WASHINGTON — After declaring Tuesday that bankruptcy is "more probable" than ever, new General Motors chief executive Frederick "Fritz" Henderson said the troubled automaker would move quickly to devise an overhaul plan that will pass muster with the Obama administration.
After receiving $13.4 billion in federal bailout money, GM will get no further government assistance unless it can close more plants, downsize its work force and squeeze more concessions from labor unions and bondholders in the next 60 days.
If the improvements aren't in place by June 1, the company will likely enter Chapter 11 bankruptcy.
Henderson, speaking at his first news conference in Detroit on Tuesday, said that additional plant closures beyond the five that former Chief Executive Rick Wagoner had envisioned, were possible, along with other measures.
Henderson said any decision on bankruptcy would be a "management judgment" that may not require 60 days to decide "if it's quite clear that we're not able to accomplish what we need to do in terms of operational restructuring (and) reduction of debt on the balance sheet."
After asking Wagoner to resign, President Barack Obama on Monday said he was "absolutely confident that GM can rise again."
GM is better prepared for an uncertain future because Henderson is much more aggressive than Wagoner, said Joe Phillippi, the principal of AutoTrends Consulting. He said that Wagoner seemed reluctant to put GM through a "horrifically wrenching downsizing and reorganization in a very short time."
Wagoner "was more of a gradualist who made the flawed assumption that the company could harvest substantial profits from their truck business which could be used to offset losses on their passenger car portfolio and to generate cash to fund their other obligations," Phillippi said. "But those plans didn't go far enough and they weren't deep enough."
Brett Smith, who directs the Automotive Analysis Group at the Center for Automotive Research in Ann Arbor, Mich., lamented the possible changes ahead.
"It's very clear that the auto industry that we've know for 60-plus years is gone," Smith said. "There will be an auto industry in America, but it will be very different. It's manufacturing capability, employment capability and worth to the economy will be greatly diminished" once the GM situation is resolved.
In the bankruptcy scenario envisioned for GM, management would run the day-to-day operations but major company decisions would have to be approved by the bankruptcy court.
For GM to get the most advantageous bankruptcy terms, Smith said it would have to work out a reorganization plan approved by creditors and stockholders before filing for bankruptcy. This can shorten the process and save money.
Smith said that any bankruptcy filing would invalidate current agreements with the United Auto Workers union and result in wage scale and benefit cuts designed to bring GM's costs in line with their foreign competitors. UAW wages average about $26 to $29 an hour while their foreign competitors pay $23 to $26, Smith said.
Retirees can also expect their medical benefits to be cut as well in a bankruptcy filing, Smith said. But they could minimize the cuts by negotiating them in advance of a bankruptcy filing, rather than leaving the details to the court, Smith said.
In Chapter 11 filings, corporate assets are paid first to the government and then to secured creditors, typically banks, and then to unsecured creditors, which can be banks, bondholders or parts suppliers. Stockholders have the last claim on assets. But they may not get anything if claims by secured and unsecured creditors aren't repaid in full.
GM bondholders, who hold $27 billion in unsecured debt, are higher on the pecking order for recovering their losses than stockholders because GM agreed to pay them interest and a return on their principal. Shareholders are last in line because they take the greater risk that their earnings will increase if the company prospers. And likewise they risk losing money if the company founders.
The number of GM dealers also would be cut under a bankruptcy filing, with only the most profitable ones surviving, Smith said. He estimated that one in three could go under, with suburban dealerships being the hardest hit. Holding onto rural GM dealerships, where truck sales dominate and competition is limited, could provide GM with a sales advantage in many areas, Smith said.
Parts suppliers, which have already been hit by the slowdown in car sales, would also suffer under a GM bankruptcy, Phillippi said. The U.S. Treasury has already provided the struggling auto parts industry with a $5 billion taxpayer-funded revolving line of credit.
A sharp reduction in orders from GM could send more suppliers into bankruptcy, which would jeopardize the ability of other manufacturers to get the parts they need. Phillippi said that foreign automakers are already changing their supply lines because of that possibility.
He said he thinks that GM will get the concessions it needs to secure additional government funding and avoid bankruptcy.
"They've got an awful lot of work to do, but with a gun pointed at your head, it tends to focus your concentration," Phillippi said.
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