Brains not brawn

IN THE end, it was us first, but it hardly mattered. Less than a day after LDV became the first notable casualty of the crisis engulfing the automotive industry, Chrysler – once one of the “Big Three” US car manufacturers – announced that it had filed for Chapter 11 bankruptcy.

Of course, bankruptcy in the US is not as severe and carries none of the stigma than it does on this side of the Atlantic. Indeed, it is often seen as the right of the entrepreneur. Henry Ford went bust three times before his motor company was established in earnest.

Chapter 11 is the least severe option open under the US Bankruptcy Code, and permits reorganisation. As Chrysler’s is the sixth largest in American history, it will take as long as two months to resolve in the courts. Barack Obama hoped for a quick resolution, and called the bankruptcy “surgical”.

There may be some truth in this, as Fiat is now in for 35% of the business, although it has the bargaining position to cherry pick. Car workers will not enjoy the medical treatment. All of Chrysler’s 30 worldwide plants are to shut down on Monday for 60 days, ready for the new arrangement. Six, including three in the metro Detroit area, will close for good in 2010, to be sold off with other assets to help settle some of its considerable debts.

Chrysler was always predicted to fall first. The company has a long and undistinguished history of fiscal turbulence – a 1986 book on the company was subtitled 50 Years of Crisis at Chrysler. Daimler-Benz, after 11 years, finally bailed, having had valued at nothing the 19.9% stake in the company it retained after Cerberus Capital Management bought the remainder in 2007. It stumped up $600m in pension contributions just to get rid.

As terrible as this development is, what the world is really bracing itself for is the collapse of GM, as the corporation’s global reach is far greater than that of Chrysler’s.

Despite receiving loans totalling $15.4bn under the Troubled Assets Relief Program (TARP) from the US Treasury (Chrysler received $4bn), and having been given a 60-day deadline, until the end of April, by the White House to restructure in order to qualify for further funding, GM has already given notice that it is likely to default on a repayment due at the start of June.

GM directly employs almost a quarter of a million staff, with perhaps double that number employed in supplying the car maker. Then there are hundreds of thousands of jobs reliant upon servicing the industry, its workers and suppliers. The Bush administration floated numbers of around two million for those engaged in some way in the US automotive industry.

GM is the sum of many parts, and while it sold 8.35m cars last year, its problem is that it can only run as fast as its slowest business. Opel is the corporation’s basket case. Forced into selling 50% of the business to attract German government loans, GM now looks with real concern as storm clouds gather around the car maker, powerless to help.

Ford might be the least shaky, but not all is rosy with it, either. It pays $7.3m to underwrite every $10m of its debt in credit default swaps. But, despite a record loss of $14.6bn for 2008, it has not yet borrowed under the TARP scheme.

This will bring some measure of relief in Wales, even though Ford’s Bridgend plant workers have been subject to volatility in recent years. Similarly, Toyota – the world’s largest car maker, appears as stable as can be expected in the current environment, and it remains a major employer on Deeside. However, their better-than-the-rest position is no reason to end any ministerial sleepless nights, especially for those that govern from Cardiff Bay.

Wales is home to around 200 automotive suppliers. All are prone to a bout of flu when their clients so much as sniffle. It happened to 750 workers at Lucas in Ystradgynlais in 1999, who learned suddenly during the morning shift that they were without jobs. It was swift and brutal, and it has happened several times since – often during good times, as the loss of a contract can kill a Welsh supplier.

How do you mitigate against recession, and redundancy? Any Assembly assistance almost certainly will not take the form of financial aid, as the administration braces itself for the ill winds that will blow in Budget consequences. As such, it behoves ministers to consider what expertise they can place at the disposal of stricken businesses. They must provide automotive companies with the tools to take control of their own destiny and remove them, as much as they can, from the perils of the supply chain.