S&P: Watch Out For Chapter 11 At Ford (F) And GM (GM)

Yesterday JD Power said that the global car market could "collapse" and GM (GM) fell 31%. Today S&P is saying that "General Motors Corp., Ford Motor Co. and Chrysler LLC may be forced into bankruptcy by slowing economies and dwindling U.S. auto sales," according to Bloomberg.

While a number of large businesses, particularly airlines, have worked in and out of Chapter 11 for decades, most research shows that consumers will not buy a car from an insolvent auto company. Buyers are concerned that parts and service may not be available to them in the future when they need work done on their vehicles. They are also worried that a bankrupt company may not honor a warranty.

If indeed it is nearly impossible for a US car firm to operate through a restructuring, the only way out would be a sale to a large international operator, probably Honda (HMC), Toyota (TM), or VW. VW is the most likely candidate. Its share of the American vehicle market is only about 1% compared to 15% for Toyota. By owning Ford, VW could be one of the top three car companies in the United States.

The American car market is still the largest in the world. But, the economic downturn means that making large amounts of money here requires annual sales to move back above 15 million a year. Next year, that number is likely to be less than 14 million.

VW could take a tremendous amount of expense out of a US manufacturer, cutting most of the administrative and product development operations.

VW may get a deal because it has the balance sheet and sales to remain in business.

Douglas A. McIntyre