Let carmakers go bankrupt, say Americans

We seem to be seeing a lot of this recently.

CNN’s Political Ticker web site wrote, a few weeks back The public used to think that the automakers were too big to fail, but not any longer. In December, two-thirds say auto bankruptcies would create major problems or a crisis for the U.S. economy. Now most say that would only cause minor problems or no problems at all.

And Americans don’t see any effect on their own lives if the automakers fail: 55 percent say they would face no problems at all if the auto companies went bankrupt. Only 37 percent say they would buy a car from a bankrupt company. But that number rises to 57 percent if the federal government stands behind the warranty on those cars.

It’s all very well for the average american to “think” there will be only minor problems. But what does the average american know about the automotive industry and its related subindustries?

Here are some numbers. The big 3 directly employ 240,000 people. The supplier network for the big 3 employs another 975,000 people, for a total of 1.2 million. There’s an estimated 1.7 million additional jobs created by those 1.2 million workers, for a total of 3 million jobs.

People assume that, if one of the Detroit 3 went out of business, about 80,000 (1/3 of the direct jobs) would be lost. But that’s not how bankruptcy works.

When a company declares bankruptcy, if a judge grants the bankruptcy, the company is relieved (at least temporarily) from paying its suppliers. Since automotive have long been the poorest payers of any manufacturing customers, most automotive Tier 1 suppliers are owed huge amounts of money by the Detroit 3. Not paying those debts, even if only temporarily during a restructuring, could force many Tier 1 suppliers into bankruptcy. That, in turn, would force Tier 2 suppliers into bankruptcy. What you then have is the beginnings of a cascade failure of significant parts of the automotive supply structure.

But wait! It gets worse. Once you get down below assembly, to the level where actual manufacturing is done, where tools and dies are hefted, when the receiver steps in, he isn’t letting go of the tools and dies so easily. You have red tape to go through to get the dies out of the shop in receivership, and into a shop that also has the equipment to run the die.

Once you’ve got the dies out of the bankrupt shop and into a shop that’s still alive and gasping, does the new shop have the expertise to run the job? Eventually, yes, they’re all smart people. But even smart people need time to work out the kinks in a new job they’ve never seen before. And if 50 new dies landed on your doorstep one day, no matter how diligent and how smart, it would still take a week or so per die to get it set up, run, PPAPed and submitted to the PPAP inspection process. That’s 50 weeks. Holding up an entire supply chain. Replicated over and over again all through the industry. It will be total meyhem.

And it will create a second cascade failure, running backwards up the supply chain this time, as entire car lines are shut down for the lack of a particular valve stem that can’t be made, a particular plating process where the local processor has been closed down and all the parts have to go to the overloaded facility in Kalamazoo, and so on.

I think this has the potential to be very, very disruptive.

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