Sunday 9 November 2008

GM and Chrysler: What about the Brands?

Living as I do on the Eastern littoral of the Mediterranean, I have become an avid listener of podcast programs on my iPod. The juxtapose of two podcast programs last week on Bloomberg radio raised some interesting questions about the role of product brands in light of the continuing economic troubles at GM and Chrysler.

In the first podcast, Edward Altman, professor of Business at NYU and a recognized expert on distressed companies, argued in favor of GM declaring for bankruptcy under Chapter 11 of the U.S. bankruptcy laws. The purpose of chapter 11 is to allow a company to enjoy court protection under a detailed code of statute and regulation with the ultimate goal of enabling the company to get back on its economic feet. In Altman's view, Chapter 11 would serve GM well because it would allow it to continue to operate its business and to take advantage of certain provisions in the law that would make it easier for GM to raise financing during the bankruptcy process.

In the second, John Casesa, an authority on the automobile business, opined on the fate of brands in the event of a GM-Chrysler merger. He suggested that if such a marriage takes place, the combined company will likely jettison certain brands while leaving on the most robust brands in tact, such as JEEP from Chrysler and CHEVROLET from GM.


The comments of Altman and Casesa put me to thinking. Let's say that GM does seek chapter 11 protection (the possibility of which was vigorously rejected again this weekend by the CEO of GM). How likely is it that GM could come out of the proceedings with at least its most valuable brands in tact? Are the two companies better-positioned to preserve at least the most valuable brands as a combined company?

A couple of initial thoughts. I note that many of the major U.S. air carriers have been in chapter 11 proceedings at one time or another, but they seem to have maintained their primary brands, more or less in tact. Once the public got over the fear that the airline ticket that they bought today would not be honored tomorrow, they continued to offer their custom to the airlines without much hesitation. That said, a service brand, especially in an industry with a limited number of options (at least for most hub airports), should be easier to maintain in bankruptcy, unless there is an absolute panic about the likelihood that the service will be halted immediately. That would seem to make it easier to preserve the quality of the brand.

Less so, it would seem, for a product-oriented company. Do I risk buying even the most robust car brand, if I am not certain that there will be any entity around to support it in a year (or two or three)? Maybe the answer is yes (after all, some other company will surely buy the rights to that brand of auto, because of the strength of the brand--witness JEEP). But maybe the answer is no (to paraphrase Captain Nemo from 20 Thousand Leagues under the Sea", when asked about the fate of the Nautilus submarine --"If GM goes down, the CHEVY goes down with it.") The answer to this question may go a long a way to determining the ultimate fate of the companies and their product lines.


Of course, it might not make much difference at the end of day if GM chooses chapter 11, but the public remains unconvinced of its ability to come out of the proceedings, or if it merges with Chrysler, but the public remains unconvinced that two failing companies are no better than one. Brands are, at the end of day, intertwined with public trust and faith. Yesterday's killer brand is today's pariah. Just ask anyone who used to swear by Lehman Brothers.

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