Once the biggest carmaker in the world, on Monday General Motors became the biggest-ever bankruptcy case filing for a US industrial company. The bankruptcy follows unprecedented sales declines in the US market, of which GM was hit particularly hard. The company has had losses over the last four years totalling $81 billion.
Suppliers and logistics providers now face an uncertain future as the company restructures into a smaller operation, shutting 14 plants by 2012 and idling another three.
GM is also closing thousands of dealerships and the new company expects to make significantly fewer cars when it emerges from Chapter 11 proceedings.
Looking at the prospects for supplier contracts ahead of the bankruptcy declaration Aaron D. Bergman, analyst for Global Automotive Group at IHS Global Insight, told Automotive Logistics that “all bets are off, as the company could very easily seek to nullify its contracts with all suppliers, and renegotiate them at reduced prices.”
GM has denied it is seeking to do this. “We are not using this bankruptcy process to renegotiate supplier contracts,” GM spokesman for Global Purchasing Dan Flores told Automotive Logistics yesterday.
What it is doing is closing three parts distribution centres – Boston and Columbus, Ohio, and Jacksonville, Florida will shut by December 31st this year. The move could have a negative impact on business for Schneider Logistics, one of GM’s service providers there, though neither party would comment on the repercussions. “Logistics has and will continue to be an important element of our global purchasing organisation,” said Flores, “but in terms of specifics I can’t tell you anymore.”
The reorganisation is also likely to hit Ryder, which is GM’s biggest logistics provider. With the carmaker shedding around 30% of capacity, Ryder may have to cut back its Supply Chain Solutions business again – having already made significant cuts in January (read more here)
In addition, five of GM’s largest parts suppliers have said they may halt shipments temporarily until the carmaker receives court confirmation to continue payments. Flores was quick to assert that this confirmation was immanent for its critical suppliers: “One of the things we did yesterday [Monday] was to file an Essential Vendor Motion with the bankruptcy court. We basically asked the court for the ability to pay our critical suppliers… and the judge approved the motion allowing us to pay certain essential suppliers the money we owe them.”
But GM is also pursuing a Supplier Compression Plan that aims at reducing its direct material supply base in North America by 30% between 2009 and 2011. At the end of 2008 the company had over 15,000 parts suppliers in the country. This is now down to 14,000. “We’ve been working on efforts to compress the supply base for some time but our compression plan is nothing to do with the Chapter 11 filing,” said Flores.
However, that squeeze may have something to do with the Chapter 11 action being taken elsewhere. Visteon and Metaldyne are just two suppliers that filed for bankruptcy last Thursday.
The US government is taking a 60% stake in a reorganised GM and pumping a further $30 billion into the company as it makes its way through bankruptcy court. GM has already received $20 billion in government aid (the title ‘Government Motors’ is now being used by some commentators).
The Canadian government and the province of Ontario are providing another $9.5 billion in a late addition to the plans for the bankruptcy.
Chevrolet, Cadillac, Buick, GMC and a 35% stake in Opel and Vauxhall – will be placed what is being called New GM. Meanwhile, the Hummer, Saab, Saturn and Pontiac brands are being jettisoned.
It was also announced this week that, after difficult negotiations, Canadian parts supplier Magna International and Russia’s biggest bank Sberbank had finally reached an agreement to take controlling stakes of GM's European assets, which include Opel and Vauxhall.
As part of the memorandum of understanding, Magna will take a 20% stake in GM Europe (including Opel and Vauxhall), Sberbank will own a 35% share, Opel employees will have 10%, while GM will retain a holding of 35%, as mentioned above. The US government is to loan GM's Opel unit $2.1 billion as part of the deal with Magna and the German government will provide a €1.5 billion ($2.1 billion) bridging loan.
Frank Stronach, Chairman of Magna, stated: "While the recent negotiations have been intense and difficult at times, I believe we have achieved a constructive solution that represents a "win-win" for all stakeholders and will position Opel to compete and succeed."
GM Europe President Carl-Peter Foster echoed the difficulties: “This has been a very intense and at times difficult negotiation,” he said thanking the German Government and federal state governments and the US Treasury.
Foster said that the Chapter 11 filing in the US would not affect existing arrangements for European suppliers and business would continue without interruption.