Wednesday, March 18, 2009
What Does a GM Bankruptcy Mean for the Michigan Economy?
The impending bankruptcy looming over auto manufacturer General Motors has many people concerned for the welfare of the local Michigan economy. Currently, the corporation has until the end of the month to prove that it is a viable company. If they can, they will most likely receive additional bailout funds from the federal government to help them stay afloat. If they are unable to do so, they will most likely have no choice but to file bankruptcy.
GM would have two choices if they file bankruptcy: they could file Chapter 7 (liquidation) bankruptcy or they could file Chapter 11 (reorganization) bankruptcy. Filing Chapter 7 would have disastrous consequences on the local Michigan economy and most likely on the national economy as well. It is less clear how Chapter 11 bankruptcy will affect the Michigan economy. Most likely, it stands to take a serious hit, but the extent of this hit hinges on several factors:
- Under Chapter 11, GM could request that the courts alter the terms of their labor agreements with the auto union. GM would have to prove that the changes are strictly intended to enable them to survive bankruptcy as a viable company. However, union workers could stand to lose a great deal in terms of salary and health care benefits.
- Retirees will most likely also be affected. GM's retirement fund is currently underfunded due to losses in the stock market. Under Chapter 11, there is a chance that GM retirees will see their benefits slashed due to lack of funding. Benefits such as health care, which are currently provided for retired salaried employees, may get cut entirely.
- Suppliers will struggle under a GM bankruptcy as well. Suppliers are already feeling the cash crunch due to slumping car production, leading to fewer parts being ordered. However, under Chapter 11 bankruptcy, GM will be able to choose which contracts it wants to honor and which it does not. Many suppliers could lose contracts that they currently have with GM, forcing them into financial crisis.
- White collar employees may face greater challenges than union workers. Their jobs can be eliminated and their wages can be cut more easily than those of union workers. Salaried white collar employees have already been hit hard by the economic downturn, as GM has already implemented massive layoffs to this sector of their work force.
- Auto dealers may be affected as well, especially if auto production continues to decline.
- GM car and truck owners may have to worry about whether or not their warranties will be honored. Companies have the ability to eliminate warranty service during Chapter 11 reorganization. However, it is unlikely that GM will do so. If their intention is to emerge from bankruptcy as a stronger company, they will need consumer confidence to accomplish this goal. Honoring customer warranties is crucial for maintaining consumer loyalty and confidence during tough times.
- Local government will be hurt as well. Bankruptcy will most likely result in lost tax revenue for the local government, as well as rising unemployment, which will further put a strain on governmental resources.
Only time will tell how the current state of General Motors will impact the local Michigan economy. Unfortunately, Michiganders may be in for a long and bumpy ride.