American Leyland

Today, GM reported huge losses ($2.5B in the third quarter) and stated that it burned through $6.9 billion. According to the company, its cash reserves now stand at $16.2B. GM says that it needs between $11 billion and $15 billion to fund operations. The company expressed concerns that it may not have enough cash to survive the balance of the year, which has just over a month and a half remaining. GM needs help (as do Ford and Chrysler) and it needs it now!

The way which is probably preferred (to varying degrees) is throwing cash at the Detroit Three is an attempt to weather the storm to maintain the status quo in Detroit. In exchange for this cash infusion, it has been suggested that the government could take an ownership interest in the Detroit automakers. This hearkens back to the thrilling days of British Leyland.

British Leyland was formed in 1968 by combining Britain's automakers. I was partially nationalized in 1975 in an attempt to keep its unionized workforce employed. Strikes, mismanagement and high labor costs eventually doomed British Leyland. Companies such as MG, Austin Healey and and Triumph passed into history and iconic brands such as Jaguar and Land Rover were sold to foreign automakers. It was an unmitigated disaster. This is probably fate which awaits a merged Detroit Three with a semi0nationalization thrown in for good measure. All is not lost however. There are ways to save the Detroit Three.

The fact of life is that Ford and GM are too big. They need to downsize and trim their labor forces. All of the Big Three need to adjust their compensation structures, both blue-collar and white-collar, to resemble those of employees of foreign manufacturers in America. After all, Toyota, Nissan, Honda, Hyundai, Subaru, BMW and Mercedes build cars and components in the U.S.

The easiest way would be to either de-unionize or reach an agreement with the UAW to restructure compensation packages. However, this is unlikely and GM is in such dire need of cash, it may be too late for mere concessions. The best answer for GM (and possibly Ford and Chrysler as well) may be a prepackaged bankruptcy.

The criticism of filing for bankruptcy is that potential car buyers may stay away out of fear that their warranties may not be honored and parts availability and service may be compromised. A prepackaged bankruptcy solves this problem.

In a prepackaged bankruptcy, a company reaches agreements with its creditors, suppliers and labor unions prior to filing for bankruptcy protection. The company will also obtain Debtor In Possession financing to pay for any restructuring costs. A company can go in and out of bankruptcy almost instantly.

One obstacle (apart from the UAW) is that few if any investors would be interested in providing DIP financing. Here is where the government can help. If the government merely provided the DIP loans (similar to Chrysler in the late 1970s, although Chrysler avoided bankruptcy, such a deal could be done. GM could be out from under billions of dollars of debt, it would be smaller, leaner and have more manageable labor agreements and be a healthier customer for its suppliers. This is the best way to preserve the Detroit Three and save as many jobs as possible.

Unfortunately, the UAW and its allies in DC would probably shoot this idea down (they don't see labor as a commodity whose demand can wax and wane along with compensation levels). At worst, GM and, maybe Ford and Chrysler as well, will fade into history. At best, we will have "American Leyland" and the U.S. auto industry's demise will be further prolonged.