http://emptywheel.firedoglake.com/emptywheel Sunday November 16, 2008 9:30 am
I was talking with mr. emptywheel about what one of the bad--but by no means worst--case scenarios in a GM bankruptcy would be. This scenario is just one of several that might happen--by no means guaranteed, and Congress would fight the scenario at every stage, though with increasingly less leverage. But it is a scenario that follows a great deal of logic about possible outcomes. It is this scenario, though, that explains why both Toyota (I've seen reported--looking for the link) and many in Congress want to bailout GM before it gets to bankruptcy.
Here's the short version: more details below.
1. GM files for Chapter 7 bankruptcy
2. GM's Chinese partner, SAIC, buys much of GM (Buick, Chevy, Cadillac)
3. GM/SAIC starts importing Chinese-made Buicks and Chevys, undercutting Toyota's cost advantages
4. GM/SAIC owns the Volt technology, requiring US firms to lease it if they wanted to use it
GM Files for Chapter 7 Bankruptcy
As Jonathan Cohn points out, an imminent GM bankruptcy is more likely to be a Chapter 7--total liquidation bankruptcy--rather than a Chapter 11 bankruptcy. That's for the same reason why GM is begging for cash right now in the first place: no one is lending.
In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.
That's why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation.
So if GM goes bankrupt in January, as may happen, it may well have to sell itself off (unless the government guarantees the same kind of financing that it is refusing now). And I believe one company is one of the most likely--and indeed sensible--buyers: Shanghai Automotive Industry Corporation, or SAIC, the Chinese company with which GM partners to do business in that country.
GM's Chinese partner, SAIC, buys much of GM (Buick, Chevy, Cadillac)
SAIC is, in my opinion, by far the most sophisticated of China's automobile companies.
-snip-
GM Files for Chapter 7 Bankruptcy
As Jonathan Cohn points out, an imminent GM bankruptcy is more likely to be a Chapter 7--total liquidation bankruptcy--rather than a Chapter 11 bankruptcy. That's for the same reason why GM is begging for cash right now in the first place: no one is lending.
In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.
That's why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation.
So if GM goes bankrupt in January, as may happen, it may well have to sell itself off (unless the government guarantees the same kind of financing that it is refusing now). And I believe one company is one of the most likely--and indeed sensible--buyers: Shanghai Automotive Industry Corporation, or SAIC, the Chinese company with which GM partners to do business in that country.
GM's Chinese partner, SAIC, buys much of GM (Buick, Chevy, Cadillac)
SAIC is, in my opinion, by far the most sophisticated of China's automobile companies. Unlike Chery, the company that makes cheap knock-offs it has threatened to sell in the US (but which even the Chinese don't like to buy), SAIC has high quality and good expertise, gained largely through its partnerships with GM and Volkswagen. SAIC has ambitions to sell cars internationally--and it has been willing to spend money to advance those plans. Consider, for example, its purchase of MG:
In a move that may help pump serious life back into the Chinese MG experiment, China's SAIC Motor has purchased Nanjing Auto, the company that paid some 53 million pounds (around $105 million) for the MG brand after MG Rover's collapse in 2005. SAIC, which has partnerships with GM and Volkswagen, is a much bigger player in the Chinese automotive industry than Nanjing, selling 1.25 million vehicles during the first 10 months of 2007 to Nanjing's 79,196.
The move works for SAIC on several fronts. Buying Nanjing allows the automaker to gain control of the MG brand and to become an even bigger player in China and other markets. The purchase also allows it to gain control of the MG plant in Longbridge, England, where Nanjing had recently begun producing MG TF roadster prototypes (pictured at left).
During the dissolution of MG Rover, SAIC snagged the Rover expertise and technology, but has been forced to produce Rover cars under the Roewe brand (the Roewe 750 sedan is pictured) due to Ford's ownership of the Rover name. With the acquisition of Longbridge, SAIC will now theoretically be able to use the plant to produce Roewes as well as MG-branded cars for European markets.
As with MG, a GM purchase would give SAIC the ability to sell-Chinese built cars under brands (reasonably) popular in the US. But a purchase of most of GM would be an even better match for SAIC than its MG purchase. After all, SAIC has been building a large volume of GM cars in China for years; it knows the company and the culture.
And SAIC has two more things that make it a likely buyer. First, cash, certainly enough to buy GM at a bargain and more to make a bunch of changes in its US operations. Also, it has got increasing numbers of factory workers pressuring for higher wages; those wages would be too high for cars built exclusively for the Chinese auto market, but a mere fraction of what American auto workers are making.
An SAIC purchase would be accompanied by a lot of the same angst that accompanied Lenovo's acquisition of IBM's PC and laptop business. After all, SAIC would acquire not only GM's brands, but also a great deal of technological know-how.
But approval for such a deal would face very different pressures than the Lenovo-IBM deal. Unlike IBM, GM would be in bankruptcy, meaning the company itself would have a lot less flexibility to pick and choose between deals. There would be a lot of politicians aiming to save whatever jobs they could in the short term, as well as some pressure from other players in the industry to keep GM cars in production. Moreover, given the economic fragility of the country as a whole right now, China's got a lot more leverage to push through such a deal if it wanted--what are going to do, tell the country's banker that it can't buy what it wants?
GM/SAIC starts importing Chinese-made Buicks and Chevys, undercutting Toyota's cost advantages
Now, in this scenario, we'd be lucky if SAIC just bought what it wanted in January and set right to making changes to the company. The Center for Automotive Research's scenario for lost jobs with GM envisions a lapse of production, which brings a related collapse in the supplier industry that even affects domestically-produced foreign makers (that is, even Honda and Toyota plants may be idled because their suppliers would go out of business and they wouldn't have all the parts they need). And frankly, SAIC might well have an incentive to let GM stew on the market for a while, to get beyond the immediate credit crisis and persuade the government to kick in some money to sweeten the deal (this is similar to what they did with MG). But let's be optimistic and say SAIC jumps right in to buy and run the parts of GM it would want. I'm imagining it would want Buick, Chevy, Cadillac, and possibly SAAB (though SAAB would be easier to sell off separately); I have no idea what it would do with Opel (presumably, European countries might try to save that as a distinct entity); it almost certainly would not want GMC or Pontiac and those two brands might simply disappear.
If I were SAIC, I would generally leave Cadillac alone, at least for now--its brand is improving, it's got better margins, and it's not a good fit, yet, for Chinese production.
I would immediately shift production of Buick models to China, starting with the LaCrosse that is already made in China for its domestic market. As part of this, I'd introduce the LaCrosse Eco-Hybrid in the US. Because Buick is a minor brand in the US, it won't attract a lot of bad PR. And by introducing a Chinese-built hybrid into the US market, SAIC could begin to compete more aggressively in the hybrid market while still achieving profits on those vehicles. (This is one of the biggest reasons why SAIC would buy Buick, which is worth much less as a brand here: because it has the most infrastructure and experience working with Buick in its own country, and could use it as a trial run for what it will eventually do with Chevy.)
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