End of the road for special case of carmakers

ANALYSIS:AMERICAN POLITICIANS trying to understand the reasons behind the collapse of Detroit's "Big Three" automakers could do worse than take a drive along Route 1 9 in New Jersey.

Just a few minutes from the bright lights of Manhattan, under the Hudson river via the Holland Tunnel, there are acres of lots overflowing with brand new American cars. All the famous marques can be found in these elephant graveyards of metal – Pontiacs, Buicks, Chevys, Chryslers and Fords.

These unwanted autos will still be there whether Congress buckles to the carmakers pleas for $34 billion of aid or not.

American car sales plummeted in November to their lowest level in a quarter of a century. General Motors’ sales tumbled 41.3 per cent, Ford’s fell 30.5 per cent, and Chrysler’s were off 47.1 per cent.

There are 21,000 new car dealerships in the US, the majority of whom are tied to the Big Three. GM alone has close to 7,000 competing with each other all over the country.

This massive glut of dealerships is a real problem for the Big Three, just as much of a hindrance to their recovery as costly union contracts and production problems.

GM knows this and has acknowledged that it would have to trim its own network by as many as 1,800 dealerships to stand a chance of survival. Yet most are protected by strong state franchise laws that simply do not allow closure without a hefty payment to the franchisee.

On Tuesday Chrysler said it needed $7 billion by the end of the year just to keep running. GM asked for $4 billion as the first instalment of a $12 billion loan, plus a $6 billion line of credit.

Ford is in much better health, it seems, and needs a $9 billion “standby line of credit”.

To get the money the Big Three were forced by the politicians to craft detailed business plans that promised retooled factories making environmentally friendly cars, a new union deal to lower labour costs, and a stake in the companies for government.

The plucky CEOs even agreed to a $1 a year salary in exchange for financial aid.

But what good is any of this if the Big Three cannot sell cars?

The only way the dealership problem – and many of the automakers other ills – can be addressed quickly and affordably is through the bankruptcy courts.

But up until now neither the Big Three nor Congress have been willing to consider such a move as they fear a damaging ripple effect through the broader economy that will cost millions of jobs.

A small group of US politicians have in the last week asked restructuring experts if a pre-arranged bankruptcy – negotiated with workers, creditors and lenders – could be used to reorganise the Big Three without liquidation. Yet such a solution would be almost impossible to implement.

An alternative, and workable, plan would be to allow Chrysler to fail. The company is owned by Cerberus, a private equity company that knows the risks inherent in a corporate turnaround, and, besides, Chrysler has already been bailed out by the US government once before. Its time is up.

GM should seek the safe haven of Chapter 11 bankruptcy to quickly reorganise production, renegotiate union contracts and axe at least half of its dealerships.

Ford is in much more robust shape and has a leaner dealership network already, but would still benefit from the union contract reworked by GM.

America’s carmakers have been treated as a special political case from the rest of industry for far too long. If the problems from the factory floor to the salesroom had been properly addressed 25 years ago – as they were in the steel industry – the US people would not today be facing Hobson’s choice of a $34 billion bailout bill or massive unemployment.