Kevin Krakora, Managing Director at Getzler Henrich and Associates has been cited in Clark Hill's 2023 Automotive & Manufacturing Industry Outlook.
Tip of the Iceberg or Puddle of Nothing
As the world unexpectedly shut down in March 2020, financial and restructuring professionals across the country expected the global economy to dive into another great recession or worse. There were major economic effects resulting from the shutdown but based on government assistance and other factors, the U.S. and global economy never suffered the wave of bankruptcy filings or meltdown that many were projecting. Today, nearly three years later, we may see the long-term effects of the shutdown catching up to the economy and, more specifically, the automotive industry. Or we may not.
Tip of the Iceberg
On August 8, 2022, Gissing North America, LLC, a Michigan based auto supplier for Tesla, GM, Toyota, and BMW filed for Chapter 11 protection in the Bankruptcy Court for the Eastern District of Michigan. Gissing filed the Chapter 11 cases based on macroeconomic volatility, including the three-month shut down in 2020 and significant price increases for material, labor, and transportation. Specifically, Gissing asserted that it faced a profound shortage of labor plus inflationary and political headwinds causing increases in fuel and freight costs.
Gissing filed for Chapter 11 protection to pursue a going-concern sale of its business and its long-term relationships with Tesla, GM, Toyota, and BMW. Gissing had estimated sales prices around $40,000,000 for the enterprise. Despite substantial marketing, Gissing was unable to procure a “Qualified Bidder” and did not receive any offers that matched its requirements. In the end, Gissing was able to sell only a portion of its assets in a $16,000,000 transaction. On January 9, 2023, the Chapter 11 cases were converted to Chapter 7.
Macroeconomic volatility was recently cited when, on or about December 9, 2022, Stellantis announced it was idling its Belvidere auto and laying off 1,350 workers. The most impactful challenge Stellantis faced, according to its announcement, was the increasing cost related to the electrification of the automotive market. The conversion to electric vehicles is far from the only headwind facing the industry. EV companies have been hit hard amid the continuous string of federal rate increases over the past several months, which have cut off the liquidity that allowed these companies to grow.
All these effects have been percolating through the auto industry since March of 2020; yet, we only seem to have seen a few of these issues go public. Like the tip of an iceberg, most issues continue to grow and exist below the surface. Kevin Krakora, the head of the automotive practice at Getzler Henrich echos these views. He believes the auto industry and the OEM and Tier-1 suppliers have been helping resolve the industry’s internal issues. To Krakora, the OEMs and Tier-1 suppliers have undertaken various accommodations for their suppliers, including financial and operational assistance, to ensure continued product delivery. The tipping point for the industry will likely come from the unsustainable oversaturation of accommodation on the part of OEMs and Tier 1 suppliers. It is at this point, which may be coming soon, Krakora believes that we will see more public restructurings and possible liquidations within the automotive industry.
Or a Puddle of Nothing
Yet, despite the prevailing headwinds, there remain numerous signs that an apparent iceberg of distress is really a puddle of nothing. The international shipping costs that ran rampant last year through the industry have moderated. Moreover, net sales for the auto industry for the 12 months ended September 2022 increased 8.8% over the past year, with early results for the fourth quarter appearing to be promising as well. Furthermore, key economic indicators for the industry remain strong. National employment levels are nearing pre-pandemic lows and wage growth indicates that consumers are in a stronger position now than in recent months.
Beyond the macroeconomic improvements, the demand for EVs continues at an all-time high. Somewhere around 20 all-new EV models are expected to debut in the U.S. this year. Unlike last year, when the EV models were aimed at the higher price tag consumers, most of the new EV models are aimed at the sweet spot in the American economy, the mid-priced, family-oriented market. All hope is not lost in the economy and the strength of the U.S. economy, which is carried by the U.S. middle class, remains employed and earning higher wages than ever before. All the fraught that has been churned over the past three years may remain below the surface and the macro concerns for the industry could, once again, be for naught.
Regardless, Timing in Everything when Restructuring
There will always be distress – whether on a macroeconomic level or an individual company basis. The key to a successful restructuring is timing and ensuring that you bring in the necessary professionals before it is too late. A successful restructuring should achieve a result that is in the best of all interested parties with targeted strategies whether the issues faced are macro or micro-level. While Chapter 11 is utilized as a last option, the tools available in a Chapter 11 can protect a company’s assets to maximize the benefit for the company and its creditors. The automatic stay and the ability to reject burdensome contracts are two patent benefits only available through a bankruptcy process. Critically, with the timely assistance of restructuring professionals, bankruptcy or an out-of-court restructuring can create a long-term solution for the benefit of the company, its suppliers, customers, and all creditors.