Tuesday, December 09, 2008

Auto industry: more comments

I'd previously stated that I wouldn't oppose a bankruptcy by one or more of the domestic US auto makers. However, an article by Morningstar reminds me that I neglected to consider two points of information: consumers may not consider buying a vehicle from a bankrupt auto maker. This is not like flying on an airline, where the airline's obligation to you ends when they drop you off. Consumers will depend on auto manufacturers and dealers to honor the warranties. Even if the government makes some attempt to guarantee a warranty, consumers might decide not to trust that guarantee when there are so many healthy foreign companies.

Additionally, Ford and GM share 80% of their parts suppliers. If one firm were to liquidate, that could well drive the suppliers into bankruptcy. If that happens, the domestic automakers would go as well. In fact, many foreign firms use the same suppliers.

This being the case, the least bad option is a government-overseen reorganization. The economic consequences will simply be too severe otherwise.

This will still be painful. Readers probably know that Congress is already passing an initial rescue plan. It's almost certain that the Obama administration will need to pass a second round of funding.

However, there's more. The automakers will need to slim down, which will reduce the sales of their suppliers. Many of these have heavy debt loads. Morningstar contends that many Tier 1 (i.e. the largest) suppliers won't make it through 2009. Many of the smaller Tier 2 and 3 suppliers will go out of business as well.

In addition, many auto dealers, especially smaller ones and those that primarily sell domestic brands, will go bankrupt.

The Morningstar article outlines the three possible scenarios: bankruptcy and liquidation, bankruptcy with the government providing operating funds, and reorganization outside of bankruptcy. Read if interested.

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