In the debate about bailing out the Big 3 automakers, it is said that we just can’t allow a bankruptcy. Despite the fact that Chapter 11 bankruptcies have taken place for retailers such as Circuit City and many airlines such as U.S. Airways, autos are said to be different because of the duration of time that people hold on to their cars for.
Horrific senarios are painted of consumers not being able to get parts for their automobiles if manufacturers are no longer in existence. But of all the many admittedly complicated aspects of a bankruptcy of General Motors (the company the Congressional hearings established was in the most trouble), these consumer issues provide the least reason for worry.
In a Chapter 11 bankruptcy, GM would most likely be reorganized into a new company, sans the current management and heavy costs. This is something that has proved impossible so far due to lax management, generous union contracts, and state dealer franchise laws that make car companies pay an arm and a leg to sever a relationship with a car dealer. A bankruptcy could finally force the tackling of these tough issues.
But even if no reorganized company emerges, the production of parts for consumers with existing GM models will almost certainly continue. All that would need to occur is the relatively simple process of the bankruptcy court transferring the GM’s intellectual property rights to a company that wants to manufacture its parts. To see how this would work, it is instructive to look at thriving reproduction parts industry for a car that hasn’t been made since the ’80s: the DeLorean.
The DeLorean Motor Company operated from the mid-’70s to the early ’80s. The company filed for bankruptcy protection in 1982 and the company went into liquidation instead of reorganization, and no new DeLoreans have been made since.
But there is still an active interest in the cars, and the sporty DeLorean DMC-12 was immortalized in the 1985 movie “Back to the Future” and its sequels. According to Wikipedia, “A very large number of the original cars are still on the road after over 25 years; most estimates put it at 6,500 cars surviving out of just over 9,000 built.”
So what happens when these cars need a new part, with the company that makes the cars no longer in business. Well, their drivers can get original and reproduction parts from the new DeLorean Motor Company. This is a new firm with entirely different owneship that acquired the trademark to the original company’s name as well as the rights to its designs.
According to the new DeLorean Motors’ web site, “when the supply of any part is exhausted or becomes no longer available, we endeavor to have the parts remanufactured using our set of the original engineering drawings.” They even sell “new build” DeLoreans using a combination of original and reproduction parts.
Going back even further, one can even buy new reproduction parts for a Studebaker, a car last made in the ’60s. An Indiana company called Studebaker International Inc. performs, according to its web site, “drilling, machining and assembly of parts” for nearly all models of Studebaker.
Of course a lot more people have GM cars than DeLoreans or Studebakers, but this fact cuts in favor of GM consumers. If there can be a thriving business in parts for cars that exist in this limited amount, entrepreneurs will rush to fill the needs of the owners of millions of GM cars on the road.
Resolving warranties is slightly more complicated, but a bankruptcy court would likely award warranty service contracts priority among the debts to be paid. And most warranties are backed by insurance companies, anyway, in the case of a firm’s bankruptcy. More on this in another post.
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Thanks for explaining this. I kinda wondered why they threw car parts into the protest or request. But I didn't think really deep about it. I didn't think the car dealers actually made the parts.
Wow! Have you ever been involved in manufacturing? Producing “parts” requires equipment and tooling, sometimes millions of dollars of tooling, for even the smallest and least complicated part. Most part makers are just holding on by their fingernails right now and most of them make parts for many customers. If they were to lose the volume of a GM or a Ford they would go out of business immediately and their other customers, who are likely the foreign transplants everyone loves, would face a shutdown of their operations. Sure speciality manufacturers can make a few repo parts (as long as it does not involve capital intensive processes like casting and forging) for low volume vehicles like Delorean which are not anyone's daily driver vehicles. Have you ever heard the expression, “your tools are on the dock” which exactly describes this situation.
GM has been in a Chapter 11 bankruptcy for almost three years with Delphi with no end in sight (if you do not understand that Delphi is GM–well it's another story).
Give GM, Ford, and Chrysler the loans that they need to keep going with the thanks of the American taxpayer as a final installment for all they did in World War II if that makes you feel better. These great companies should be held in the highest esteem for the pioneering work thay have done with employer based health care, defined benefit pensions, and 401k plans (see GM Stock Savings Purchase Plan). Thank you American Auto Industry!
Wow! The people producing parts who are hanging on by their fingernails would fail. Then they'd have to… *gasp!* … do something else! Calamity! You're right. No enterprising business would fill the parts market niche and make a profit on it.
Thank them for what they did in World War II? Can I thank them for paying their “laid off” workers up to 95% of their salary? Can I thank them for giving their employees a sense of entitlement? Can I thank them for ignoring the ramifications of the last energy crisis in the 70s by designing vehicles that get the same gas mileage as those of 30 years ago? Good riddance, then. Adapt and improve, or die off. If they are unwilling to do the former, then I welcome the latter.
The problem is not that the big three will have trouble continuing to produce parts (although they will), but rather that consumers will stop buying vehicles produced by companies in bankruptcy. Would *you* buy a new car from a bankrupt automaker? I highly doubt it.
When I buy something from Circuit City or U.S. Airways I get way I pay for: a ticket or a consumer electronics device. Doesn't matter if they're in chapter 11 or not. When I buy a car I'm actually buying a long term relationship with the manufacturer. That's not a bet most reasonable consumers would make.
Whether or not warranties could be restructured, consumer perceptions would sound the death knell of bankrupt automakers.
But frankly that's probably what they deserve.