LEXINGTON, KY - It's the rarest of moments in American history with the federal government now poised to become the controlling interest in the manufacture of a line of consumer products as the iconic General Motors moves forward with one of the biggest and most complex bankruptcy cases in U.S. history.
"There's been nothing like it," mused John W. Ames, immediate past president of the American Bankruptcy Institute and member of Greenebaum Doll & McDonald in the firm's Louisville office. "You have a series of industries where the government could have gotten involved, and elected not to. This is unprecedented. I just don't know of anything that has ever occurred where the government is going to be that much of a participant."
GM is reorganizing under Chapter 11 of the federal bankruptcy law, which allows companies to sell assets, restructure debt, cancel contracts and close operations that normally would have to continue running. Once the companies secure financing to emerge from bankruptcy, they are reconstituted as new legal entities.
Of major concern for Kentucky is any further impact on an automotive parts supply industry already rocked hard by recession. White House officials said supplier contracts would remain in force. The Obama administration has created a program to provide federal help to parts makers, but in bankruptcy, supplier contracts can be canceled.
GM is expected to tell the court which suppliers it wants to continue doing business with, and which contracts it wants to reject.
"You've got a vertical chain, and the vertical chain has these components in it where a lot of these suppliers are married to GM in a way that if GM were to say to them, 'Instead of Able Brakes, we're going over to Baker Brakes,' that could put Able Brakes in a completely different category. They could be in their own Chapter 11 next week, themselves," said Ames.
Suppliers could challenge GM's rejection of their contract, but most likely they would have to reach a settlement with the automaker. While no Kentucky- or Indiana-based companies are among GM's 50 largest unsecured creditors named on a list included with the carmaker's initial bankruptcy filings on Monday, they do include AK Steel of West Chester, Ohio, owed $9.1 million by the carmaker. The company has carbon melting and coating operations in Ashland, Ky.
Business Lexington (Weakened links: Lean times in the auto supply chain)
Supply chains, complex and capital intensive, are designed for continuous flow based on an assumption of ongoing growth, noted Thomas J. Goldsby, Ph.D.,an associate professor of supply chain management at the University of Kentucky. In an April 2, 2009, article in , Goldsby observed that "it proves difficult to change their pace at a moment's notice."
In recent times, however, fluctuating gas prices, tightened credit and job losses have slowed the pace of new car sales to a crawl and that dynamic has rippled back through the manufacturing chain, resulting in a slowdown in production.
"This effort to reduce volumes in such environments can be likened to trying to stop the ocean," observed Goldsby. "Continuing to run the lines at a pace that exceeds demand results in inventory - inventory that must be sold at deep discounts to provide cash flow and reduce the burden of inventory. A habit of selling product at deep discounts, however, trains consumers to expect the discounted price, and the brand deteriorates over time."
Industry survival now turns on the outcome of an actual paradigm shift unlike anything witnessed in American history. What will take the hit? Quality? Labor? Both?
"There are certain costs that can't be decreased," noted Ames. "You can't not have rearview mirrors; you can't go without a transmission. That's what the challenge is going to be."
Published reports have raised concerns that bankruptcy could chase off GM's remaining customer base, or that the bankruptcy proceedings could bog down as the cost of the bailout increases while government intervention winds up failing to do what needs to be done: make and market better cars. Ames believes that if this unprecedented undertaking fails, it won't be traceable to the talent behind its crafting.
"The only thing that is consistent about it is that they have really super professionals working this case," Ames said. "They're the best of the best, the top in their professions, very good at what they do."