CHAPTER 1 Introduction

• Jurisdiction: United States

CHAPTER 1 Introduction

A. Changes in the Automotive Industry: 2006-12

In 2006, when the first edition of this work was published by the American Bankruptcy Institute,¹ the chapter 11 cases commenced by Delphi Corp. and a number of its affiliates were in full swing, along with the cases of a number of other Tier One and Tier Two automotive suppliers. At that time, no one could accurately predict the sea changes that would inundate this industry within the following three years, culminating in the federal government's bailouts of General Motors Corporation and Chrysler Corporation in late 2008, followed by their chapter 11 filings less than a year later.² The third member of the "Detroit Three," Ford Motor Co., declined to accept monies from the U.S. Treasury Department's Troubled Asset Relief Program (TARP) and subsequently performed its own internal financial and operational reorganization.³

A "new" General Motors and Chrysler emerged from their chapter 11 cases, which were orchestrated by the U.S. government, as stronger, slimmed-down original equipment manufacturers (OEMs), having shed redundant assets and, in Chrysler's case, operating with a new controlling shareholder, Fiat S.p.a., headquartered in Turin, Italy, and run by the dynamic Sergio Mar-chionne.⁴ The 2008-09 world financial crisis also severely impacted the European automotive sector, where the ownership of General Motors' former subsidiary, Saab Automotive AB, was transferred to a Dutch car manufacturer, Spyker Cars, N.V., after commencing a reorganization proceeding in Sweden.⁵ General Motors came within a whisker of selling its equity interest in its German subsidiary, Adam Opel GmbH, to a Canadian/Austrian/Russian consortium in late 2009 before abruptly changing course, deciding instead to retain ownership of Opel and its English sister company, Vauxhall Motors.⁶ During this same period, Ford divested itself of its foreign subsidiaries, Volvo Cars, Jaguar Cars and Land Rover, by selling them to foreign OEMs.

As of June 2012, the global automotive industry, except for the European sector and, to some extent, the Asian sector, appears to have weathered the worst of the world financial crisis. The Detroit Three, after disposing of substantial automotive manufacturing and assembly assets and shrinking their workforces and supplier bases, seem to have right-sized their respective North American operations to adjust to reduced consumer demand for their products in this region. In addition, the Detroit Three have eliminated a number of vehicle platforms, focusing on fewer, more common platforms for use throughout the world in a reduced number of vehicle models. These measures, forced upon the Detroit Three by the crisis, have had the positive result of right-sizing their design, manufacturing and assembly costs, which have resulted in these OEMs reporting substantial profits from their North American operations in the first quarter of 2012—marking a complete turnaround from the bleak conditions of 2008-09.⁷ The Asian automotive industry (and particularly sales of imports from Asia), however, continues to suffer from recent setbacks related to quality-control issues and the catastrophic tsunami that devastated Japan's northeast coast in March 2011.

B. Challenges Caused by Overcapacity in Europe

The major challenge that the Detroit Three and many foreign OEMs face in the immediate future arises in Europe. That continent's foreign and domestic automobile manufacturers must soon address the overcapacities that plague their operations and result in substantial operating losses. From 2008-12, the Detroit Three closed 13 factories in the U.S. and, by shifting production from the closed factories to other facilities, increased the use of their North American operational capacities from 66 percent in 2008 to 82 percent during the first months of 2012.⁸ From 2007-12, the U.S. automotive industry, including transplants, reduced its overall capacity by 1.5 million units.⁹

In contrast, only three automotive plants in Europe were shuttered during the period from 2008 through early 2012, although more have been scheduled for closure later in 2012. In Europe, there are currently 241 automotive plants in 27 countries. During the world financial crisis, a number of European governments took actions to prop up their automotive industries by promoting scrap-page schemes to subsidize purchases of new vehicles, often referred to as the "cash for clunkers" program. Few, if any, efforts were made during this period by these same governments to address the core issue facing Europe today: how to reduce automotive production capacities without tearing further the broad safety net, the Rettungsschirm, that protects European autoworkers and their families.¹⁰

The European automotive industry is now being forced to address this problem of...