Put firms into bankruptcy, reorganize, merge

Put firms into bankruptcy, reorganize, merge

Bill VanderMolen, Michigan

How about this instead: The boards of Chrysler Llc. and General Motors Corp. put their companies into bankruptcy with the clear intent of reorganization and merger. Maybe that sounds radical, but it’s the best road we see to a viable, long-term future for the industry.

And yes, the US car industry does belong in the future. Free market proponents can talk all they want about the industry’s “natural" demise—they’ve got a legitimate point. Despite enormous progress in American car quality and design, well-run German, Japanese and South Korean companies have taken about half the US market, and the competition from global car makers is only going to get tougher with the entry of Chinese and Indian producers.

But like many others, we believe that for the sake of jobs, national defence and self-respect, America needs to keep its “true" domestic auto industry alive.

A government handout, however, is decidedly not the way to make that happen. Washington may impose conditions and promise strict oversight, but it simply can’t push through the kind of transformative change the auto industry needs.

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There would be too much political opposition, and regardless, the bailout sums being bandied about—$25 billion (Rs1.25 trillion) taxpayer dollars for starters, with plenty more required down the road—would only keep the Big Three heaving along, basically as they are. It’s a life-support solution, not a cure.

That’s why the auto makers’ boards should take the courageous step of putting their companies into bankruptcy. Some creditors might make the case for liquidation, but given the diminished worth of the auto makers’ assets, that’s a pretty unattractive scenario. Instead, creditors would most likely opt for the government’s stepping in as the debtor-in-possession financier supporting the reorganization.

Talk about a fresh start. For at least a decade, US auto makers have been chipping away incrementally at their massive legacy costs. But reorganization would finally open the door to meaningful structural change with the renegotiation of contracts with creditors, dealers and unions. And it would do so with a much improved chance of taxpayer return.

Once in Chapter 11, a merger would further galvanize fundamental change. Three companies are too cumbersome to unite, and Ford has a two-tiered, family-controlled structure, so we’ll leave them out of this solution for now and propose that GM and Chrysler join forces.

It’s been estimated that such a merger could create up to $15 billion in synergies from reduced capacity and overhead redundancies—savings that could lower the cost of producing a car, as well as providing for an increase in spending on research and development.

Granted, GM and Chrysler could lose several points of market share during the transition, but a merged entity would still end up in a strong position, with at least a quarter of the US market.

We have no intention of making this sound easy.

Mergers are challenging under any circumstances, and a merger of two companies in bankruptcy would be at the outer limits of difficulty, requiring the commitment of constituencies steeped in old, adversarial ways of doing things. And there would be real pain before a turnaround starts.

Shareholders would see their investments evaporate. Thousands of jobs would be lost, and many pensions and other benefits affected. And banks would see much of their debt converted to equity.

We also realize there are dozens of reasons to shoot down such a drastic solution. Some argue that American consumers won’t invest $30,000 or more in a car from a bankrupt company.

But Americans regularly invest their most precious asset—their lives—in bankrupt airlines when they fly.

That said, if the government wants to see Chrysler and GM emerge from bankruptcy sooner rather than later, it could show its long-term support in some form, perhaps by guaranteeing new car warranties.

Others will argue that the mechanics of two bankruptcies and a merger are impossible to execute, and still others will say that too many contractual concessions have already been made.

Leaders, too, may baulk at championing painful change. That’s a brutal task in normal times—and it would surely be Herculean in the highly politicized pay-back environments of Washington and Detroit.

But for the US industry to get from here to there—“there" meaning a globally competitive future—it has to get off the beaten path of incrementalism.

With reorganization and a merger, a long and bumpy trip awaits, but the destination should make it worth the ride.

©2008/By NYT Syndicate

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