Auto Industry on June 1, Thesis

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The other important function of the plan was to shift responsibility for the pension obligations from the company to the United Auto Workers. While smaller creditors and contractual partners need not be satisfied with the reorganization, it is difficult to believe that the reorganization could have been done with the cooperation of the UAW. It would not have been politically expedient for the federal government to become involved and without their involvement the judge would have had had the option of the 363 asset sale. In accepting responsibility for the pension, the union has lifted a major portion of the liabilities from General Motors. In addition, a deal reached before the filing adjusted some of the work rules, ended bonuses and froze wages, all of which combined to save GM $1.2-1.3 billion per year. Combined with plant closures, the moves are expected to bring GM's labor costs more in line with those of its competitors. This will eliminate a major competitive disadvantage. The cost to the company is a significant UAW ownership stake and a union seat on the board (Strumpf, 2009).

It should be noted that the unique structure of automakers' operations stretches the impacts of the Chapter 11 reorganization's internationally. General Motors and Ford in particular have a significant amount of their production capacity in Canada. The Canadian government, therefore, needed to become involved in the Chapter 11 process. The Canadian Auto Workers, however, did not have the same involvement as the UAW in large part because the health care liabilities to pensioners are dramatically lower in Canada due to the socialized medical system. It is highly unusual for one federal government to become heavily involved in a Chapter 11 case, let along two governments, which makes the case of the automakers unique.

Impacts

In theory the automakers have utilized Chapter 11 to free themselves from the majority of their liabilities. Without these liabilities on their balance sheets, and other burdensome contracts that were left behind during the course of the bankruptcy proceedings, the automakers are theoretically better equipped to compete with their rivals.

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The cost of goods sold will be significantly lower, since not only with the average hourly labor cost be lower but so will the average number of hours per vehicle.

By altering the underlying financial situation of the automakers, the focus can be shifted towards improving the operations side of the business. With the less efficient plants and product lines jettisoned, General Motors expects at this point to only have four lines of product. They will be able to better focus on meeting customer needs, the lack thereof in the past has contributed to the dire financial situation in which they found themselves.

Conclusion

Chapter 11 bankruptcy allows for insolvent companies to reorganize themselves in order to satisfy their creditors and relieve their debt burdens. If there is reason to believe that the company will otherwise fail, Section 363 can be utilized in order to allow the company to sell its assets, if there is a willing buyer. Two automakers, General Motors and Chrysler, filed for Chapter 11 protection in order to restructure their operations and balance sheets.

At GM, the company was able to cut unproductive assets, renegotiate union contracts and transfer its good assets to a new GM company backed by the federal government. The most significant of its legacy liabilities was its pension obligations, particularly with respect to health care. These obligations were transferred to the United Auto Workers in exchange for an ownership stake in the new company. Some other major creditors also received a stake.

The reorganization served some key functions, such as lower labor costs and dramatically improving the firm's balance sheet. What it did not do was address some of the other strategic and competitive issues facing the automakers. The hope is that by restructuring, these firms will be better able to respond to the challenges in today's competitive environment, allowing for their long-term survival.

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