GM: Better off bankrupt
The automaker is in trouble, but even Chapter 11 would be better than
hooking up with Chrysler.
By Alex Taylor III, senior editor
October 15, 2008: 9:04 AM ET
NEW YORK (Fortune) -- GM certainly is keeping a close eye on its cash
these days.
One supplier reports he is now getting paid 60 days after he presents
an invoice - not the 30 days he was used to. Worse, the clock doesn't
start ticking until after the bills get approved in Detroit - and then
sent to Arizona for processing.
Next thing you know, GM will be inflating its float by cutting
supplier checks on banks in Fiji that will take weeks to clear.
It is a measure of GM's desperation that it is reported to be
considering a linkup with Chrysler to get access to Chrysler's cash so
it can remain in business. The idea has provoked nearly universal
skepticism among analysts and GM watchers.
With good reason; they have history on their side. The list of
unsuccessful auto mergers stretches from the present day - Daimler
(DAI) and Chrysler, BMW and Rover - all the way back to
Studebaker-Packard and Nash-Hudson.
Buying Chrysler would only get GM (GM, Fortune 500) more of what it
doesn't need: more brands, more models, more factories, more
employees, more dealers. You have to wonder what makes GM think it
could run Chrysler's operations more successfully than it has run its
own. Like a second marriage, a GM/Chrysler merger would be a triumph
of hope over experience.
So what's an ailing automotive giant to do?
GM has the wrong products to sell into a shrinking market and can
offer little or nothing in the way of financing to its customers.
To remain liquid through next year, it needs to raise $10 billion to
$15 billion through a combination of internal measures, borrowing and
asset sales. That's next to impossible these days. With some of its
bonds selling for less than 50 cents on the dollar, the cost of new
debt would be prohibitive. Not even vulture investors are clamoring to
buy shuttered parts or assembly plants. And Hummer, which GM is trying
to shed, does not appear to be the next iconic American brand.
Harley-Davidson it isn't.
Bailout or bust
So how about a government bailout? What's good for GM is good for the
country, and vice versa. The federal government has promised more than
$1 trillion to keep banks, insurance companies and other financial
institutions afloat. Couldn't it find another $100 billion or so to
invest in the Detroit Three on top of the $25 billion in loans already
approved?
A government loan wouldn't be about protecting well-compensated union
jobs or keeping afloat inefficient suppliers in Michigan and Ohio. It
could be directed toward advancing Detroit's and the country's
strategic interests by speeding development of alternative fuel
technologies that reduce our dependence on foreign oil as well as help
limit the generation of greenhouse gases.
GM may have a decent shot at that in a Democratic administration. If
not, there is bankruptcy. That's a horrible possibility, to be sure,
and one that GM claims is not an option because it would destroy
consumer confidence in its vehicles. Who is going to accept a
three-year warrantee on a new car from a bankrupt company?
But hear me out. Bankruptcy would give GM a chance to negotiate
further cost reductions with its union workers, work out its
obligations with those suppliers that are still solvent, and help
speed the rationalization of its dealer body.
Would GM then be stigmatized as the only bankrupt auto company? No
way. Ford (F, Fortune 500) and Chrysler would immediately find that
they have been made uncompetitive by GM's actions and quickly follow
it into Chapter 11.
Flying one bankrupt airline felt a little awkward, but by the time
half a dozen were in the same condition, it seemed perfectly natural.
That would apply to the Detroit Three. There is still an appetite out
there in America's heartland for Detroit iron, and in the end
bankruptcy may be the best way to continue to satisfy it. To top of
page
GM closing factories in Wisconsin, Michigan
GM needs cash before Chrysler
GM says no to bankruptcy
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