Automakers Going Bankrupt: It's NOT An Option


Over the last two months, I've heard one comment over and over about the dire straits Detroit's Big 3 find themselves in right now: Just go bankrupt and wipe the slate clean.

This is one of those ideas that on paper makes sense on some level. In reality, it's a horrible idea.

I say that because of the devastating impact bankruptcy will have on the sales, corporate structure, and future hopes of any automaker who goes that route. Let's start with the most obvious impact, sales.

If GM or Ford were to file for chapter 11 protection it would scare off thousands of potential buyers, worsening the company's finances. Research shows people will be reluctant to buy a car and take out a 5 or 6 year auto loan with a company that may not be around down the road. If we feel there is not a company backing our car or truck we get panicky.

If that's not bad enough, bankruptcy will prompt some of the best and brightest to leave the company. Oh sure, bankrupt firms can get a court to authorize retention bonuses, but for many execs., especially the future stars, sticking around through 12 or 18 months of bankruptcy uncertainty is very unappealing.

Finally, bankruptcy is not a cure for all that ails automakers. Sure it allows a company to re-work union contracts at lower wages or break contracts with stubborn dealers who really should be out of business. But chapter 11 doesn't mean those things are resolved for good. Look at the airlines and some of the same old problems many had before bankruptcy are popping up again.

The point is, the way Detroit's Big 3 will get out of this current mess is through tough choices. Those include more cutbacks, alliances with foreign automakers, even selling off parts of the company. But bankruptcy is not the route to go if they hope to truly rebound in the future.

Questions? Comments?