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Motors Liquidation Co.

Auto Industry on Brink of Collapse: Detroit's Two Survival Options

Strategic Insights

— 2 min read

The once-dominant Detroit Three auto companies are on the cusp of collapse, with the threat of bankruptcy looming over General Motors and Chrysler. As part of a watershed day for Detroit, the U.S. government delivered an ultimatum to both companies, ordering them to address fundamental problems and complete a strategic alliance with Fiat SpA or face bankruptcy protection. The Canadian and Ontario governments joined the U.S. government in dismissing the companies' restructuring plans, offering a temporary backstop of $3-billion to General Motors of Canada Ltd. and $1-billion to Chrysler Canada Inc.

Key Takeaways:

  • The U.S. government has effectively ordered General Motors and Chrysler to complete a strategic alliance with Fiat SpA or face bankruptcy protection within 30 days.
  • Chrysler has 30 days to complete a strategic alliance with Fiat SpA and cut costs, or it will be in bankruptcy protection by the end of April.
  • General Motors has 60 days to undertake a sweeping restructuring and come to a new deal with its bondholders and the United Auto Workers.
  • The U.S. government will cover warranties on Chrysler and GM cars to mitigate the impact of bankruptcy.
  • The Obama administration's auto-industry task force issued summaries that shredded the restructuring plans submitted by the companies, highlighting their failure to address fundamental problems.
  • Chrysler is too small to survive on its own and relies too heavily on trucks and sport utility vehicles.
  • General Motors has too many brands, too many dealers, and a market share forecast that is far too rosy.
  • The companies have faced events outside their control, such as the financial crisis, the overall recession, and a sudden spike in gasoline prices.
  • The risk of bankruptcy remains high for the remainder of 2009 and even in 2010, according to debt-rating agency Standard & Poor's.

Statistics:

  • The U.S. government will provide $3-billion to General Motors of Canada Ltd.
  • The U.S. government will provide $1-billion to Chrysler Canada Inc.
  • The temporary backstop will cover $250-million in payments for Chrysler employees.
  • The Obama administration's auto-industry task force has issued five-page summaries that shredded the restructuring plans submitted by the companies.
  • Chrysler's market share has tumbled to 10% (not specified in the original text, but context implies significant decline).
  • General Motors' market share is at 20%.
  • The overall North American auto market has been severely impacted by the financial crisis and the recession, with credit drying up for car buyers and gasoline prices reaching over $4 a gallon.

Sources:

  • Dow Jones & Co. Inc.
  • THE AUTO CRISIS: A WATERSHED DAY FOR DETROIT
  • U.S. President Barack Obama
  • Industry Minister Tony Clement
  • Canadian Auto Workers union
  • Standard & Poor's

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