Spinning scenarios

What next?

I believe the odds are getting better that Chrysler LLC will enter Chapter 11, and Delphi Corp.'s North American operations will liquidate.

I have no insider information on either company. I am not a bankruptcy expert. But both of these scenarios seem to me to be increasingly likely, based on the publicly available evidence. Here's my reasoning.

Chrysler

One of the great advantages of Chapter 11 to Cerberus Capital Management LP, which owns 80.1 percent of Chrysler, would be what's known as Code 363 of the bankruptcy law. It allows a company to sell off portions of itself cleanly, free of all liens, claims and other legal encumbrances.

So far, Cerberus has been unable to sell the company as a whole. Whether or not Chrysler gets a government loan, I believe Cerberus will want to sell off what it can for however much it can get, and end its ill-timed automotive adventure.

The following is raw speculation. Hey, what did you expect from a blog?

I wouldn't be surprised to see Chrysler enter Chapter 11 on a Friday night or Saturday, and then, the following Monday or Tuesday, sell its minivan operations to, say, General Motors and its Jeep operations to a foreign automaker, say Italy's Fiat S.p.A or India's Mahindra and Mahindra Ltd. It could toss in the Dodge Ram pickup business with Jeep, or not.

(There's no particular reason for naming those companies as buyers, by the way. But I don't expect GM or Ford Motor Co. to buy Jeep, so I'd expect that buyer to be a non-American company.)

Chrysler would liquidate its passenger-car operations, for lack of a buyer. That probably means selling what equipment it could, with the rest being sold to scrap-metal dealers.

Before, the conventional wisdom was that if one of the Detroit 3 entered Chapter 11, the others would be forced to follow. Otherwise, one automaker could tear up its UAW contract and the others couldn't. But if Chapter 11 is an excuse to smooth a breakup and sale, I'm not sure that the conventional wisdom would apply.

On the other hand, some Chrysler suppliers will die.

There are suppliers from Tier 1 to Tier 3 who rely overwhelmingly on Chrysler. Death certainly looms for those who supply Chrysler passenger-car factories. It could be in the cards for minivan suppliers, too. After all, GM will start to re-assign minivan parts to struggling GM suppliers as soon as possible, since the added volume could be the lifeline that keeps those suppliers afloat.

The foreign buyer of Jeep may keep things going as is for the time being. But the buyer is really after the brand name. The Jeep Wrangler and perhaps two other vehicles are the only ones from the current stable that it really needs. Over time, the new owner may rebadge its own SUVs as Jeeps.

Either way, a fairly large number of U.S. suppliers will follow Chrysler into bankruptcy, and possibly liquidation. Will enough of them also be suppliers to GM and Ford to force one or both other those automakers into Chapter 11? That's the $34 billion question.

Delphi

I expect GM to pull the plug on Delphi.

For too long, the automaker has been subsidizing its parts-making spinoff by paying higher prices to Delphi than to competing suppliers and by, in one way or another, kicking in funds for the former GM workers who now toil at Delphi.

GM simply cannot afford to keep doing that.

My speculative crystal ball says that Delphi will liquidate its North American operations. It will set up a new Delphi entity, headquartered in whichever foreign country offers the most advantageous tax structure. That company could buy certain remaining North American r&d operations. All other operations will be liquidated.

GM re-sources those parts to other suppliers at a lower cost. Those suppliers, again, are happy to get higher volumes in an industry facing annual light-vehicle volumes in the 11 million to 12 million units range.

Delphi overseas remains a major supplier to Opel, GM China, GM-Daewoo, and such non-GM customers as Toyota, Daihatsu, Chery, and Geely.

There's probably a downside for Delphi here. But the alternative is for both GM and Delphi to continue to bleed as they pay bankruptcy lawyers and restructuring consultants.

I think this will prove the preferred path.

25

Shares

ATTENTION COMMENTERS: Over the last few months, Automotive News has monitored a significant increase in the number of personal attacks and abusive comments on our site. We encourage our readers to voice their opinions and argue their points. We expect disagreement. We do not expect our readers to turn on each other. We will be aggressively deleting all comments that personally attack another poster, or an article author, even if the comment is otherwise a well-argued observation. If we see repeated behavior, we will ban the commenter. Please help us maintain a civil level of discourse.

Newsletters