Driven to Bankruptcy?

Posted Dec. 12, 2008, at 5:38 p.m.

With the failure of a rescue package for the automobile industry this week, there is increasing talk of one or more American carmakers heading toward bankruptcy. Whether this is a viable alternative depends as much on consumers as it does bankruptcy judges.

The House passed a $14 billion bailout package for the country’s three American automakers, but the measure failed in the Senate. Sens. Olympia Snowe and Susan Collins voted to continue discussion on the package, but the measure fell eight votes short of that needed to keep it alive. Much of the opposition came from Republican lawmakers, many of whom were upset that union officials refused to agree to immediate wage cuts.

It is possible that the White House will come up with a bailout package for General Motors, Chrysler and Ford. It could use a portion of the $700 billion approved by Congress in October to help Wall Street. Although the administration has said that money was meant to help financial institutions, after Thursday’s vote, it said it was looking at its options.

One option, many economists say, is to push the weakest companies — GM and Chrysler — toward bankruptcy.

A benefit of bankruptcy, says John Mahon, dean of the College of Business, Public Policy and Health at the University of Maine, is that it would allow the companies to reorganize their business. This means renegotiating union contracts, a big plus since the per-hour employee salary, health and re-tirement benefit costs are much higher for the three American companies than they are for Japanese companies that make cars in the United States, he says.

As for concerns that people won’t buy cars from companies going through bankruptcy, Professor Mahon notes that people buy tickets on bankrupt airlines every day. Federal law requires that car companies ensure the availability of parts for models that are discontinued, and dealerships have financial incentives to ensure warranty work remains available, he says.

Jim McConnon, a professor of economics at the University of Maine, says that, because of the cost difference, people will be much more concerned about buying a car from a company in bankruptcy than buying airline tickets from a company in the same position. He points to a recent survey that found 85 percent of respondents said they wouldn’t buy a car from a bankrupt automaker.

However, he notes, there isn’t much psychological difference between a company being in bankruptcy and being in the news every day as needing a lifeline.

The bottom line, he says, is to convince consumers of the stability of the companies.

This can be done through a bailout, bankruptcy or another form of restructuring. It won’t happen by continuing business as usual.

SEE COMMENTS →

ADVERTISEMENT | Grow your business
ADVERTISEMENT | Grow your business

Similar Articles

More in Opinion