Downstream Effects of GM and Chrysler Chapter 11 Cases

Chrysler filed Chapter 11 on May 1, 2009. GM will almost certainly file on June 1.

The immediate consequences are clear for all to see. Chrysler will be sold to Fiat. Plants will close, employees will be laid off, dealerships will be terminated. How many people will be directly effected is not so clear. We don’t know how many UAW workers will lose their jobs at Chrysler until new management has a chance to review operations and make those decisions. We do know that Chrysler is terminating 789 dealership agreements and that approximately 40,000 people are employed at those dealerships. Many of those dealerships also sell other brands so many will continue, but one would assume that if they are selling less cars, they will need less employees and at least some of them will lose their jobs.

The news from GM is even worse given its greater size. GM has announced it will eliminate 21,000 of its 61,000 UAW employees, will close approximately 14 plants, and terminate approximately 2200 dealerships.

All of that is bad enough, but it doesn’t tell the whole story. Auto manufacturers buy parts to build cars. Once upon a time, they made most of their own parts, but in the last 30 years or so, there has been a trend in the industry to spin off the parts companies. GM spun off Delphi. Ford spun off Visteon.

Delphi filed Chapter 11 in October, 2005 and has been stuck there ever since. (So mush for “surgical” Chapter 11 cases.) One of the complicating factors for Delphi is that the world in which it operates keeps changing. Delphi confirmed a plan in January, 2008, but the current recession officially started in December, 2007. Car sales have decreased by 50% or more since then. Due to no fault on its part, the Delphi plan of reorganization was based on a reality which no longer exists. According to its 2008 10K, Delphi employed 146,600 employees as of December 31, 2008, 18,900 in the U.S. and 127,700 outside the U.S. This is compared to a year earlier when it employed 169,500, a drop of 23,000. As a major supplier to GM, what happens to Delphi when GM files Chapter 11 and closes 14 plants and lays off 21,000 UAW workers? Sounds like GM will be buying less parts, further complicating Delphi’s financial reality.

On May 28, 2009 Visteon filed Chapter 11. According to its 2008 10K, Visteon employs 33,500 employees, which is a reduction of 27% of manufacturing employees and 14% of salaried employees during 2008. The company also closed 14 facilities and sold 7 more. Visteon is faced with the same issues as Delphi – declining demand due to decreased sales and increased competition from foreign competitors. (Although Visteon already employs many of its personnel in “low cost countries.”) How many Visteon employees will be laid off? How many more Delphi employees will be laid off? How many employees of the smaller companies nobody ever heard of that supply screws and light bulbs and cup holders and …. to the companies that make the car parts will be laid off? The short answer is that there will probably be AT LEAST another 100,000 jobs lost in the U.S. auto industry, if not double that number. (And remember, Delphi and Visteon are global companies. The effects won’t be felt just in the U.S.)

What happens to the local businesses in the communities where these plants are when the “good paying” jobs start to disappear? People stop buying houses and cars and big screen TVs and stop eating out at the local restaurants and stop going to the car wash and get their hair cut less often and …… For a good review of the impact on a local economy, look at Elkhart, Indiana, home of the U.S. RV industry, which has been decimated by layoffs due to a lack of demand for toys due to the recession.

People who talk about “surgical Chapter 11’s” are intentionally not telling the whole truth. Chrysler’s asset sale to Fiat may be complete within 90 days, but the case will linger while the attorneys mop up the blood (at $500 to $1000 per hour.) In addition, the downstream effects on suppliers and dealers and local communities will take months or years to be fully appreciated. AND we as taxpayers will now be major shareholders in Chrysler and GM, waiting for the day when we can sell “our” stock and recoup some or all of our “investment.” Let me say right now that I think GM will emerge as a “leaner, meaner” company and that it will survive if it can make better product decisions. (For instance, why do we need GMC? Isn’t the GMC Sierra basically the same thing as the Chevrolet Silverado?) On the other hand, I think Chrysler is doomed and we are only delaying its inevitable demise, which will mean still more job losses and more downstream effects.

Until the U.S housing market stabilizes and there is an end to the continuing job losses, there will be little demand for new cars, and Chrysler and GM (and Ford and Toyota and Nissan) will all continue to struggle. The weak will not survive. I am always amused to hear the financial pundits say the “good news” is that we “only” lost 500,000 jobs last month. Obviously, this is better than losing 650,000 jobs in a month, but it is hardly “good news.” Depending on who you listen to, we need to generate about 100,000 jobs per month just to stay even and another 100,000 to support economic growth. When we are losing “only” 500,000 jobs per month, there will be no growth and no bright future for the auto industry.

Law Office of Michael Baumer

Comments are closed.

by Michael Baumer