GM bankruptcy threatens auto supply chain

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It seems highly likely that GM, the largest US car manufacturer, will enter Chapter 11 bankruptcy proceedings in the next few weeks. Chrysler, the 4th largest US company, may well follow them.

Even if it avoids bankruptcy, GM’s own restructuring plan has the potential to be equally traumatic. It is based on a forecast US market of just 10 million vehicles/year – compared to the 15-17 million/year sales seen between 1995-2007.

This raises a number of serious issues for chemical companies supplying into the auto industry value chain:

• Bankruptcies are nearly always messy affairs. It is therefore very hard to forecast just how they will develop. A judge will most likely be in charge of the process, and whilst they will be aware of commercial issues, their first priority is to follow the law.
• A bankruptcy of this scale will be unprecedented. It is also important to remember that a key aim of the process, as the Wall Street Journal notes today, would be to help GM “outmanoeuvre uncompetitive supply contracts with parts makers”.
• So far, auto suppliers have received a $5bn support package from the government in March. But we don’t know whether any more money will follow this, or on what conditions.
• Chapter 11 will probably only apply formally to GM’s US-based companies. But there is clearly a strong risk that some lenders will also seek to involve GM’s overseas affiliates (as we have seen with LyondellBasell), adding to the complexity.
• Emotional issues will also come to the fore. Not only will many people be losing their jobs, and their businesses, but brands such as Pontiac have iconic status. Nobody can therefore predict just how the media and wider population may react.

As the Journal warns, the Chapter 11 process “could lead to a unintended collapse of the whole network of companies dependent on the two companies”. An up-front investment of time now, in finalising a contingency plan, could be a very wise move.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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