President Barack Obama said he is confident Chrysler will survive but the company is heading toward bankruptcy. You have a stake in this story, even if you don’t own a Chrysler vehicle or work in an auto plant. Here is some background and detail.
How Did the Bankruptcy Happen?
First, remember that bankruptcy is not the same as liquidation. Bankruptcy allows a company to keep running or merge while courts and lawyers sort out debts and promises. It is true however that sometimes companies go into bankruptcy and cannot find a way to avoid liquidation, or shutting down altogether.
BusinessWeek explained that the bankruptcy comes:
Click here for more market statistics and market shares.
What Does Bankruptcy Mean for Workers?
Union workers have already made concessions on vacation pay, overtime rules and bonuses. Bankruptcy may actually give some stabilization to the company as it finds its footing with a new partner, Fiat.
BusinessWeek explains, “The United Auto Workers agreed to take 55 percent of the company’s equity in place of $4.5 billion owed to the union’s health-care trust fund that pays future obligations for workers and retirees.”
Why Should We Care About The Big Three?
Reuters explains the enormity of the auto industry in the U.S. and beyond:
- “The auto sector contributes 3-4 percent of the total gross domestic product (GDP) of the United States, and over 6 percent of EU-15 GDP, according to consultancy Frost & Sullivan.
- “Around 9 million jobs worldwide, or over 5 percent of the world’s manufacturing workforce, are directly linked to making vehicles and parts. Each direct auto job supports at least another 5 jobs indirectly, with many more people employed in related service and manufacturing jobs, meaning more than 50 million people earn their livings from the industry.
- “The U.S. automotive industry employed 850,000 people in manufacturing jobs at the end of 2008, according to Frost & Sullivan.”
What Does Bankruptcy Mean to Car Owners?
New car warranties are covered by a federal agreement struck in recent weeks with GM and Chrysler. The Obama administration worried that nobody would want to buy a car from a company that was bankrupt or nearly bankrupt.
US News & World Report pointed out that many car buyers turned their backs on the company some time ago. In fact, if Chrysler’s nameplate disappeared, it might give a boost to Ford and GM because there are some buyers who insist on buying from one of the Big Three:
How Long Would Bankruptcy Take to Resolve?
The idea is to get through this restructuring quickly. The Detroit Free Press quotes President Obama saying:
“The UAW late Wednesday night overwhelmingly ratified cost-cutting changes in its labor contract that freeze wages for Chrysler’s 26,000 U.S. hourly workers and slash more than $5 billion from what Chrysler was to pay into a retiree health care trust next year. That trust would own 55% of the new Chrysler, while Fiat would start with a 20% stake and the government would own another large portion.”
Who Owns Chrysler, Anyway?
Click here for a company timeline.
Watch a 3-minute film about the company’s history.
Unlike GM and Ford which are traded on the stock market, Chrysler is a private company run by privately held Cerberus Capital Management. Cerberus is a huge company with its fingers in many pies. A deal is in the works for Fiat to buy at least a third of Chrysler.
Chrysler has tried many partnerships, as The Detroit News points out, Fiat is just the latest:
“Now come the Italians, riding to the rescue with promises, some good-looking cars, a dodgy past and no intention of pumping cash into the union … mostly because they don’t have it to invest. Keep an open mind? OK, but this looks more like transatlantic opportunism than a marriage made in heaven.”
What Brands Can We Expect to Survive?
It could be that down the road, there would be no “Chrysler” nameplate. BusinessWeek said that if the Chrysler and Fiat merger goes through:
“A source close to Chrysler says that Fiat — which has an agreement to take a 35 percent stake in the U.S. automaker — is working on an operating plan that would sell Fiat cars at Chrysler’s dealerships. Fiat’s upscale Alfa Romeos could be sold at select dealerships. The two companies are also reviewing the Chrysler brand and trying to figure out if they should keep it. Assuming the Fiat-Chrysler alliance goes through, five brands — including Fiat’s two — would be too many. No decision has been made on Chrysler, but a source close to the plans said that the brand is on the block.”
What Will All of This Cost Taxpayers?
You are already in this fairly deeply.
The company has been kept alive since December with $4 billion in government bailout funds.
The Kansas City Star explains in an op-ed:
“It could cost billions of dollars to keep the automaker’s production lines humming while the firm goes through bankruptcy. There’s no assurance that taxpayers would ever get a return on that investment.
“Still, bankruptcy appears to be the best option at this point, because it also could help cement a deal between Chrysler and Fiat.
“If that happens, the resulting car company might be able to stand on its feet in the long run — as long as the new version of Chrysler-Fiat (or whatever it’s going to be called) can slash its production costs and improve the quality of the vehicles it sells in America.”
Hasn’t Chrysler Been Close to Bankruptcy Before?
Yes, very close. In 1979, the company got a federal bailout, which it repaid with help from its development of the K-Car, stronger warranties and the advent of the mini-van. In fact as late as 1994, the company turned a nearly $2 billion profit. This timeline tells the story of the company’s struggles.
