The end of the road
for General Motors?
What lies ahead for the automotive industry?
1 BDO Stoy Hayward
The end of the road for General Motors?
GM’s decision to file for Chapter 11 bankruptcy protection is likely to have profound
effects on the whole automotive industry, with both winners and losers emerging during
a painful period of re-adjustment.
Sid Hopper, automotive partner, considers the consequences of GM’s filing for bankruptcy
protection and looks ahead to the future shape and size of the industry.
The old model employees and politicians – may delay the phoenix’s creation,
perhaps the more crucial current issue is how ‘old’ GM’s
Over-capacity, under-investment and a drastic fall in demise will affect the broader automotive industry. And
demand made GM’s problems insurmountable – perhaps the first place we should look for answers is a
despite $19.4bn of US Treasury funding. recent precedent: Chrysler.
As GM’s US market share halved from 45 per cent in the
1980s to 22 per cent in 2008, profits plunged. GM’s last
quarter saw an astonishing $6bn loss. Lessons from Chrysler
Chrysler entered into Chapter 11 proceedings on
A radical restructuring plan put together by GM’s new
30 April, triggering immediate effects for suppliers,
management team prescribed strong medicine for the ailing
distributors and consumers.
giant: slimming down models and brands, closing plants, selling
subsidiaries, culling dealers, reaching compromises with $27bn Consumers lost confidence, resulting in residual values for cars
of unsecured bondholders and funding up to $20.4bn of at dealerships falling by 9 per cent. Exiting dealers started to
retiree healthcare liabilities. heavily discount inventories to clear stocks. There are also
ongoing dealer concerns about potential liability for warranties
Given the difficulties of achieving this scale of restructuring in
and service contracts.
such a small timescale – and the huge legacy costs it would
trigger – it was perhaps inevitable that the only way GM Suppliers were immediately hit by credit downgrades. Harman
could achieve its plans would be by entering into Chapter 11 International, Johnson Controls, Magna International, Shiloh
proceedings. Industries, Stoneridge and TRW Automotive were placed by
Standard & Poor onto Creditwatch. S&P also expects a number
of tier 2 suppliers to fail. With suppliers buckling, vehicle
Route 11: where will it lead for GM? production has been affected: a number of assembly plants
have been halted due to parts shortage.
Whilst it is too early to map out exactly how the
Chapter 11 proceedings will run their course, it looks The other key effect can be summed up in one word:
likely that GM will seek to sell its profitable assets to uncertainty. At a recent meeting with over 400 suppliers in
a NewCo under Section 363 of the bankruptcy code. Detroit, Chrysler advised that it did not yet know what would
be in its 2009 model programme, that supplier numbers would
This will provide for the separation of toxic assets and
be greatly reduced, and that although the Fiat buyout deal was
liabilities, and attract a US government cash injection
not definite, there was no contingency plan. Reports also
(thought to be c.$30bn) to fund restructuring and essential
suggest that some suppliers are being deselected purely on the
suppliers. In return for this investment the US Government
basis of their banks and that those in the supply chain will be
will acquire a majority share ownership in the new company.
paid much later, on 90-day terms, when production resumes.
Other shareholders will include the UAW union,
Bondholders and possibly the Canadian govenment.
Many expect that eventually we will see a phoenix rising from GM Europe – left out in the cold?
Detroit: a ‘new GM’ emerging from the ashes, able to leave its GM Europe will almost certainly have to fend for
legacy liabilities behind and, backed by its US Treasury itself, left to firm up both a buyer and the necessary
injection, capable of positioning itself to deliver long-term €3.3bn of state aid. Fewer production plants, fewer
profitable growth. suppliers and a smaller distributor network look
Although objections – from creditors, bondholders, sure to follow.
2 BDO Stoy Hayward
The end of the road for General Motors?
Implications for European
GM Europe key facts
Brands include Opel (Vauxhall in the UK), Saab, Radical restructuring will be necessary to align
Chevrolet, Cadillac, Corvette and Hummer. production with reduced demand and new product
Sales in 2008 of 2.0m vehicles (Opel/Vauxhall mix. Three or four assembly plants may close.
represents 72 per cent). However politicians and employee industrial action
are likely to limit the scale of restructuring to
54,000 employees (46 per cent based in Germany). preserve jobs.
10 wholly owned assembly plants in Europe, eight GM Europe advised that it has sufficient funds to last until
joint venture/other production sites and four Quarter 4 of this year. To achieve this commentators believe
locations where vehicles are assembled from GM Europe will require substantial cuts in production and
component kits. reductions in finished inventories.
Nine wholly owned powertrain plants, three It will depend which buyer acquires Opel, but we believe the 2
engineering centres and three design centres.
UK assembly plants will be particularly at risk. If the Fiat or the
Magna/Russian consortium acquire Opel then consolidation of
transmission plants, design/engineering centres and admin
How the restructuring will work functions is more likely. The future of technology JV’s and
GM Europe is likely to be broken up and alliances also depend largely on the acquirer.
Opel/Vauxhall acquired by a third party. Although The launch of the ‘all new’ Astra and other future cycle plan
there have been three potential candidayes, including models are likely to be delayed as development funds are
Fiat and equity fund RHJ International, the likley limited, this will impact future profit margins. An additional
winner is a consortium made up of auto components hazard to production is that if supplier payments are missed, a
group Magna, Russian conglomerate GAZ and a lack of part’s availability could stop or limit production.
If Opel is acquired by a third party, GM US may retain a stake
in return for relinquishing intellectual property rights, or this Given the projected lackluster
may have to be purchased from the US government as part of growth in volumes for the next
the transaction. five years, the chronic
Saab is unlikely to be part of this acquisition and we believe the structural imbalance in our industry
Swedish government is likely to provide significant financial will become even more marked. Many
assistance to keep the company trading. factories will become redundant. That
The future of Chevrolet in Europe is less clear. It is likely that means we will hear more screaming
GM will dispose of either part or its entire 51 per cent stake in and we will probably see strikes. It will
GM Daewoo as part of the global restructuring. Potential be ‘ugly’ and ‘painful’ but until someone
candidates include the Korean government. Future sales of comes up with a better way to cope with
Chevrolet in GM Europe dealerships is unclear, as are the
prospects for Chevrolet assembly plants in Eastern Europe.
dramatically falling demand,
this is the only way for the
It is unclear whether GM Europe will enter the European
automotive industry to survive.
equivalent of bankruptcy as a result of a Chapter 11 of GM in
the US. The German government have suggested a plan that Sergio Marchionne
Opel assets could be handed over to a trustee who would CEO Fiat, at Fiat's annual meeting in March
ensure the interests of creditors, with a consortium of banks
providing bridging finance until the situation is resolved.
Inevitably, plants will be reduced across the European Union if
this (Fiat) takeover goes ahead. This move sends shivers down
General Secretary of British industrial union Unite
3 BDO Stoy Hayward
The end of the road for General Motors?
Implications for other OEMs volumes as economic recovery commences (likely in late 2010)
– this could trigger a fresh wave of failures.
Although Fiat see acquiring GM Europe as an
opportunity to achieve the scale to survive in the With so much change amongst suppliers a risk for Opel in
’new automotive economy’, their level of achieving future success could be a reduction in product quality
restructuring is likely to be much deeper than other and higher warranty claims as components are transitioned to
potential acquirers – making them a less popular new tier 1 and 2 suppliers.
choice with Berlin.
Other automakers, like Ford, see the removal of competitor Implications for Financial
vehicles from the market place as a chance to increase sales. Stakeholders
However, if falling demand from GM plants puts parts suppliers
Financial stakeholders face a period of uncertainly.
out of business the consequences could be disastrous. OEMs
The ability to back ‘winners’ and cut back on ‘losers’
may therefore have to make significant price concessions or
will be vital for lending teams in the next two years.
provide one-off cash injections to keep crucial suppliers afloat.
As UK component companies close, and supply moves away
OEMs will need to carefully assess the strength of supplier
from the UK, lending institutions are likely to experience a
networks. While many have already done so and have started
reduction in business over the medium-term.
to rationalise the supplier base, those that have not are likely to
face severe financial penalties in 2009. Business plans will need reviewing and sensitising to lower GM
Europe volumes as well as lower volumes in the sector
generally. Expectations for the sector are that 2009 volumes
Implications for European Suppliers will be 40per cent down, and 2010 25per cent down on 2008.
Falling car sales are already having a severe impact Cash flow forecasts need to be updated and assessed against
on tier 1 and tier 2 suppliers. Many have already funding levels and banking covenants. Lending institutions in
commenced operational restructuring, leading to particular need to understand what companies and which
plant closures, short term working, and consolidation. OEM/vehicle models their borrowers are supplying, to ensure
The sale and/or restructuring of GM Europe will add they assess their risk levels correctly.
significant further pressure.
Pressure needs to be placed on companies to accelerate
Initially, there is likely to be little change for Opel / Vauxhall restructuring plans and to be clear at what stage they need to
suppliers as payments can be met in full from existing funding be implemented.
(although this may not to apply to Chevrolet and Saab
Just as the OEM’s are rating tier 1 suppliers and transitioning
supply away from the weaker suppliers, tier 1 suppliers should
However, in the medium to long term, significant supplier assess their tier 2 suppliers for financial health and failure risk.
consolidation is likely. If Fiat acquires Opel, consolidation is Financial stakeholders should conduct a similar exercise in
likely to centre on Fiat’s existing Italian supplier base, whereas if respect of their tier 1 and tier 2 borrowers – whose futures
Magna and the Russian consortium acquire Opel, component may be intertwined.
supply is likely to move to Eastern Europe more quickly.
Another driver for consolidation is that many US owned
groups with European operations are likely to dispose of their Suppliers are going to be
overseas companies to focus on the home market. working as furiously as
Suppliers will be divided into winners and losers. The winners possible to try to cut costs and
are likely to be those with high plant efficiencies, low cost survive through this until we can see
bases, and a history of investing in technology. Being on the some sort of stability in the
right model programmes with a low, or manageable, exposure
to GM Europe is also important. The losers are likely to be
those that are: having to divert significant funds away from R&D
to fund current restructuring actions; have a high exposure to auto analyst at CSM Worldwide
GM vehicles; and who produce products of low technical
Suppliers are also likely to struggle to fund the higher levels of
working capital required to build inventories and supply higher
4 BDO Stoy Hayward
The end of the road for General Motors?
The process will undoubtedly be painful for employees.
Suppliers must cut their costs now to survive. It's going to
spread throughout the entire [supply] chain.
automotive consultant at Plante Moran
Although GM’s decision to enter Chapter 11 proceedings is a major event in itself, it is
ultimately just one step on the world-wide automotive industry’s journey towards a ‘new
model’. With production down 50 per cent in the US and expected by some
commentators not to fully recover until 2015, there is clearly the need for a major
realignment. Those that survive will, like the ‘new’ GM we envisage, have undergone major
changes in operational efficiency and will emerge stronger and better placed to profit
from new opportunities However, they will first have to endure a long and painful period
of uncertainty and adjustment.
For more information or advice on this topic please contact Sid Hopper on 0121 352
6400, a member of the automotive team, or your usual BDO Stoy Hayward contact.