The Big Three have a litany of reasons for why Washington should throw them a lifeline, not the least of which is their claim bankruptcy would destroy them. Chapter 11 would create a crisis of confidence that would so thoroughly undermine sales the automakers wouldn't recover, they argue.
General Motors and Chrysler could be out of money by the end of the month, creating the very real possibility that one or both of them could go down. The Bush Administration has raised the possibility of forcing the two companies into a managed bankruptcy to prevent their collapse. Some say bankruptcy is the auto industry's best chance to remake itself, and they note that Chapter 11 has saved many airlines. Once those struggling airlines restructured their debts, rewrote their labor contracts and repainted their planes, they're usually came back better than ever with consumers generally none the wiser. Why would Detroit be any different?
Because people are used to airlines going under, says Philip Graves, a market researcher who specializes in consumer psychology. They know a bankrupt airline will come back. Detroit is uncharted territory. Seeing it go under would make people very nervous because buying a car is a far bigger deal than buying a plane ticket.
"These companies have been around forever without going under," he told us, referring to General Motors, Ford and Chrysler. "From a psychological standpoint, a bankruptcy filing would be enormous news, and it would force people to think about something they have never considered before."
The media blitz and national discussion that would accompany a Big Three bankruptcy would have consumers pondering every factor that pushed the automakers to the brink and compel them to think twice about buying. "Maybe their cars really are terrible," they'd think. "Maybe they won't be back. Why risk it?" Thanks to a phenomenon known as social proof - what might be called the herd mentality - it could create a domino effect leading to a collapse in sales.
"People like to believe they are individual thinkers, but for the most part they are followers," Graves says. "If even a small group starts acting as if they are scared, that is a strong social proof message that will spread like wildfire."
It's a different story for commercial aviation because an airline bankruptcy isn't terribly newsworthy, especially in the US, where at one point in 2005 four of them were in Chapter 11. It's almost commonplace, Graves said. Such familiarity creates a level of comfort that keeps people flying, which sends a message to others that ultimately feeds on itself. "The implication is that other people are doing it, and it is OK," Graves says.
People also would be reluctant to buy something from an automaker who may not be around to service it or honor the warranty should something go wrong. There are no such concerns when booking a flight.
"Most people shop for flights more often than they shop for a car, which means they tend to spend less time pondering the decision," Graves says. "People plan their trip, book their ticket, and get on the plane. Even if they're concerned about the health of the airline, that anxiety happens within a much more compressed time line."
What makes the equation so interesting is it works in ways that are difficult to measure. A recent Rasmussen survey found 51 percent of consumers wouldn't buy a car from a company in bankruptcy, but Graves suggests the figure might be much higher.
"People will say that they are going to support US manufacturing by buying from a domestic car maker, and they may believe it," he says. "But then they'll come up with a different excuse for holding off, telling themselves that the time just isn't right, for example. They give themselves a more rational reason, but the end result is the same."
Bankruptcy might create some big headaches for the Big Three, but Graves isn't convinced it would be a death sentence because the government has made it clear it won't let Detroit fail. "And that builds consumer confidence that things will eventually get sorted out."
The other thing the automakers have going for them may end up being even more important. "Their dealer networks could end up being a huge asset," Graves says. "If they are strong and have strong relationships with their customers, then buying a car becomes less about dealing with a scary corporation. It becomes a more personal thing."
Photo by Flickr user Hitchster
