What Bankruptcy Could Mean for GM, Chrysler

Experts Say Filing Could Actually Help Sales by Removing Uncertainty

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DETROIT (AdAge.com) -- General Motors Corp. and Chrysler have been arguing against bankruptcy, saying not only would it be more costly than a bailout, but it would severely damage their companies and result in significant plunges in their brands' new-vehicle sales. After all, who would buy a car from an automaker gone bust?


SOME GOOD NEWS: GM's McNabb said all Saab's warranties will remain valid despite it becoming independent.

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Lots of Americans, according to some experts, who say a filing might actually boost sales. "People are already reacting to the possibility of bankruptcy" for GM or Chrysler by not buying their products, said Maryann Keller, principal of the eponymous consultantcy and author of several industry books. She said a government-backed, prepackaged bankruptcy or Chapter 11 filing "takes a huge source of uncertainty out" of Americans' minds and could actually improve sales.

Robert Austin, founder of consultantcy Auto Futures Group, also argues that bankruptcy could help automakers. GM and Chrysler "can put a smiley face" on a bankruptcy with ads touting, "We're restructuring for the next century" or "Come buy the leaner, meaner Chevrolet." Mr. Austin, who headed marketing for a while during his long stint at Volvo Cars of North America, said it's difficult for GM and Chrysler to put positive spins on current messaging "because they don't know which way their futures are going."

He praised an upbeat e-mail sent by GM's Mark McNabb, VP of Cadillac, Saab USA and Hummer, to thousands of U.S. owners and prospects late last week reassuring them that all Saab's vehicle warranties will remain valid and current products still available even though the brand said Feb. 20 it will file for reorganization in Sweden to create a business independent from GM.

Of course, GM and Chrysler going belly up wouldn't be very good news to the ad agencies and media that supply them. Barbara Rom, a bankruptcy attorney at the Detroit office at Pepper Hamilton, said shops would be considered unsecured creditors with extremely low payment priority unless they have ongoing contracts that the company legally "assumed" with court approval after an opportunity for stakeholder groups to comment.

In that instance, they would receive 100% of the debt owed to them. Otherwise, they would have to wait until the end of the case when the plan is confirmed, and be paid perhaps just pennies on the dollar. That could take years -- GM's spun-off parts supplier Delphi is already more than three years into Chapter 11.

Lessons from Studebaker
There is some precedent for an auto company rising from the ashes of bankruptcy -- Studebaker -- although the brand did eventually disappear some 30 years later partly due to a major problem now plaguing Detroit: cumbersome labor costs.

After 80 years in the vehicle business that started by making horse-drawn buggies, Studebaker sunk into the red for the first time during the Great Depression in 1932. It landed in bankruptcy court in 1933 and convinced the judge it was best to let the company survive. With the judge's OK, it soon started an aggressive, unprecedented $100,000 ad campaign themed "Studebaker Carries On."

Donald Critchlow, a business historian who wrote "Studebaker: The Life and Death of an American Corporation," said the automaker's ads promoted their cooperation with labor to keep people working, which kept the company in the public eye. Studebaker used public relations effectively by staging a massive company rally at Notre Dame Stadium near its headquarters in South Bend, Ind., inviting the celebs of the day along with reporters from radio, newspapers and movie news reels. These efforts generated "warm feelings" among Americans for Studebaker.

Studebaker dropped many of its dealers and models during its time in bankruptcy, but it emerged in March 1935. The company actually increased its position in the marketplace in 1934, tallying nearly 62,000 new-vehicle registrations vs. almost 27,000 the prior year, moving it from 10th to eighth place. It was only one of four automakers during the Depression to do so that year.

Mr. Critchlow, now a professor at St. Louis University, said he doesn't accept the claims from GM and Chrysler that bankruptcy will their halt vehicle sales since Americans bought cars from Studebaker during its darkest days. He acknowledged today's general slowdown in new-vehicle demand.

Studebaker survived another 30 years, said Mr. Critchlow, and Americans still had a positive nostalgia for the company when its last car rolled off the assembly line in 1966. "It's amazing to me," he said, "how little sense of history people in business and especially in automotive have today."

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