Trucks at Work

The bankruptcy hurdle

If there's a filing by Chrysler today, it will create a great deal of uncertainty for the industry and suppliers.” –Bill Kohlder, co-chair, Butzel Long’s Global Automotive Practice, as told to Reuters after Chrysler LLC announced it will file for Chapter 11 bankruptcy protection.

So it’s come to this: Chrysler LLC couldn’t restructure its debts with bondholders and so must file for bankruptcy protection. It’s been a long, sad road for Chrysler thus far and now we enter a new and more worrisome chapter – especially for those fleets that rely on Dodge-branded light trucks to do business.

Here’s why bankruptcy may prove to be more harm than good when all is said and done: in a recent poll, the majority of consumers said they don’t want to buy vehicles from a bankrupt automaker. And without buyers, Chrysler – and any other automaker that goes down this road – would have no hope for recovery.

In a new study, advertising research firm Ad-ology found that 21% of the consumers it surveyed said they DEFINITELY would NOT consider buying a car from an automaker considering bankruptcy, with another 28.6% saying they PROBABLY would NOT consider buying a car from a struggling manufacturer.

Note that Ad-ology surveyed an online consumer panel of 1,225 adults in a manner that is 98% representative of the U.S. adult population from April 24-29, 2009, with the margin of error in this survey is +/- 2.2 percentage points.

Of consumers who would consider buying a car from a struggling automaker “only if they got a great deal,” 38.6% said a deeply discounted price and 38.8% said a discounted/free extended warranty would make a purchase more likely, the group reported.

“It’s not just out of sight, out of mind: It is worse,” said C. Lee Smith, president and CEO of Ad-ology Research. “Whether it's GM, Chrysler or individual dealerships, the auto industry must stay top-of-mind to rebuild consumer confidence.”

Another hurdle for automakers is that 46% of the consumers in Ad-ology’s survey view a company’s products or services much less or somewhat less favorably after an announcement of a large number of layoffs.

The reaction from the investment community is none too positive either, according to interviews by reporters from Reuters.

“Bankruptcy will damage the Chrysler brand and that is regrettable,” noted Brian Bethune, an economist with IHS Global Insight. “The government has to think carefully about how long they can bleed Chrysler out. They need to bring some fresh blood there to lead this company.”

"If it ends up being bankruptcy, why have we wasted all our time? Has the government's political process been of any benefit at all other than to waste a lot of time and money, and do we have to suffer this for every other bankruptcy?” wondered Andrew Kanaly, chairman of the Kanaly Trust Co.

"Bankruptcy is not new. It's been there all along. For some reason these days the government seems to be the only remedy when we have plenty of remedies available to us,” he told Reuters. “Maybe this is a pattern that we are going to see for Ford, GM, maybe Bank of America, maybe Citi – a whole lot of hand waving, a whole lot of talking, a whole lot of hand wringing, when the bottom line is.”

Kanaly believes we should just let such “failed institutions” go so the nation as a whole can get on down the road to recovery.

"It's no shocker. If you bought a Chrysler a year-ago you knew you had an issue,” he said. “The American [consumer] has already voted with their feet by virtue of their purchases. They are driving down in their Honda."

Still, it is the contention of others such as Jeff Kleintop, chief market strategist at LP Financial, that the certainty of even a bankruptcy is better than the uncertainty of not knowing where this is going to go or how deep the cuts or layoffs at Chrysler might end up being.

“The fact that it's moving toward bankruptcy, the range of possibilities is being narrowed and the market always prefers certainty over uncertainty, even if it means the certainty of a negative outcome,” he said. “The market is looking forward for the first time in quite a long time, and so the near-term issues around what happens with the automakers, or even the stress tests with the banks, have taken back seat to a bigger picture view by the American investor.”

Time will tell of course if Chrysler survives this latest chapter in its ever-more rocky history, or gives up the ghost for good.