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GM Cuts While Chrysler Faces The End

2007 Chrysler 300
David Zalubowski
2007 Chrysler 300

With one week left before Chrysler faces the very real prospect of filing for Chapter 11 reorganization, and potentially a Chapter 7 liquidation, GM is acting like a company already in bankruptcy. In other words, the end game is almost here. As we're seeing now, it's messy and everyone involved will be feeling the pain.

* GM Cuts

With its inventories bloated, GM will soon announce that it will shut down many of its plantsfor up to 9 weeks this summer. This is the next leg in the slow and wrenching process of building fewer cars and trucks. Sure, the summer shut down is being brought on by the sluggish economy, but don't be fooled. GM isn't far from announcing the permanent closure of more plants.

This is all about cutting production down to the core plants that can run the most efficiently with the most flexibility. It's the same thing a company does in bankruptcy. The idea is getting GM to a size where it uses its plants to maximum capacity so that when the economy rebounds and demand for cars and trucks picks up, GM can make a greater profit per vehicle.

Bottom line: Between the white collar job cuts, the intention to not make a bond payment in June, and the impending plant shut downs GM is kicking the bankruptcy downsizing into full gear even though its technically not in chapter 11.

* Chrysler

In one week we will find out if Chrysler can swing a deal with its bond holders, the UAW, and Fiat to save the company. And even then, it needs the blessing of the Treasury Department if the struggling auto maker hopes to get any more federal aid. While there is substantial progress between the UAW, Chrysler, and Fiat on getting a deal, there's a huge gap that remains with the bond holders.

I'm not sure that gap can be bridged in a week. The two sides are roughly $3 Billion apart when it comes to what the bond holders are being offered for their debt and what they are willing to accept. From the debt holders viewpoint, they could probably get a better "payoff" in bankruptcy court where they have priority status in terms of getting paid, were Chrysler to liquidate.

If Chrysler files, it will be interesting to see how that ripples through the industry. Many suppliers could be effected, but the supplier aid program set up by the Federal Government (and run through GM and Chrysler) has been put in place to make sure those parts makers do not have to collapse. A Chrysler bankruptcy would be the first major test for the supplier relief program.

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