GM Bankruptcy: Ripple Effects for Family Enterprises
General Motors, one of the nation’s foremost manufacturing icons, officially filed for bankruptcy protection on June 1st. While the news has been anticipated for a few weeks, for many it was still a shock. What remains to be seen is how much this shock reverberates through the broader economy.
The Center for Automotive Research reports that the Big Three (GM, Ford, and Chrysler) automakers employ 240,000 people. If you factor in parts makers and other suppliers, as well as employees at dealerships, however, you get to a figure of close to 1.2 million jobs that are directly tied to the auto industry. The question for us is how this will affect family businesses across the United States.
The nation’s approximately 20,700 auto dealerships is one sector of the auto industry that has been traditionally dominated by family businesses. This past year has been a very difficult one for these businesses. More than 1,300 auto dealers have already closed their doors, and estimates of further dealership closings from GM and Chrysler range from 1,900 to 3,300. While this gut-wrenching process for countless family businesses does not appear to be slowing down anytime soon, the silver lining is the surviving dealers should be able to enjoy higher sales in the future, thanks to reduced competition. In fact, many positioned to survive are currently looking for opportunities to grow through additional brands or locations.
We expect many of these future survivors to be family businesses whose long-term focus will enable them to see beyond the current crisis, and whose conservative approach to finance will have put them in a position to capitalize on opportunities during this tumultuous period. So the take-home message for dealerships is, while these are challenging times for many, it is important to not get so hunkered down that your business misses a unique opportunity for strategic growth.
Another important sector of the economy that is feeling the impact of the shakeout in the auto sector are the suppliers. Like the auto dealers, manufacturers who supply the auto industry have been feeling the pinch for some time. Fully one third of automotive suppliers were deemed at risk for bankruptcy themselves by Grant Thorton earlier this year. “The supplier network’s structure is in pretty serious trouble now,” said David Cole, chairman of the Center for Automotive Research. “It’s not profitable, and critical suppliers are on the edge of failure,” Cole said.
While the bankruptcy court will likely allow GM to keep paying “key vendors,” the fear is the bankruptcy process could slow down the process of these vendors getting paid. This will put businesses that were already on the edge in an even more precarious position. As with the dealership network, this is likely to lead to a survival of the fittest outcome. Analysts say those businesses whose balance sheets are strong enough to withstand this stress through the summer could benefit as their competition falls by the wayside, a position that underscores the value of fiscal conservatism that is often the hallmark of family enterprises. While it is hard to get statistics on such things, it will be interesting to see what proportion of the businesses that survive this period are family businesses.
Thousands of GM workers stand to lose jobs as the company shuts down plants and seeks to discontinue entire brands. In addition, businesses well outside the automotive sector in communities where a plant is closed can expect to feel the effect as many families are forced to relocate or make substantial cuts in their household spending to cope with job loss. It is important to note that this effect is not limited to Michigan. Thirteen other states have auto manufacturing facilities.
If your community is being impacted by a plant closure, you should spend some time determining how this will affect your business and make the necessary adjustments as rapidly as possible. One of the advantages of closely held businesses is the speed at which owners can make important decisions and strategic adjustments. Now is the time to lean on your board of directors or other important advisors to seek counsel on how to best proceed so you can survive the current crisis, while not compromising your ability to effectively capture some upside potential.
With all the stories of financial crises and “too big to fail” that we have heard over the past several months, it is easy to start to feel a bit numb to this sort of news. However, GM’s bankruptcy filing is the fourth-largest ever for an industrial company in the United States. The company reported it has $172.81 billion in debt and $82.29 billion in assets. While you may be saddened by the demise of this American icon, or feel they got what they deserved from years of poor management – the reality is this business failure will affect thousands and thousands of other businesses and their employees. The domestic auto plants and their interconnected group of suppliers are far bigger than GM. It includes 54 North American manufacturing plants and at least 4,000 Tier 1 suppliers (firms that feed parts directly to those plants). These businesses come in all shapes and sizes. Many of them are family controlled. Many of the companies that will be adversely affected by GM’s bankruptcy are family businesses. However, many of those that survive will also be family enterprises that are positioned to not just survive, but to thrive as their industry gets completely reinvented.
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