After Detroit’s Bankruptcy: Automobile Manufacturers Not Threatened

Detroit’s bankruptcy should not harm the Big Three — the three automakers that have their headquarters in the city. It is a paradox because, after all, the economic troubles at General Motors, Chrysler and — to a lesser extent — Ford contributed to Detroit’s financial disaster.

On Thursday, Michigan Gov. Rick Snyder authorized the city to seek federal bankruptcy protection from creditors under Chapter 9 of the U.S. Bankruptcy Code. The City of Detroit, home of the domestic auto industry, has more than $18 billion in debt with no prospect of repaying the borrowed money or of reaching an agreement with the creditors.

The carmakers, trying to soothe Wall Street investors’ worries, assert confidently that the problems of Detroit will not affect their condition. At the same time, they pledge to help rebuild the city.

Detroit Is Our Home

“GM is proud to call Detroit home,” was the response of General Motors to the information about the city’s insolvency. GM is the only one of the Big Three that has its head office within the administrative boundaries of the city. It employs nearly 3,000 people there. “We do not anticipate any impact to our daily operations or business outlook,” the automaker said. “A healthy auto industry will play a part in Detroit’s comeback story and GM is doing its part.”

GM’s two competitors, Ford and Chrysler, have their headquarters in the suburbs, though Chrysler opened its office in Detroit last year. Chrysler Group keeps a full-fledged car assembly plant in Detroit, which employs nearly 5,000 people, and has four other factories in the area. “We not only continue to invest in the city and its residents by adding to our presence in Detroit, we also are committed to playing a positive role in its revitalization,” declared the Fiat-controlled automaker.

Ford Motor, whose headquarters is located in suburban Dearborn, stays relatively far away. Yet, the corporation has also issued a statement, expressing hope for the rebirth of the bankrupt Detroit.

Debt To Pay

Detroit’s Big Three owe a debt to the city. The problems of the American automotive industry are considered to be one of the main reasons for Detroit’s bankruptcy. Within the city limits, there are dozens of abandoned small and large companies which once belonged to either GM, Chrysler or Ford, or to their suppliers.

With each new wave of the automotive industry crisis — starting with the Japanese automakers’ offensive four decades ago — more and more companies were moving out of the city, thus depriving Detroit of income taxes. The final blow came after 2009, when both GM and Chrysler announced bankruptcies. The automakers have survived only thanks to the money of the American taxpayers. However, the reorganization was very painful. Even more workplaces had to shut down and this, inevitably, only worsened the financial situation of Detroit.

Redevelopment Will Be Difficult

Revitalization of Detroit will be more difficult than resuscitation of GM and Chrysler (Ford was the only one that avoided bankruptcy in 2009). The city will have to deal not only with its obligations to creditors, but also to the retirees and unions.

Only after that can one talk about ensuring basic safety to the degraded city and attracting investments. But even then, the appearance of the completely devastated areas with boarded-up houses, from which residents have been fleeing for years, will not change overnight.