General Motors CEO Rick Wagoner, (r), pleads with Congress for a bailout in December 2008.
Most of what has been written about General Motors lately seems to concentrate on the purely financial aspects of the worldwide economic crisis and the looming threat of government foot-dragging on GM pleas for loans.
Both our media colleagues and the ridiculously under-qualified members of President Obama’s automotive panel appear to have overlooked or under-estimated the consequences of GM being unable to pay its bills, whether or not in bankruptcy.
But a group of highly qualified observers of the auto industry, market forecasting firm CSM Worldwide specified — not speculated — on the dangers in a presentation to the Automotive Press Association back before Christmas.
It’s real simple, according to CSM: if GM goes down, it will trigger closed assembly plants for other North American vehicle producers, including transplants from Asia and Europe.
This is because GM is still a giant by any reasonable measure, and a failure to pay its bills would set off a collapsing house of cards for suppliers who, forced into financial crisis in turn, would be unable to keep supplying parts to U.S. assembly operations for the likes of Chrysler, Ford, Toyota, Honda, Nissan, Subaru, Hyundai, Kia, Mercedes and BMW. Further, GM closing its doors would shut down other companies’ automotive assembly in Canada and Mexico as well.
Remember, a shortage of even just one critical part or assembly can force a plant into temporary closing.
Is anyone besides industry insiders paying attention to this? It doesn’t seem so.
In a study commissioned last fall by the Original Equipment Suppliers Association, CSM reported that 58% of GM’s supply base also supply Asian auto companies in North America, 56% support Chrysler, 51% Ford and 37% European transplant automakers here.
“The bankruptcy of a major automaker won’t be just a Detroit problem or a Michigan problem,” Craig Cather, CSM’s president and CEO, said in December. “The pain will quickly spread to the Southern states that have new foreign-owned auto plants, as well as Canada and Mexico, because there are no quick and easy ways to restructure companies or resource components when the entire industry is in crisis.” He noted, “Many suppliers can’t afford another hit to their production and cash flow.”
In the present credit crunch, like everyone else from homeowners upside down on their mortgages to GM, suppliers can’t find financing to tide them over. Sudden supplier reorganizations or liquidations under bankruptcy “would start a ripple effect that would undermine the health and stability of every automaker in North America,” Cather observed.
CSM’s study on the cross-supply problem covered 15,000 supply contracts across 64 supplied vehicle components or systems for all light vehicles produced in North America.
The strife of shutdown assembly plants might not last forever, however, even in a doomsday 10-million-auto-sales year. At a minimum, the friction of auto transportation– in which millions of vehicles are removed from service by being wrecked or when needed repairs or replacement of components like tires cost more than the vehicles are worth — creates demand. Further, cars and trucks coming off leases trigger replacements. That is, if financing is available.
So automakers might have to suspend production while they beat the bushes for new suppliers, normally a lengthy process, and find the money for tooling, training, wholesale inventories and ultimately retail purchases. Still, the effects would be devastating on the national economy, already sinking like a lead balloon.
In America’s Great Depression, triggered by the infamous Black Tuesday of the stock market in 1929, Detroit’s worst year didn’t come until 1932. U. S. new car registrations dropped from 4 million in 1929 to 1.1 in 1932, and it took 20 years, until 1949, to surpass 1929 again. In the domestic auto industry Recession of the 1950s, new car registrations fell from 7.1 million in booming 1955 to 4.7 million in 1958, when “foreign cars” counted for only a paltry 8%.