The end of the road for General Motors - Sid Hopper

What lies ahead for the automotive industry?

GM’s decision to file for Chapter 11 bankruptcy protection will have a significant impact on the automotive industry, with both winners and losers emerging during a painful period of re-adjustment.

• GM Europe is likely to be broken up and Opel / Vauxhall acquired by a third party. Fewer production plants, fewer suppliers and a smaller distributor network are set to follow.
• GM will almost certainly seek to sell its profitable assets to a NewCo under Section 363 of the bankruptcy code.  Able to leave behind its legacy liabilities, the ‘new GM’ will implement radical restructuring.
• Extreme pressure on the supply chain will lead to further consolidation. Financial stakeholders will need to monitor the situation very closely.

Those that survive will, like the ‘new’ GM we envisage, have undergone major changes in operational efficiency and will emerge stronger and better placed to profit from these new opportunities  However, even the winners will first have to endure a long and painful period of uncertainty.

Financial stakeholders need to assess winners and those suppliers at risk amongst their portfolio:

• Review and sensitise business plans for exposure to GM Europe and ongoing reduction in new vehicle sales.
• Assess company's ability to reduce the fixed cost base, quantifying savings, timetable and implementation costs.
• Determine whether operational restructuring has commenced or if the company has determined a trigger point to start.
• Update cash flow requirements of the business taking into account revenue sensitivities, cost savings.
• Identify whether business has sufficient funding to stay within facility limit, also taking into account working capital requirements when economic upturn begins.

Having identified winners it will be important to understand not only the support required in the short term but also the support and investment required as production volumes eventually increase in the medium term over a much smaller supplier base.

Supplier stakeholders should:

• Review and sensitise business plans for exposure to GM Europe and ongoing reduction in new vehicle sales.
• Assess company's ability to reduce the fixed cost base, quantifying savings, timetable and implementation costs.
• Assess future development spending and targeting of future vehicle programmes.
• Update cash flow and review requirements versus lenders covenants and facility limit.
• Identify and implement working capital improvements.
• If operational restructuring is insufficient to right size the company, negotiate with bank to restructure facilities, and consider merger or administration. 

Download our full report (.PDF <357 KB) where we consider the consequences of GM’s filing for bankruptcy protection and look ahead to the future shape and size of the automotive industry.

If you would like any advice relating to this article or would like more information on how our Business Restructuring team could help your business, please contact Sid Hopper, Partner, BDO.