Bailout or Failure?

It is Wednesday evening and so far, there is no bailout program for the auto industry. Although a bailout is not the greatest idea, compared to certain other options, it is by far the lesser of two evils when considering the consequences of the failure of at least two of the three American auto makers.

Without an immediate bailout, GM and Chrysler will no doubt file for bankruptcy in the next sixty days. Executives of the companies have said bankruptcy would be q disaster because customers would not buy their cars. That does not make complete sense, though. If the manufacturers maintained their warranty programs throughout bankruptcy, and dealer service departments continued to operate, it seems people would buy the vehicles. The bigger problem of revenue generation is the lack of the right vehicles for the market, not a bankruptcy.

As earlier written on this blog, it still seems that bankruptcy of GM, with post petition financing guaranteed by the government; a line of credit for Ford guaranteed by the government; and the breakup of Chrysler makes the most sense.

If in bankruptcy, GM can quickly deal with the problems of high labor costs, high legacy costs, too many dealers and debt overload. They can shed models and factories and dealers, and renegotiate their debt, and in two years exit bankruptcy as a smoothly operating company with the beginning of a competitive model lineup. Many thousand dealers will be out of business, with great dislocation to customers and employees – unfortunately that is the consequence of the Big 3’s poor management through the years.

Although Ford is stronger than GM, they also may need to go through a Chapter 11 proceeding in order to achieve all their goals in the time available. Union reaction will have great importance in determining the issue.

The next few days will decide the fate of the companies, their employees, their customers and the many other stakeholders. Too bad I will not be the “Car Czar.”