President Obama recently rejected the turnaround proposals of troubled American auto industry giants General Motors (GM) and Chrysler LLC. The two companies sought additional federal bailout money but were rebuffed by the Obama administration which saw as unsatisfactory the companies’ efforts at restructuring and creating sustainable long-term viability. The president effectively forced out GM CEO Rick Wagoner and put any further bailout of Chrysler contingent upon reaching an alliance with Italian automaker Fiat SpA (FIA), which has remade itself into a strong company after having staved off bankruptcy itself only a few years ago.
These events leave the futures of both GM and Chrysler very much uncertain and some analysts believe both are inevitably headed toward bankruptcy. Some experts believe that even if bankruptcy is the answer, the government will not allow them to liquidate entirely but will provide at least enough aid to keep them operating because of their importance to the economy overall. Regardless of whether they liquidate or not, bankruptcy of these two auto behemoths would leave a substantial void in the auto industry market. If all this plays out, investors will be scrambling to determine who is in a better position to fill the void.
Perhaps, the most obvious answer is that their Japanese rivals stand to benefit the most. Honda Motor (HMC) and Toyota Motor (TM) have also struggled recently as the stumbling world economy continues to stifle auto sales. But their stronger financial position may leave them ready to pounce if two of their main American counterparts should fail. Earlier this year it was announced that Toyota, for the first time ever, had overtaken GM for the largest automaker in the world. Even in the Big Three’s home market of the United States, Toyota years ago supplanted Chrysler as the third largest in auto sales behind GM and Ford Motor Co. (F), with Honda perilously close to knocking Chrysler out of the fourth spot as well.
Other foreign car companies will also undoubtedly step up their efforts in the U.S. and elsewhere should GM and Chrysler go bankrupt. Asian automakers Nissan (NSANY), another Japanese automaker, and Hyundai Motor Co. (HYMLF), a Korean company, are among the other automakers that will be seeking to take advantage of such an opportunity.
Should GM and Chrysler actually fail, Ford Motor Co. would stand alone as the last American auto industry giant. While they are also experiencing declining sales and have their own financial struggles to deal with, they are in better financial condition than the other two American companies and have yet to require any federal funds to stay afloat.
Unlike GM and Chrysler, Ford was more proactive in dealing with struggling viability concerns. Ford previously initiated massive restructuring, slimming down operations, shedding jobs, and cutting production. If Ford does, in fact, complete this overhaul to be able to compete with its foreign counterparts, Ford could stand to gain much ground. This is especially true in the U.S. where there is a resurgent “Buy America” sentiment. As the only remaining American-based auto giant, Ford would have that marketing advantage over foreign competitors. Still, in the end Ford will need to prove that its products can compete both in quality and affordability with the likes of Honda and Toyota.
If GM and Chrysler are allowed to fail, a number of companies will be racing to claim their market share. Will Japanese powerhouses Toyota and Honda further bolster their already strong positions? Will Ford be able to re-establish itself as a profitable company capable of gaining significant market share? Will one of the smaller foreign companies, such as Nissan or Hyundai, surge out of the fringes to become a major global competitor? Despite the current economic struggles, with as much money is involved in the auto industry worldwide, this situation certainly bears watching to see who gains the most from the misfortunes of GM and Chrysler.