Bankruptcy for Detroit

I am getting the sense that Congress was never really serious about handing over 25 billion more dollars to the Three Stooges Motorcar Companies, in addition to 25 billion already requested. Not surprising, since despite several visits by auto executives to Congress in the past year, not one has made a convincing case that their companies are competitive or responsible, and therefore there is no evidence to support a belief that they would be properly accountable or trustworthy with the money. Not one executive had a plan to explain how they would become truly competitive again; it was clear to everyone that this money was not going to address the true causes of the automakers’ current crisis. There was (and is) the very real possibility that giving taxpayer money to these companies might be the worst possible course of action.

So, having slowly begun to comprehend that even D.C. is not keen on continuing to enable a very bad habit in Detroit, the automakers have begun the predictable whine and rant. In general, they are trying to make folks believe that if they do not get the money they want, they will file bankruptcy, and this would result in “dire” consequences for the nation (a word used often in the past week by the suits). Personally, I tend to bristle at extortion attempts and that is exactly what this amounts to; ”buy our lousy cars and subsidize our worthless industry, or you’ll get hurt”. Hey, I’m sure that kind of thing works great at UAW meetings, but it does not work with honest people who earn their money through ingenuity and effort. For one thing, History has killed off companies and industries with no mercy over and over again in the past (remember when we were a world power in Textiles? Remember when the dominant personal transportation was horse-drawn carriage? Anyone still pay for home ice delivery to stay cool in the summer?) Adapt or die boyo, and GM/Ford/Chrysler have not adapted to reality in our lifetimes. They have ramped up the advertising, but along the way they have managed to forget the triangle of business strategy – you cannot compete unless you offer the best price, the most desirable features, or the highest quality. LoserCars of Detroit have managed to blow opportunities and one-time advantages in all three categories. Detroit had about a two-decade window where they could have done the things they needed to do to revive their mojo, but instead they chose to stay on the same reckless course and hope they could fake out the world. Right about now, no choices are left save the desperate.

So, on to bankruptcy. For a lot of people, bankruptcy means the end of the road, and that could be the case for one or even all three of these companies. But let’s first look at the other options.

Frankly, there are a lot of reasons why it would be a very good thing for these companies to file bankruptcy. Look, the prime directive for any company, is to make a profit. That’s because no matter what good things you want to do, you cannot do them unless the company first insures its survival. And if you look at these automakers, the first thing that jumps out at any accountant is the huge debt and liability they carry. I looked through GM’s 2007 Annual Report, for instance, and despite 181 billion dollars in sales and revenue, GM lost 38.7 billion (before accounting principle changes – GM changed its accounting principles three straight years). Net revenue was down 12% from 2006. And this was 2007, before the credit crunch of 2008 hit. What happened, basically, was that GM was so loaded up with debt and long-term commitments for things like pensions and multiple brand lines and dealership locations, that even in a good year it could just tread water; when things went bad they went really bad. Straight-forward accounting for GM shows operational losses for at least four years, and again that’s before we count 2008. The basic reason GM is in a panic, is because they have no idea how to sell more cars, and they have no way to to substantially cut costs. From what has been reported, Ford and Chrysler are in the same shape. All three companies are locked into contracts with stakeholders who refuse to give an inch, even if the alternative is the company’s dissolution. The most likely reason for this, is that the creditors do not believe that these large companies would actually fail. Therefore, two sound business reasons exist for moving towards bankruptcy: If the creditors come to understand that the company is going to file for bankruptcy, it is in their best interest to work out a way to avoid bankruptcy for their customer, and if bankruptcy cannot be avoided, a reasonably objective judge and standardized process exist to provide guidance and a background.

The most desirable chapter for filing would be Chapter 11, or reorganization. Frankly, that is the minimum action needed to make these companies face up to the fact that they simply have no effective business plan. For example, what is GM’s “base” product? These guys so over-specialized that pretty much all of their vehicles are for a niche market. Sure, they have basic sedans and such, but does any of them strike you as their core product, the way the Honda Accord or Toyota Camry does? Not even close. GM does not even have a core brand line ... fuhgeddaboudit. The only fix worth talking about, involves rebuilding everything, nothing held off the table. And it looks like only a bankruptcy could make that happen.

The car execs are whining that they would not be allowed a DIP (debtor-in-possession) in a bankruptcy. To which I answer, too freaking bad. I mean, companies do not deserve favors when they file bankruptcy, what they need to do is find their humble place and go along with the court. There’s not a single top executive at any of the “Big Three” who should be pulling down a paycheck these days, and if they are just now beginning to understand the scale of consequences for their screw-ups, well change their diapers and tell ‘em to shut up and stay out of the way. If they have to file bankruptcy, they’ll get a chance to plead for DIP, and if they cannot make that case then that proves the bankruptcy was overdue anyway. Chapter 11 with a competent trustee in charge could be the best thing to happen to the industry in half a century.

But what if Chapter 11 does not work out? Well, then we look at Chapters 13 or even 7. Yes, that means the companies go away as we know them, but it also means that the parts are sorted out and someone else acquire the means to make their own major automaker. There are plenty of groups with the means to create a successful corporation for making cars and trucks, and the infrastructure would be right there. The new company (or companies) could pick from optimal factory sites and equipment, a deep talent pool for design and manufacturing, and within two or three years a truly competitive and effective auto manufacturing industry would be reborn in America. It’s happened in other countries, so it can just as easily happen here. Quality cars at good prices with solid opportunity, the only losers being those unable or unwilling to work under the new company’s terms.

That’s really what this comes down to, you see. The new company would not be much different from what we see now, except that the new company’s directors could avoid the mistakes of the past. They could avoid making open-ended commitments that would kill future generations, they could find a functional agreement with unions that made best use of the skills and pride of union workers, while avoiding either side becoming the pawn of the other. The new company could focus on a few models, well-made and suited to the customer base, instead of drowning in more than a dozen nameplates. The new company could franchise dealerships in a way that keeps its cash flow free for business, and develop new products in line with sound business principles. But it starts with tearing down the wreckage that is the current corpse of American auto making.

Why will bankruptcy work? The short version is, because we need it to work. I work with companies which have filed bankruptcy, and what happens is one of two things; the company falls completely to pieces, or it gets its act together. In the first case someone else picks up the pieces and makes them work in a new way, and in the second the company bears up under what amounts to business boot camp and it clears out the trash from its past performance. This works because of three basic forces which work together – the company remains extant in terms of its people and product, the creditors find it is in their best interest to help the company survive and succeed, and the public finds the product is worth its money. Once the shock of a bankruptcy filing eases, the people generally realize they can still make things work, but they need to be more flexible.

And what if it does not work? In the last century, there have been many automakers. Prominent names included Studebaker, Packard, Deusenberg, and Hudson. Those names died out because they could not compete, and maybe it’s time for Ford, GM, and Chrysler to join them. If they do go, rest assured that someone will fill the demand for quality American-made cars.