Automotive Bankruptcies: An Inconvenient Competition

Some people are heaving sighs of relief that Chrysler is emerging from bankruptcy in the arms of Fiat and that GM is officially in bankruptcy soon to emerge as leaner and meaner entities. However, many are left holding the proverbial bag. Who are they? The unsecured creditors who are lining up to salvage whatever they can from this mess. Two key groups of creditors are particularly important. 

The first group consists of first-tier suppliers. The Chrysler list, for example, reads like a who’s who of the top tier automotive supplier firms: Visteon (owed $25.6M), Cummins Engine (owed $43.9M), Johnson Controls ($50.3M), Ohio Module Manufacturing ($70.3M). The GM list, where the total amounts owed to unsecured creditors is far higher, exceeding $50B, and includes some of the same suppliers as well as many others.

The second group of unsecured creditors includes all the people who have product liability lawsuits pending against these two automakers. People in the midst of product these lawsuits have now joined the ranks of unsecured creditors, lining up alongside the first-tier suppliers who are owed billions of dollars. But in comparison with the first-tier suppliers, these creditors consist of the “little people”. The New York Times profiled someone who lost both legs in a Jeep Wrangler accident and who is in the midst of a product liability lawsuit against Chrysler. With Chrysler’s bankruptcy and sale to Fiat, he is finding that his chances of getting much money from the lawsuit are poor. The bankruptcies are also freezing lemon law cases as well. Consumer advocacy groups are claiming that more people will be injured by defective vehicles because “a critical public-safety protection that has been used to reduce the number of Americans hurt or killed from defective Chrysler and General Motors vehicles,” namely “the public’s right to hold these companies accountable,” has been stripped away, according to Joanne Doroshow, executive director of the Center for Justice & Democracy.

The choices here are between ugly and uglier. Those who have auto safety-related injuries are not the only ones impacted. The suppliers holding unsecured Chrysler and GM debt also stand to severely impact the lives of their own employees and the employees at their suppliers should they be unable to collect their money. Whether public safety is at risk because of the carmakers’ ability to circumvent safety procedures is not clear as the newly-reorganized companies keep the good assets and ditch the bad ones. If the auto companies attempt to and are able to skirt legitimate claims, the tarnish will remain on their new images and fresh starts and impede future success. It makes you wonder whom the bailout is helping. Or whether it is just buying time for those affected by the U.S. automotive industry to retool themselves, rather than retooling the industry itself.

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