GM (GM): People Will Not Buy Cars From A Bankrupt Company

There is a perception among investors and government officials that GM (GM) CEO Rick Wagoner will say anything to save his job. He has argued hard and often that people will not buy cars from a company in Chapter 11. And, he is probably right.

Bankruptcy is a better deal for fixing car companies than a government loan, at least on paper. It would allow a court to void union contracts, pension payments, and debt obligations.

What bankruptcy does not do is ease the consumer’s mind.

The government could set up a "warranty guarantee" pool so that car buyers would see that the US was backing the warranties that come with every GM car. If the firm eventually did have to fold, at least a customer could get his car fixed at no cost. That leaves out the fact that dealerships would also fold and there would be nowhere to go to get the warranty honored

The average citizen does not even know what the FDIC is. Almost everyone has a bank account, but how it is guaranteed and at what level is a mystery to checking account holders. Telling that same population that some wizard behind a curtain will make sure that their cars will be repaired is beyond the comprehension of most people.

Because car buyers have a number of alternatives, they will buy from the healthy car companies like Toyota (TM). It makes better cars and people know that its warranties are solid.

What the warranty problem means is that if GM does go into a Chapter 11, its divisions will have to be sold to healthy car companies immediately to keep buyer confidence in the products and their repairs.

It makes not matter if GM can cut its costs 30% in a receivership if it loses another 40% of its sales.

Douglas A. McIntyre