workers even if they don’t work, which, come to think of it, is something GM has been doing! Maybe that’s not such a good idea.
The company would get a breather. With no intervention, GM is likely to run out of cash sometime early in 2009, which is why it can’t raise financing in the ordinary debt markets—lenders are afraid they won’t get their money back. Bankruptcy would give GM some relief it doesn’t have right now with its creditors, unions, and dealerships. “GM is locked into a set of obligations that are unsustainable,” says MIT lecturer Steven Spear, author of Chasing the Rabbit: How Market Leaders Outdistance the Competition. “Bankruptcy could give them the latitude to go to people where they’ve got obligations and say, ‘We’ve been lying to each other.’ ” Debt would be reduced, union rules relaxed, and contractual obligations to dealers modified or canceled.
Real reform would be possible. GM has been restructuring itself for at least four years, but water keeps pouring in faster than GM can bail. The company insists it needs seven of its eight divisions (it put Hummer up for sale this year), even though there’s a ton of overlap between Chevrolet, Saturn, Pontiac, and Buick. Toyota, by contrast, has only three U.S. divisions, with virtually no overlap. And GM never shifted aggressively away from big trucks and SUVs until gas prices hit $4 per gallon this summer—which was too late.
Surveys show that car buyers would flee an automaker in bankruptcy, since they want to know that service and spare parts will be available for the life of the car and don’t want the resale value to plummet. And there are plenty of competitors that would be eager to take GM’s business. So an aggressive confidence-building campaign, emphasizing the plan to emerge from bankruptcy healthier, would need to change some consumers’ minds. This would be a gamble, but it might be more effective than current efforts to persuade customers to stick with GM as it begs for a bailout, slashes spending, dodges bankruptcy—and tries to go on with business as usual.
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