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Auditors' finding ratchets up fears of GM bankruptcy

Auditors have 'substantial doubt' the company can continue to operate. The automaker is seeking billions from the U.S. and other countries to keep it in business.

March 06, 2009|Ken Bensinger and Nathan Olivarez-Giles

Who would buy a car from a bankrupt automaker?

As the state of General Motors Corp.'s finances grows more dire, the relevance of that question is growing.

On Thursday, GM's auditor, Deloitte & Touche, became the latest player to beat the bankruptcy drum, revealing in the automaker's annual report that there was "substantial doubt" about the company's ability to continue operations.

Lately, faced with huge debts, crashing sales and deep structural problems, having borrowed $13.4 billion from the government and begging $16.6 billion more, even GM itself has begun mentioning the possibility of a bankruptcy filing. Last month, the Treasury Department retained a leading bankruptcy firm to advise it on the option.

Supporters of a filing say that it would allow the company to lower its debt, reduce its dealer count and rework contracts with the unions. But others ponder whether consumers, worried about warranties, spare parts and other issues, would be willing to purchase vehicles from a manufacturer that's locked in Bankruptcy Court.

For The Record
Los Angeles Times Wednesday, March 11, 2009 Home Edition Main News Part A Page 4 National Desk 1 inches; 62 words Type of Material: Correction
General Motors: An article in Business on Friday about the possibility of bankruptcy for General Motors Corp. said the last U.S. automaker to go out of business was Kaiser Motors in 1955. At least two other U.S. companies stopped making autos after that year: Studebaker Corp. produced its last vehicle in 1966, and Checker Motor Corp. built its last taxi in 1982.

GM finds itself in a dilemma: Without filing for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code, the company's structural issues may never be resolved. But if it does file, its sales may dry up, which could threaten the automaker's very existence.

"Chapter 11 is definitely an option for GM," said Aaron Bragman, an auto analyst at IHS Global Insight. "The problem is the collateral damage. Beyond what happens to all the people and companies that depend on GM, the question is what happens to sales?"

Part of the uncertainty is that automakers don't go into bankruptcy very often.

The last American car manufacturer to go out of business rather than be acquired or merge was Kaiser Motors, which gave up making its own line of cars. Before that, according to most accounts, it was Lincoln, which entered receivership in 1920 and was bought out by Ford Motor Co. for $8 million two years later.

Beyond the failure of DeLorean in 1982, the most recent example would be Daewoo, a South Korean carmaker that went bankrupt in 2000. That move was a sales disaster, with revenue falling 37% in the first six months after the filing, and profit declining 71%.

"There's little history of bankruptcy in this industry, but what there is suggests sales fall off the cliff," GM President Fritz Henderson said last month when the company filed an updated business plan that said a full-scale bankruptcy filing could cost taxpayers $100 billion.

That's more than three times the total amount GM has requested from the government for restructuring outside of bankruptcy, and the company argues that the cost of bankruptcy is so high precisely because sales would collapse. Unlike a ticket purchased from an airline, GM and others contend, an auto is a long-term investment and buyers expect the company to stick around to provide service and parts.

"I certainly wouldn't buy a GM car if they go bankrupt," said John Rossmann, a retired teacher in Tustin who owns a 9-year-old Saturn. "You have to think about the warranty. I know GM offers a five-year warranty, but if they're gone, it's worth nothing."

Nobody argues that a bankruptcy would help sell cars. But some contend that the company's depressed sales reflect the fact that, in the public imagination, GM is already as good as insolvent.

Since GM filed its first business plan in early December, the company's sales have plummeted at a significantly faster clip than they had before. In the last three full months, GM's sales have fallen 43.4%, while overall industry sales have declined 38%, compared with the same period a year earlier.

And sales at Saturn, Saab, Pontiac and Hummer -- brands that GM announced it would downsize, sell or close in the December plan -- have fallen even more, a full 50% compared with the year-earlier period.

"The prospect of a bankruptcy has already affected GM's sales," said Douglas Bernstein, who heads the bankruptcy practice at law firm Plunkett Cooney. "GM is saying the costs will go up if they file, but they're already baked in."

Bruce Hamlin, owner of two Orange County Chevrolet dealerships, estimates that 30% of potential customers who come into his dealerships these days raise concerns about GM's solvency.

"I'd say there are hundreds of people who aren't even coming in because of the rumors," he said.

At Felix Chevrolet and Cadillac in Los Angeles, GM's uncertain future has led to a slowdown unlike anything saleswoman Liz Lewis has ever seen. Only a few people stop in each day, she said, noting that sometimes there are more employees than shoppers. Even on weekends, she said, only a handful of customers come in.

"That's a big change because we can remember a time when we used to bring home $5,000 a month in commission," Lewis said. "Now it's nowhere near that."

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