The Awakening of Detroit

When we say 'Detroit' we think of automobile manufacturers. In actuality the automobile industry has been shifting to other areas of the country. BMW, Toyota, Honda and others have shifted manufacturing to other states.  GM builds cars in South America,as well.

The  American automobile industry over the last 20 years has contributed less and less to the GDP.  This has ocurred for largely two reasons. 

1. The shift to technology, including the internet, development of online industry, software, outsourcing to foreign countries,

2. While Detroit has considered itself the core of United States productivity and the heartbeat of the nation, this in reality is no longer true. 

Demand for their product has gradually and now precipitously declined due to the economic credit crunch, and other more insidious reasons.

Looking in the mirror will do little to correct the immediate problem.

The history of companies reveals what will happend to General Motors. When companies begin to fail they look for increased efficiency, and more stable revenue sources.  The model is clear, those who successfully diversify survive with the ability to increase their business portfolio as the world changes.

General Motors has been asleep at the switch, isolated in Michigan with a feeling of invincibility.  This was demonstrated when their executives flew to D.C. in three separate private jets. The expense for that trip was in reality small compared to the enormous challenge they now face.

A mere bailout of 34 billion dollars is a bandaid at this point. Bandaids will not stop the hemorrhage from an artery.

The sequence of events will be:

1. Failure to make payrolls

2. Breach of contracts with their suppliers

3. Lawsuits, followed by liens, seizures,

4. Increased liabilities due to 1,2 and 3.

5..Forced involuntary bankruptcy, and take over by a court appointed trustee.

Some planning and initiative by filing for a Chapter 11 provides some protection for a period of reorganization with oversight by third parties.  The success rate for this move overall is questionable.  The rate of confirmation for companies filing Chapter 11 is outlined in this report

The success rate of Chapter 11 bankruptcy cases, as measured by the percentage of cases confirmed each year, has doubled since the early 1980s, according to a new study of data collected by the United States Trustee Program.
The study showed, on average, a 27 percent annual confirmation rate of Chapter 11 cases filed between 1989 and 1995. Previous statistics indicated that only around 17 percent of Chapter 11 cases were confirmed.
A Chapter 11 debtor, often with participation from creditors, creates a plan to repay part or all of its debts. A case is "confirmed" if the bankruptcy court approves that plan.
The report, published in the February 1998 issue of American Bankruptcy Institute Journal, was prepared by Ed Flynn and Gordon Bermant for the Executive Office for United States Trustees. The EOUST performs administrative and supervisory functions for the United States Trustee Program, a component of the Justice Department that monitors the administration of bankruptcy cases nationwide.

Filing chapter  11 does not mean the end of a business.

Alternatives are available.  When attorneys become involved if there is anything left they will get it.

Usually those involved are emotionally and physically drained by the events leading up to the business failure.

It is always wise to have outside professional advice, and not necessarily attorneys.  Most will advise Chapter 11 or 7 because of the conflict of interest.....they will profit while all others lose out.  They have their fees alloted at the inceptionof the filing by a trustee (who is usually a judge) ie, attorney. 

It has been done previously by a number of big industries,the railroads were broken up into smaller companies.  They survived in a different format, some with government subsidies.  One way or the other we all pay for it, if it is deemed essential to the national interest. The big question is "Is GM essential to our way of life?"

What will supercede it's necessary functions?

Automobiles built in the United States will have a new logo.

GM needs to cut it's payroll, make fewer cars, renegotiate contract with vendors, eliminate some or most of it's legacy costs.  Workers are going to have to bite the bullet in the face of all other employed losing health insurance, other perks and benefits. The idea of a job bank, is well intentioned, but in survival mode where there will be fewer if any jobs is very questionable.  Government may have to step in with unemployment and social service benefits for some time while industries reorganize to a modern business model.