There are two story lines revolving around the expected bankruptcy of General Motors Corp., and the first one is ugly. Bankruptcy is a nasty business and IT vendors may be left with unpaid bills, smaller contracts and uncertainty about the automaker's future.
The second story, however, line is more hopeful: GM will gain some needed freedom if, as expected, it files for Chapter 11 bankruptcy and reorganizes. It will be able to jettison contracts and IT plans that may not be working for it and better position itself to adopt new technologies.
Among the companies that make up GM's suppliers is supply chain management vendor i2 Technologies Inc. As with other vendors, i2 is paid on a 60-day term, meaning that if GM files for bankruptcy, there is a chance it won't be paid for two months worth of work, said Kelly Thomas, senior vice president and general manager of manufacturing at i2.
Which vendors are paid after a bankruptcy is filed will be up to a judge, but Thomas said his firm will stay with GM, regardless of a court decision. “You make a bet that you will be a much stronger partner because you stuck by their side,” he said.
There are many other IT vendors at risk of losing money in a GM bankruptcy. Automakers and their supply chains spent $9 billion on IT last year, according to IDC's Manufacturing Insights — and GM is a big part of that spending. In 2006 alone, GM approved $15 billion in multi-year outsourcing contracts. Overall IT spending for this year in the U.S. is estimated to be nearly nearly $500 billion, according to IDC.
But once GM is out of bankruptcy, vendors continuing with the company will be paid. The court “will make sure there is a financing system,” said D. Mike Darland, a partner at CRG Partners, a New York consulting firm that handles restructurings and corporate turnarounds.
Darland expects most suppliers will want to continue business with GM, but the automaker will likely scale back on suppliers as it reduces its size. “GM is looking to come out of this process a more efficient company,” he said.
The bankruptcy “is almost a cleansing process that will help GM understand what's needed from an IT perspective,” said Thilo Koslowski, vice president at Gartner Inc.'s industry advisory service.
“There will certainly be some pain for vendors,” said Koslowski, noting that whatever comes out of the bankruptcy “is going to be smaller than the GM we know today.”
The best-case scenario for IT spending by the auto industry over the next few years is for it to be relatively flat, growing to about $10.5 billion by 2012. That growth is predicated on GM emerging from bankruptcy as a stronger company — coupled with a general improvement in the auto business, said Joe Barkai, practice director at IDC's Manufacturing Insights.
Barkai said bankruptcy may give GM the time it needs to build new products that bring in buyers. “We are on the verge of breaking through technology barriers on a new generation of cars,” he said.
The federal stimulus package pushed through Congress earlier this year may help. The government is spending $2 billion on building battery manufacturing plants, and Barkai said those batteries need to be built in the U.S. Otherwise, their sheer weight and shipping costs would offset any salary gains realized by building the batteries in plants overseas.