Wednesday, May 27, 2009
By Don Shilling
GM faces big fights in the courtroom and marketplace if it files for bankruptcy.
General Motors appears ready to resort to bankruptcy to save the company, but industry analysts say it won’t be easy.
GM would face big fights both inside and outside of court, analysts say. A judge would need to be persuaded to approve a reorganization plan quickly, and consumers would need to be persuaded to buy brands that have been tainted by bankruptcy.
Stephanie Brinley, analyst with AutoPacific in Southfield, Mich., said a courtroom battle would be tough as a large number of bondholders, dealers and suppliers vie for the judge’s attention. They all may have beefs with how GM plans to slim down to a smaller, but profitable, automaker.
Even if it prevails in court, however, GM still needs to make a profit, and that means selling vehicles that don’t have large discounts attached, said Erich Merkle, an auto analyst in Grand Rapids, Mich.
“They can be pushed out of bankruptcy, but it’s going to be incredibly difficult to survive for the next 12 to 18 months,” he said.
The potential bankruptcy of GM is coming to a head because the federal automotive task force gave the automaker until June 1 to present an acceptable reorganization plan. GM has been surviving on loans from the federal government.
GM’s plan must include deals with bondholders, who hold much of GM’s debt, and the United Auto Workers, who are owed $20 billion to fund retirees’ health care.
The UAW agreed to a deal last week, but new terms with the bondholders have proved more difficult. GM and the bondholders had until midnight Tuesday to reach a deal, and most reports said a deal was unlikely.
Without concessions from bondholders, GM would be forced to file for bankruptcy, perhaps as early as this week.
In bankruptcy court, GM has said it would create an entity that’s been called “Good GM.” It would attempt to emerge quickly as a new, reorganized company that would sell Chevrolet, Cadillac, Buick and GMC.
The rest of the GM brands could be left with “Bad GM” in a bankruptcy case that could linger as lawyers from creditors and bondholders fight over the remains.
Chrysler, which filed for bankruptcy April 30, has proposed a similar plan, and a judge may rule as early as today on whether the automaker can place its most valuable assets in the hands of new company controlled by the Italian automaker Fiat.
Plans call for reorganized automakers to begin making profits because they would have no debt and lower operating costs through plant closings and union concessions, Brinley said. With those profits, they could invest more in product development and become stronger companies, she said.
Car sales will have to rise for the plans to work, she said.
“A lot of it hinges on when the economy comes back,” she said.
Merkle questioned, however, whether a bounceback in the economy will be enough. Bankruptcy will hurt Chrysler — and GM if it files — because it will lead to lower prices for vehicles and delays in new product development, he said.
Merkle said he thinks a bankrupt GM would have to cut back on some product launches in 2010, which would hurt its market share in the future.
Also, an industry report said resale values of three-year-old Chrysler products already have fallen six percentage points since the bankruptcy, he said. As resale values fall, new vehicle prices will go down as well, he said.
GM will face the same issues if it files for bankruptcy, he said.
“People will still buy your cars, but they will buy it only if there’s a whale of a deal on it,” he said.
The problem will worsen in coming weeks as Chrysler dealers that are being forced to close look to dump their inventory at reduced prices, he said. GM dealers could be doing the same thing as they are forced out of business by next year, he said.
Once these lower prices hit, it will be hard for remaining dealers to return prices to the previous levels and that would make it difficult for automakers to cover their operating costs, he said.
shilling@vindy.com