If GM Fails, Then What?
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If GM Fails, Then What?
The carmaker says it has no intention of entering Chapter 11, but some
analysts say a bankruptcy filing in the next few years is a definite
possibility. The ripple effects on the economy would be huge

By Tom Petruno and John O'Dell, Times Staff Writers
April 23, 2006

Ponying up more than $100,000 of their own money, three dozen General Motors
Corp. dealers nationwide this month bought full-page newspaper ads imploring
the public to give GM a chance.

"For the good of everyone, they must succeed and they need our help," the ad
read. "We pledge ours. We hope you will do the same."

For most of GM's 98-year history, that kind of plea would have been
unimaginable. But now, the company long synonymous with U.S. industrial
might is scrambling to avoid something else once unimaginable: bankruptcy.

GM executives, including Chief Executive Rick Wagoner, say they have no
intention of filing for bankruptcy protection, and no need to do so.

On Thursday, the company reported a $323 million first quarter loss, a sharp
improvement from recent quarters and an "important milestone" in the
automaker's turnaround plan, Wagoner said.

But some veteran industry analysts say GM's fundamental problems of high
labor costs and falling market share are so severe that there is a serious
risk that the auto giant will enter Bankruptcy Court in the next few years.
Any number of events could be the tipping point - another surge in oil and
gasoline prices, a recession brought on by rising interest rates or a strike
by GM's main parts supplier, which already is operating under Chapter 11 of
the U.S. Bankruptcy Code.

For the world's largest automaker and its vast constituencies, the prospect
of a bankruptcy filing is so daunting that even many of Wagoner's critics
hope his revival program works.

A GM bankruptcy filing would be the largest in history, challenging Wall
Street, organized labor, politicians and the legal system to deal with the
fallout.

GM's 147,000 workers in the U.S. and 460,000 retirees would face the
prospect of their pension plans' being dumped on the federal government and
of seeing their future benefits reduced.

Stock and bond markets could be upended, at least temporarily. GM
shareholders, including billionaire Kirk Kerkorian, who owns 9.9% of GM,
could lose every penny of their investments in the carmaker. Meanwhile, the
company's bondholders, banks and other creditors would face unknown losses
on $33 billion of debt.

Almost certainly, a GM bankruptcy filing would have enormous repercussions
for the entire U.S. auto industry, which still directly employs about 1
million Americans, many of them in the Midwest.

Several big auto parts suppliers already are in financial reorganization. If
GM joined them, it would raise the possibility of a domino effect of
additional failures throughout the industry - including Ford Motor Co., some
analysts say.

Although the public has witnessed some colossal corporate busts in recent
years, "I would not underestimate the effect on the American psyche" of GM
in Chapter 11, said Steven Roach, an economist at brokerage Morgan Stanley
in New York.

The shock effects would ripple through the economy, from assembly lines to
auto insurance offices, from Midwest shopping malls to global financial
capitals.

For GM's 7,300 U.S. dealers, an immediate worry would be that sales might
halt.

GM in bankruptcy would be "really uncharted territory," said Leonard Renick,
owner of Renick Cadillac in Fullerton.

In terms of his ability to keep customers coming through the door, "It
couldn't be good," Renick said. "I think it would be pretty devastating."

For all of its problems, GM still accounts for about 1 of every 4 passenger
vehicles sold in the U.S. Its worldwide sales were $193 billion in 2005,
ranking third on the Fortune 500 list.

But GM lost $10.6 billion last year, and Asian rivals have been taking
market share from the company for decades.

Since last fall, GM has been trying to shrink its way back to health by
closing a dozen plants and offering cash buyouts and retirement incentives
to all 113,000 of its U.S. hourly workers, hoping to get a large number of
them off the payroll. The company also has struck a deal with the United
Auto Workers to trim retiree healthcare costs. Even so, by some estimates GM
is draining $13 million a day.

"The current path is simply unsustainable," said Sean Egan, managing
director of credit-rating firm Egan-Jones Ratings Co. in Haverford, Pa. He
predicts GM will be in Bankruptcy Court within two years.

Chapter 11 is designed to give a troubled company breathing room while it
restructures. Debts are instantly suspended, and the company operates under
court oversight and protection while it tries to work out its problems.

In that sense, a filing by GM might seem a logical step for a business that
is battling to reinvent itself. Major airlines and telecommunication firms
have sought bankruptcy protection in recent years, and their customers have
stuck with them.

But apart from a home, a car is the most expensive item most consumers buy.
They expect big-ticket goods to last for years and for the manufacturer to
be around to service them. In bankruptcy protection, GM would have to
convince consumers that it wasn't going away.

Renick, the Fullerton dealer, said he would expect to tough it out if sales
withered initially because of a GM Chapter 11 filing. His dealership, which
his father founded as a Packard franchise in 1952, employs about 80 people.

But he wasn't sure what GM's strategy would be to lure people back into the
showrooms. "Would GM be willing to slash prices? I doubt it. They've already
done it across the board," Renick said.

Roy Adler, a marketing professor and consumer-attitude specialist at
Pepperdine University, said it would be hard to overcome peoples' fears.

"The quality of most cars is really close now, so if I've got $25,000 and
there are four or five other carmakers with competing products and they
aren't in bankruptcy, then I've got a lot less risk going to one of them"
instead of a company in Chapter 11, he said.

The stigma of bankruptcy would affect used GM cars too, said Maryann Keller,
an independent auto industry analyst in Greenwich, Conn. "Every owner of a
GM car would suffer an immediate loss of value," she said.

GM would be forced to drop sticker prices to draw customers, Keller said.

"There's only one way to compensate consumers for the risk, and that's by
cutting the price," she said.

GM also would need to project a hopeful message in its post-bankruptcy
advertising, Adler said.

"They would have to avoid the B-word," he said, "and craft a pretty dramatic
message that said they were going to be stronger than ever with the
streamlining they were doing."

Adler suggested that GM might take a page from South Korea's Hyundai Motor
Co. and provide a 10-year service warranty on cars and trucks, with the
funding to back up those warranties held in a trust by a large financial
institution.

In addition, Adler said, the company "would have to promise exciting new
cars were coming soon, and show some examples, and they'd have to promise an
expanded commitment to serving GM owners."

Lee Iacocca did that for Chrysler Corp. in the late-1970s and early-1980s,
after it avoided bankruptcy with a $1.5-billion federal loan guarantee. "He
was able to keep sales from faltering by wrapping himself in the flag, going
on TV and pitching those cars," Keller said.

But that was a different era, she said, when manufacturing was a larger part
of the U.S. economy and Chrysler's woes struck a patriotic nerve. Today,
Japanese cars outsell GM's models in the U.S.

"Rick Wagoner couldn't do what Iacocca did," Keller said.

Much of what might happen to GM in bankruptcy will happen in any case, many
analysts say. One way or another, "The old GM is going away. It will be a
totally different company," said Sean McAlinden, an economist at the Center
for Automotive Research in Ann Arbor, Mich.

But for GM workers and their families, bankruptcy could instantly intensify
uncertainty about their future. No job would be safe, because the shape of a
new GM wouldn't be management's decision alone. Creditors would have to
agree to the company's reorganization plan, and a Bankruptcy Court judge
would have final say-so.

Wagoner, who has been GM's CEO for six years and has been widely criticized
for not dealing with the company's problems sooner, says the game plan to
stay solvent is to continue hacking expenses. The company says it is on
track to reduce North American structural costs - including union labor
expenses - by $7 billion a year.

GM also is raising capital by selling long-held stakes in foreign auto
makers such as Fiat and 51% of its profitable financing subsidiary, General
Motors Acceptance Corp.

But cost cutting alone won't save GM, many analysts say. In recent months,
sales have continued to decline despite the company's restructuring moves.

In or out of bankruptcy, Wagoner must decide which GM car and truck brands
to keep, which plants to close and how much the company can profitably
afford in wages and benefits.

Last year, GM Vice Chairman Robert Lutz called Pontiac and Buick "damaged
brands." Since then, they frequently have been mentioned as divisions that
GM might shed. A bankruptcy filing could speed up the process.

GM now has eight brands, and "that's just too many mouths to feed," said
Eric Noble, president of CarLab market research in Orange.

That analogy also applies to GM's workforce.

As so-called legacy costs for retirees' pensions and healthcare expenses
have mounted over the last 20 years, GM's competitive disadvantage compared
with foreign rivals has ballooned.

Its U.S. labor costs averaged $74 an hour in wages and benefits last year,
compared with $48 for Toyota's U.S. labor force. GM said it spent $5.4
billion last year on healthcare alone.

If GM and the auto workers union can't agree on how to cut labor costs so
that GM can be consistently profitable, and bankruptcy follows, a federal
judge ultimately will make the decision.

On that issue, Delphi Corp. may be a prelude to how a GM bankruptcy would
unfold.

Delphi, an auto parts supplier spun off by GM in 1999, filed for Chapter 11
protection last October. Delphi wants to slash hourly union wages by 40%.
The auto workers union has balked. Two weeks ago, Delphi took the radical
step of asking the Bankruptcy Court's permission to void its labor contracts
and modify retiree benefits.

The union warned that if the court agreed to Delphi's request, it would
sanction a strike. A judge is expected to rule by June.

So what would happen if GM sought to cut its pension benefits by, say, 20%
to 40%?

"I might as well shoot myself," said 65-year-old Linda Ruth Jones, who
retired in 1996 after 34 years as a GM assembly worker and inspector at
plants in Flint and Pontiac, Mich.

Jones retired to the rural community of Harrison, Mich., about 300 miles
north of Detroit. If her GM pension was cut by even 20%, Jones said, she
couldn't continue making her $350 monthly mortgage payment.

Recently, Jones protested a GM-union agreement made last fall to begin
imposing extra costs on retirees for health insurance. She says that the
automaker is breaking a promise that kept her working hard for more than
three decades.

"I didn't go to work at GM for the wages," she said. "I went for benefits
for my two children, whose father wouldn't support them, and for myself when
I retired. I paid a baby-sitter every day so I could work for GM."

In return, she said, the company promised a certain level of benefits "and
now they are forcing things on us that we shouldn't have to face at this
time of our life. They signed a contract with us at retirement, and they
should be made to stand by that contract."

For the auto workers union, GM's financial woes are forcing bitter choices:
how to apportion financial pain among former workers who draw healthcare and
pension benefits and the workers currently on the shop floor.

Paul Krell, a spokesman for the union in Detroit, said its goal in reducing
pay and benefits "is to spread the sacrifices as broadly but as thinly as
possible."

The issue of legacy costs "creates a real conflict between existing workers
and retired workers," said Jeff Werbalowsky, a reorganization specialist and
co-chief executive of financial advisory firm Houlihan Lokey Howard & Zukin
in Los Angeles.

That conflict could deepen in bankruptcy, because under Chapter 11 the
automaker could try to dump its $95-billion pension plans onto the federal
Pension Benefit Guaranty Corp. If the Bankruptcy Court agreed, many GM
workers could face sharply reduced benefits, because the federal agency is
limited in what it can pay.

Even if GM didn't seek to hand its pension funds to the agency, many
analysts say the company undoubtedly would use that threat as a key
bargaining chip to wring other cost savings from the union.

Moreover, the auto workers union faces the likelihood that whatever deals it
strikes with GM, they would be models for the rest of the auto industry.

"We expect that any concessions that GM got out of the UAW, Ford and
Chrysler would expect to get as well," said Mark Oline, head of corporate
debt at credit-rating firm Fitch Ratings in Chicago.

The implications of a new round of labor cost cutting in the auto industry,
however, could go far beyond that business.

What is happening at GM, many analysts say, is a microcosm of the rest of
the country. The question it poses: In the age of globalization, can U.S.
companies, state and local governments and the Social Security system really
afford the healthcare and retirement benefits they have promised their
workers?

Politically, that issue has been too hot to touch.

In bankruptcy, however, some obligations ultimately go unpaid.

"The one thing that a bankruptcy makes clear is that, this is the size of
the pie, and that's all there is," Werbalowsky said.

Largest U.S. bankruptcies

With $160 billion in assets in its automotive operations, General

Motors would rank as the largest U.S. bankruptcy in history if the company
filed for reorganization - a move that GM says it is not contemplating.

Largest U.S. bankruptcies, ranked by pre-bankruptcy assets (in billions)

     Company  Year filed Assets
     1. WorldCom  2002    $103.9
     2. Enron  2001    $63.4
     3. Conseco  2002    $61.4
     4. Texaco  1987    $35.9
     5. Financial Corp. of America  1988    $33.9
     6. Global Crossing  2002    $30.2
     7. Pacific Gas & Electric  2001    $29.8
     8. Calpine  2005    $26.6
     9. UAL (United Air Lines)  2002    $25.2
     10. Delta Air Lines  2005    $21.8
     11. Adelphia Communications  2002    $21.5
     12. MCorp (Texas bank)  1989    $20.2
     13. Mirant   2003    $19.4
     14. Delphi  2005    $17.1
     15. First Executive  1991    $15.2

Source: New Generation Research

Skidding marks

For decades GM has lost sales to Asian and European automakers. Here's a
look at the company's shrinking slice of the U.S. market over the past four
decades.

Share of U.S. auto sales

1965

General Motors: 50%

Ford: 26%

Chrysler: 14%

Total imports: 5%

Other American: 4%

*

1985

General Motors: 41%

Total imports: 24%

Ford: 21%

Chrysler: 12%

Other American: 2%

*

2005

Total imports: 43%

General Motors: 26%

Ford: 17%

Chrysler: 14%

--
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