Suppose the government “allows” one of Detroit’s big automakers to fail — and at this point, it might happen, as it is still not clear Congress will pass a rescue plan.
What happens next?
GM appears to be the first in line to fall.
GM burned through $6.9 billion during the third quarter, leaving it with only $16 billion on hand as of Sept. 30. But it needs $11 billion to $14 billion to continue normal operations.
The basic bailout scenario is this: The government provides a large sum of cash to keep the companies afloat long enough for savings from renegotiated autoworkers contracts to kick in and slumping sales to rebound. Only one of those is a sure thing. (The NYTimes’ story on the failed bailout of British automaker Leyland is also worth a read for some historical context.)
The prospects aren’t good for an automaker that heads into Chapter 11 bankruptcy. Would you buy a new car from a company that had publicly declared its insolvency? Then again, who’s buying cars from the Big Three when they’ve put their collective hands out and declared the virtual inevitability of their bottom lines bottoming out?
The CEOs of GM, Chrysler and Ford have been making a case that the auto industry is the linchpin of the American economy, and without a quick cash infusion, mass financial ruin is just beyond the horizon. For millions, it’s a devastating scenario.
Nearly 2 million Americans get their health insurance directly from one of the Big Three automakers. Most of them would lose that coverage if their company goes out of business. A failure of one of the Big Three could also cause a string of bankruptcies among suppliers.
The Center for Automotive Research, a Michigan think tank that supports the bailout, estimates that between 1.4 million and 1.7 million jobs indirectly tied to the Big Three would be lost in the first year following widespread auto failures.
The question that many ask is — how do you turn around a company in three months when it has lost $20 billion already this year?
So, let’s suppose the Big Three’s biggest battle now is ostensibly for the hearts and wallets of the American consumer. My perception of my (loosely defined) generation — I’m 24 — is that for the most part, what loyalty is left in our bunch is to whatever car is going to get us where we need to go.
I’m a two-time Honda Accord driver — one passed down from my parents and one purchased used with cash. If I had to buy a vehicle today, I would be more inclined to purchase a Honda as both vehicles have made it past 200,000 miles, with the current one pushing 250,000, but I’m not wedded to the brand.
So, do the Feds prop up the Big Three, or should they let the companies run their course and deal with the fallout? And would you buy a car called Ka?