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Thursday, January 22, 2009

Should American Auto Manufacturers File Bankruptcy?

This is a critical time for American auto manufacturers. Profits have been falling for quite awhile, and both GM and Chrysler may be headed toward bankruptcy without financial relief from the federal government. GM is closing approximately 20 plants across North America in anticipation of producing 250,000 fewer cars in the first quarter of 2009 than they did in the first quarter of 2008 (a reduction of about 30%). But is bankruptcy the best option for the auto manufacturers?

There are varying opinions on this matter. A recent survey conducted in early December polled 1,063 adults across the country. The findings indicated that only 26% of new car buyers would be willing to purchase a car produced by a company in bankruptcy.

The primary logic behind this hesitation on the part of consumers lies in the fear that if the bankrupt auto company eventually folds, people stuck with new cars from this manufacturer would be unable to receive the warranty service they deserve. This was certainly the situation with Daewoo, the last auto company that went bankrupt.

However, there are several prominent economists who argue that bankruptcy would in fact be the best option for several auto manufacturers. As part of the bankruptcy proceedings, these companies would undergo a reorganization that may leave them stronger in the long-run. Furthermore, the bankruptcy proceedings would most likely dissolve union contracts, leading to slightly lower wages for auto workers. Bankruptcy would also dissolve contracts regarding health payments and pension obligations. These factors have played a major role in the tenuous economic situation experienced by the big 3 auto manufacturers. By filing bankruptcy, these companies would also have the ability to restructure their debt, providing them with much lower interest rates. For these reasons, bankruptcy may give the big 3 their best chance at survival in these tough economic times.

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