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The Ramifications of Bankruptcy at GM, Ford, and Chrysler

Companies / US Auto's Nov 19, 2008 - 01:24 AM GMT

By: David_Urban

Companies Best Financial Markets Analysis ArticleMuch is being made in the press about the financial problems at GM, Ford, and Chrysler. For a number of years, the US automakers were the backbone of the US economy, providing jobs and products that were part of the rise of the middle class not just in this country, but abroad. A car was looked upon as a status symbol and along with the national highway system allowed Americans the freedom to travel and a symbol of wealth and stature.


The Japanese then started to produce automobiles and became attuned to areas such as quality and production management, surpassing the US automakers. While quality has improved, brand management has not. Ask anyone outside of Michigan and despite producing quality automobiles, US automakers have a serious problem with brand management. There are too many brands competing in the same space for the same customers.

Now the US automakers stand on the brink of bankruptcy as Congress debates a bailout package of at least $25 billion dollars. If bankruptcy were to be declared it would cause a major dislocation in the economy and the ramifications of a bankruptcy would last for years.

First and foremost, the US automakers would be able to break UAW contracts. Under the current system all UAW employees, past and present, have the power to vote on UAW contracts. This means that the retirees, who greatly outnumber the current rank-and-file, generate significant influence over the current contracts in order to protect the benefits they have worked their lives to obtain.

While this is a major problem for the US automakers as pension costs have risen and UAW members live longer lives, the retired workers were made an inherent promise when they were working on the assembly line. In return for working labor intensive and repetitive jobs, the company would take care of them when they retired.

It is this inherent promise which makes a bankruptcy filing difficult. Not only would the US automakers be able to break the UAW contracts but they would be able to place their pensions back on the government much in the same way United did in order to decrease their cost structure and exit bankruptcy. Placing the pensions on the government would mean a cut in benefits for retirees. Not a favorable solution by any means, especially for those workers who worked their lives in difficult jobs toiling day by day to support their families and create a better life for their children.

Dealership contracts are another area where bankruptcy would pose a problem. The automakers would be able to break dealer contracts which would mean consolidation in the dealer industry. This may also mean a consolidation in the number of brands carried by each automaker. Undoubtedly, this would cause a firestorm of protests across the country although some areas of the country could use stand to see a consolidation in dealers. Services may become hindered as it would require the surviving dealers taking on additional business in the maintenance category that they may not be equipped to handle.

Once bankruptcy is declared you can expect parts suppliers such as Delphi to automatically file as well. Delphi has a number of agreements with GM, most prominently in the area of its UAW pension plan where Delphi can place part of its pension benefits back on GM.

Communities directly and indirectly affected by the US automakers through plants, suppliers, etc. would become entangled and a wave of lawsuits would soon follow as everyone jockeyed for position.

Just as important from a political position, this puts at least 37 electoral votes at risk for the Democrats in the 2012 election as the bankruptcy can be expected to drag on for years.

I am not advocating that the bailout is a solution but the consequences of bankruptcy are not being discussed in the press. The ideal solution is a middle ground, where all parties need to admit that the current system is not working and needs to be changed. Each party needs to take a bitter pill and work towards some system where pain will be felt in return for a rescue package from the government. Back in the 1980's Lee Iococca came to the government looking for help. In the following years, Chrysler was able to temporarily get back on its feet before falling back into the position it is in today. Any solution put into place should ensure that the US automakers do not return to the table asking for additional funds in the future while guaranteeing stable and healthy jobs and benefits for current and past employees.

By David Urban

http://blog.myspace.com/global112

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