The Writing’s on the Wall

by Mitchell Clark, B. Comm.

There is a real sense of inevitability in the car business that bankruptcy reorganization is going to happen at GM and maybe Chrysler. You know the writing is on the wall when you have both the U.S. and Canadian governments now saying to consumers that GM and Chrysler new car warrantees will be guaranteed. I think it’s only a matter of time.

It is ironic that, just at a time when Detroit is coming out with some really interesting new vehicles, the industry is in such turmoil. Domestic cars are now much more competitive with overseas producers and they’re built way better than even just a few years ago. But, the triple whammy of high oil prices, the credit crunch and now the recession is just too strong a headwind to get through. The writing is on the wall.

It’s interesting to note that Germany’s cabinet just approved an increase to the funds dedicated to their vehicle scrappage subsidy. Germany now has a $6.6-billion incentive program to get people to trade in their older vehicles for new greener models. This is just the kind of program we need here to get people back into new car showrooms. Cash for clunkers is one of the best ideas around to get the Main Street economy moving again.

Even if you don’t own a car, the automobile industry is so pervasive throughout the economy that you can say what’s good for GM really is good for the rest of the economy. The closest Chrysler dealership to my home just went bankrupt, with all employees losing their jobs. According to local news, the dealership just couldn’t get the day-to-day financing from local banks to keep the business afloat. This doesn’t surprise me one bit. Credit is already tight for business customers, and what bank wants to lend money to a car dealership in a recession with the manufacturer teetering on bankruptcy? It’s a vicious cycle that has to be put to rest this year.

So, if bankruptcy is what it takes, I say let’s get it over with. I wish there could be a massive restructuring without having to go into bankruptcy protection, but I suspect that negotiations with creditors are just too difficult to settle out of court.

As an auto enthusiast, it’s my hope that the bankruptcy option doesn’t stop the flow of innovation from Detroit. American cars are getting better and better, and not just in the reliability department, but in the driving experience. I think the big three have learned that you can’t just manufacture what you want and tell customers to buy it. You have to manufacture what customers tell you they want to purchase, while at the same time being competitive.

I’m actually optimistic about the domestic automobile industry. As consumers and the economy go back to basics, I think the future is bright for the big three. All that’s required now is to get the business model at the corporate level adjusted to the reality of the marketplace. When this is done, the industry could shine once again.