Auto bankruptcies could reverberate throughout broader economy

Lengthy and disorderly bankruptcies by Chrysler and General Motors could lead to the loss of more than 1.3 million jobs, as pain at the restructuring companies extends to suppliers, and subsequently, healthy OEMs. Researchers at the non-profit automotive think tank, the Center for Automotive Research (CAR; Ann Arbor, MI), considered the short-term economic cost of unsuccessful bankruptcies at the two firms compared to the public cost of initiating successful bankruptcies, determining that a prolonged and chaotic restructuring would disrupt the supply chain and lead to a potential loss of market share. CAR estimates that after one year, a 90% reduction in the operations of the two Detroit companies could result.

Conversely, a “successful bankruptcy,” according to CAR, would mean the maintenance of wages, social security receipts, personal income taxes paid, and a reduction in the need for transfer payments for the government. The think tank estimates that if the companies did not re-emerge as successful standalone companies, the government would lose approximately $37 billion in revenue in the first two years alone.

Chrysler filed for Chapter 11 bankruptcy on April 30, and rival GM reached the same destination June 1. The research used economic modeling to forecast one possible outcome should GM and Chrysler gradually fail in the U.S. automotive market. The model assumes Ford Motor Co. and transplant automakers in the U.S. would lose 50% of their production in the first year due to parts shortages or fire sales of GM and Chrysler inventories. In the second year, these automakers would resume full production and replace 30% of GM and Chrysler output, with the balance falling to imports and U.S. job losses totaling 440,000. Cracks continue to propagate in the automotive industry, with Tier One supplier Visteon recently filing for bankruptcy, while Lear is working to renegotiate its debt terms with creditors. [email protected]

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