So the news out of the Motor City this weekend (other than the (unfortunately fleeting) joy of Spartan fans everywhere), is that GM’s new President & CEO, Fritz Henderson, has made it clear that he is not afraid to use the dreaded “B” word when it comes to ’saving’ the automotive behemoth from the scrap heap;

That’s right, Bankruptcy.

Indeed, for most people throughout the country, bankruptcy may sound like the most sensible course of action–bring GM into court and go one-by-one down the long (and growing) list of its creditors, telling each of them that, essentially, they’ll get nothing and like it.  In the interim, GM is “reorganized” while under the protection of the court and, in this pie-in-the-sky world, emerges a leaner, meaner American industrial power ready to out-compete European and Asian automakers and go on building cars and trucks (‘green’ ones too!) for another 100 years.

Unfortunately, I see some significant problems with this approach.

First, let me acknowledge that Henderson’s comments may be a thinly disguised effort (by GM in partnership with the Obama Administration) to lure certain creditors to the table for some renegotiation.  For GM’s creditors, getting some kind of return on their accounts receivables & investmentsis certainly more appealing than getting nothing should GM go into bankruptcy.

Second, that said, any discussion of a General Motors bankruptcy must involve consideration of the impact on the numerous part-suppliers and manufacturers who depend on (and have huge amounts of capital invested in the success of) GM, Ford, and Chrysler.  Simply put, bankruptcy for GM, Ford, or Chrysler could kill thousands of these companies.  Many of them have granted the Big Three extension after extension on accounts payable in the hope that their generosity would eventually be rewarded by repayment and an eventual return to business, even if curtailed significantly.  Simply wiping those accounts off the books would crush those businesses, in the process killing as many jobs as you may save.

One telling example of the complexity of bankruptcy fillings in the automotive industry is that of Delphi, the former primary parts-maker for GM.  Delphi has been in bankruptcy court since 2005, and while some in the area had hoped to see a refurbished and slimmed down GM purchase Delphi as a means to centralize some control over parts-production, it now appears that BeijingWest Industries Co. has made such a configuration less likely, only adding additional uncertainty both to Delphi’s ultimate future, as well as that of GM.  This is simply a way of saying that bankruptcy may not be as neat and tidy operation as many think.

This is the reasoning behind the cautious language and trepidatious footwork of both the past and current Administrations when it comes to using the word “bankruptcy,” as everyone in Michigan (and the rest of the industrial Midwest) knows that the ramifications could be disastrous, taking the country further down a road we don’t want to take.

Third — and this is where I see the biggest stumbling block — there are at least two significant structural ambiguities built into all of the estimates for how much it might cost to build an American-made car in the coming decades that are almost certain to make any such bankruptcy-reorganization a lengthier and more complex process than most people may currently envision:  climate change and health care.

Now, in my opinion, requiring a cognizable shift away from gas-guzzlers to more efficient (and yes, even gasoline-free) cars and trucks, while the government provides assistance towards making that shift, is both reasonable and necessary (whether it will be enough is a tougher question).

Since coming into office, the Obama Administration already has raised the Corporate Average Fuel Economy (CAFE) standards for cars & light trucks to 27.3 miles per gallon.   If they’re smart, the automakers should recognize that this is only the beginning.  Adding a great deal more uncertainty to the recovery planning of each auto manufacturer is the possibility legislation requiring additional carbon-dioxide regulation.

Although the Administration has indicated that industries responsible for CO2 emissions should be considered on notice that regulation is, in fact, forthcoming, the lack of detail relating to what the future emissions scheme will be is most unhelpful to the Big Three:  their recovery will be immeasurably altered by life under a CO2-regulatory regime, yet Congress is not going to resolve the myriad issues surrounding comprehensive climate-change legislation before the automakers are called upon to submit their revised recovery plans.

(Interestingly, such legislation is not completely necessary, as the Administration could regulate NOW, with the caveat that more comprehensive Congressional legislation will be on the way, but i am doubtful that such regulation is in the cards.)

Ultimately, the responsibility for this catch-22 must fall at the feet of many of the previous Congresses and Presidential Administrations who have had opportunities to lead in this regard, but who found it all too easy to simply kick the can down the road.  Of course, the Big Three were always more than willing to encourage this benign neglect, which they surely felt was in their best interest at the time.  Now, however, it iscoming back to bite them at a time when it is most unhelpful.

No matter where you place the blame, however, the fact remains that without knowing what the future regulatory scheme will be with respect to CO2 and climate change, GM, Ford, and Chrysler must figure out how to survive in coming decades without a key piece of the regulatory environment that will dominate that future economic landscape.

The same can be said for health care, the second major ambiguity in the Big Three’s future cost environment which has yet to be determined.  Obviously, there are a number of nations whose domestic automakers are buttressed by a national health care system (which means that the Big Three’s chief foreign competitors do not find itself in the business of also purchasing and providing health care to hundreds of thousands of past and current employees).

Again, the solution to resolving this ambiguity lies in the hands of our current Congress and the Obama Administration, both of which have shown quite an admirable determination to move quickly on health care reform.

Let us hope they do, because the fate of the auto-industry depends on it.

Related posts

• Let’s Make Buying American Cool Again
• Detroit Exhales
• Death Knell?
• Chrysler in Bankruptcy: The Forgotten Villain
• Whinedog Quarter-Millionaires