Good Bye, GM

In two weeks, General Motors will declare bankruptcy. It is as good as certain. Only a miracle would prevent it, and miracles have been in very short supply. Last week, the world’s formerly largest auto maker sent letters to 1,100 dealers in the U.S.A., telling them they would no longer be GM dealers after October 2010. It’s just the beginning of the end. GM wants to eliminate 2400 of their nearly 6000 dealers in the US. Due to the U.S. franchise laws, a closure of that magnitude would be unaffordable under normal circumstances.

It is only financially possible after bankruptcy. In a conference call with reporters, General Motors sales chief Mark LaNeve acknowledged that carrying out the plan would be difficult outside of bankruptcy-court protection, as state franchise laws make it "onerous and expensive" for manufacturers to force dealers out of business. In bankruptcy court, however, those contracts can be nullified, the Wall Street Journal explains. "Without a legal bankruptcy filing, these dealer cuts would be hard to enforce," LaNeve said.

After Chrysler declared bankruptcy end of April, GM will be the second of the Detroit 3 to go under, with only Ford left standing. Even Ford may be forced to seek court protection, if only to maintain competitive advantage: If Ford wants to trim its dealer network, which it has to, it would have to face the same "onerous and expensive" consequences. Under bankruptcy protection, it could close shops at will, like Chrysler and GM.

The global recession “may be so deep that it is destroying manufacturers and other companies in the supply chain at too fast a pace for the damage to be repaired quickly,” Reuters wrote in an analysis. Many fear that whole sections of the supply chain will be destroyed beyond repair. Already, "there has been widespread decimation of production capacity," said Paul Bingham, managing director of world trade and transportation markets at IHS Global Insight. "There is no question that this destruction will become an impediment to recovery." Bingham and others think that many factories will be lost forever.

Manufacturers from China form the largest group of foreign suppliers to the United States, and the U.S. downturn has already destroyed a lot of production in China. According to Panjiva, which collects information on suppliers and manufacturers using customs and other data, the number of active foreign manufacturers exporting to the United States totaled 120,000 in March, 26 percent below the peak of 162,000 foreign manufacturers in July 2007 and more than 15 percent below March 2008.

Although the March number was a 1.7 percent improvement over the 118,000 foreign suppliers in February, the number of Chinese manufacturers shrank 3 percent.

Panjiva has created a watch list of significant suppliers at risk. Thirty percent of all significant suppliers were on the list in March. Some 30 percent of significant suppliers were Chinese in March and 28 percent of them were on the watch list.

Meanwhile in Japan, 19 out of 36 major Japanese autoparts makers reported losses for fiscal 2008, the Nikkei reports. Their combined losses totaled 276.1 billion yen in fiscal 2008, after a combined net profit of 755.9 billion yen the year before. According to the Nikkei, “they will likely post another combined net loss in fiscal 2009.” Parts giant Denso reported the biggest net loss among the 36, as orders from Toyota nose-dived. Denso suffered a net loss of 84 billion yen, compared with a 244.4 billion yen net profit a year earlier. Calsonic Kansei posted the second-biggest net loss at 55.3 billion yen following drastic production cuts at Nissan.

Of the developed markets, Europe is by far the largest, and by far the least affected by the global meltdown. According to data released by the European Auto Manufacturers Association ACEA, April sales in all of Europe were down 12.3 percent compared to April 2008. Four months into 2009, the market decrease amounts to 15.9 percent. Compared to the disastrous sales elsewhere, this isn’t so bad. Some markets such as Austria ( 12.8 percent,) Germany ( 19.4 percent,) Poland ( 2.4 percent,) the Czech Republic ( 19.0 percent) and Slovakia ( 43.5 percent) report solid growth. Other countries such as the UK (-24.0 percent,) Spain (- 45.6 percent) keep crashing. Sales in Iceland (-88.4 percent,) Ireland (-66.7 percent) and Finland (-52.1 percent,) nearly evaporated. Seen as a whole, Europe is still alive and recovering.

What does it all mean? As a parts manufacturer, try to lighten your dependency on OEM sales to the USA and Japan as quickly as possible. Strengthen your ties to Europe, even if it means investing in certification costs. Focus on aftersales, aftersales, aftersales, a market that goes up whenever new car sales go down. Be happy that you are in China, already the world’s largest car market, with nearly unlimited room to grow. The Chinese car market made an amazing jump in spring. The way it looks, some Chinese car companies will snap up U.S. brands and assets after they have become cheap and unencumbered after bankruptcy. This should open the door to aggressive whole car exports, the only area where China currently lags. It won’t be long.

About the author: Bertel Schmitt, Gasgoo's columnist, is CEO of Hong Kong based parts sourcing company Sinamotive. Before founding Sinamotive, with the assistance of U.S. venture capital, Mr. Schmitt was a marketing consultant to Volkswagen AG.