Sending shocks through the auto industry and ripples beyond, Chrysler on Thursday filed for bankruptcy-court protection and began shutting most operations until it emerges from bankruptcy.
While the shutdown was to begin Monday, some suppliers immediately halted shipments, closing several plants already.
The automaker was done in by its emphasis on trucks and big cars as 2008's fuel prices sent buyers scurrying for smaller vehicles, and by the credit squeeze and recession that have flattened new car sales around the globe.
That brought Chrysler — smallest and most vulnerable of the Detroit 3 — to its knees, begging for emergency federal loans. President Obama took a hard line, refusing any more taxpayer money unless Chrysler could show it was likely to survive.
Close, but not quite. The automaker, and Treasury officials who had been negotiating on its behalf with holdouts among the creditors, had to throw in the towel.
What happens to Chrysler could determine how faltering General Motors is treated; whether suppliers can stay in business and furnish parts to other makers; and whether a sour economy can swallow tens of thousands of newly unemployed when Chrysler closes dealerships and idles plants — wrecking businesses as diverse as diners and boat sellers whose customers built or sold cars.
Obama and Chrysler say the bankruptcy filing is needed to deal with issues such as the company's debt. They say a new Chrysler will emerge in 30 to 60 days, resurrected as a smaller, leaner, debt-free automaker holding fresh concessions on labor costs and newly partnered with the automaking unit of Italian industrial giant Fiat. Remaining, unprofitable assets will be left behind in court for liquidation.
But even a temporary disruption will be hard on auto suppliers and dealers already under extreme pressure. And no one knows if people will buy cars from Chrysler in bankruptcy, even though the government now backs the warranties.
"I think it will be a test of this premise that you can have a controlled bankruptcy at an automaker," says Gregg Lemos-Stein, a credit analyst at Standard & Poor's.
And Chrysler will emerge with new leaders. CEO Bob Nardelli, who left as Home Depot CEO in 2007, said he will step aside once the company emerges from bankruptcy. A new CEO will be picked by the company's new board of directors, which will include members picked by the United Auto Workers and the U.S. and Canadian governments, which are financing the bankruptcy and providing aid after Chrysler emerges.
Nardelli says he's leaving without a severance package.
"I just pick up my pencil and walk out the door," he says. But he will continue to work for private-equity firm Cerberus Capital Management, Chrysler's now-to-be-former owner, as an adviser.
All eyes on Chrysler
General Motors, for one, will be watching closely to see how Chrysler's bankruptcy plays out. GM may face the same fate in just a month, when its deadline from the government approaches.
But all automakers have an interest, because they share a supply chain. If the idle Chrysler cuts suppliers' volumes so much they can't stay in business, that could halt production lines at Toyota, Honda and Ford.
Ford said Thursday it is closely monitoring the situation. "Our industry is highly interdependent, and the health of the supply base and dealer network is critical for all automakers," Ford said.
Lemos-Stein predicts there will be a lot of bumps in the road, including many auto-supplier bankruptcies in the coming months. Many suppliers already were reeling from the news that GM is shutting down many of its assembly plants for up to nine weeks starting this month.
Despite pledges of a quick court process, no one can guarantee it. The case was filed in the Southern District of New York, which has experience with speedy bankruptcy cases. Still, judges are obliged to listen to each interested party that wants to be heard, which could drag out the process.
The automaker's bankruptcy filing listed assets of $39 billion. Its top 25 unsecured creditors — suppliers, attorneys and advertising firms — are owed $575 million.
The line's already forming. According to documents filed with the court, 14 auto suppliers say they are interested parties. Ford and Mercedes-Benz have filed asking to be notified of anything going on in the court. A group calling itself the Committee of Consumer Victims of Chrysler LLC and also the Ad Hoc Committee of Mesothelioma and Lung Cancer Claimants have filed.
The list will likely keep growing.
There are other big questions, such as what happens to Chrysler's financial services arm? The government named GMAC as Chrysler's new financing company, and it's still unclear what that means for Chrysler Financial. That company is now at risk of bankruptcy, too, Lemos-Stein says.
There is also concern that the bankruptcy filing will scare away consumers, who might wrongly believe it means Chrysler is going out of business. Thursday, Obama pointed out that the government is backing Chrysler's warranties.
"No one can blame car buyers who shied away from brands that were mentioned in the same breath as the word 'bankruptcy,' " said Philip Reed, consumer advice editor for Edmunds.com. "Now that their warranties are being guaranteed, Chrysler and GM vehicles are good deals which are worth considering."
But it may get harder to find a dealer. Chrysler has 3,200 dealers, and the company believes it needs no more than 1,500.
John McEleney, chairman of the National Automobile Dealers Association, says he hopes Chrysler doesn't use its bankruptcy filing as a way to get rid of dealers.
"Dealers generate more than 90% of manufacturer revenue and are not a cost to the automaker," he says. "A rapid reduction in dealer numbers would not only do absolutely nothing to improve Chrysler's viability in the short term, but it would actually work against Chrysler's stated objective to increase revenue and cut costs."
History of troubles
The last American automaker to file for bankruptcy was Studebaker in 1933. After emerging from bankruptcy, it continued operating, albeit struggling at times, until the mid 1960s.
This isn't the first time Chrysler has found itself in trouble. In 1979, then-CEO Lee Iacocca persuaded the government to guarantee $1.5 billion in loans that the automaker wouldn't have otherwise been able to get. Chrysler returned to profitability in 1983 and repaid the loans early.
David Lewis, professor emeritus of business history at the University of Michigan's Ross School of Business, says Chrysler can turn itself around: "It has a way of coming through. Particularly now, with the government committed."
And with Fiat on board.
Obama criticized Chrysler for having moved too slowly in the past, and for building cars that aren't fuel-efficient. Fiat has promised to bring a car to the U.S. that gets 40 miles per gallon, likely the Fiat 500, which could be imported within 18 months.
The automaker celebrated Cerberus' takeover of the company from Germany's Daimler in 2007 with a big party on the front lawn. Just 21 months later, with the company in shambles, Nardelli says he can't help but ponder what went wrong.
"You always as a management team look back and say, 'Coulda, woulda, shoulda.' But I think the rate at which the industry fell off due to the financial crisis … I don't know if we could've done more than we did."
Contributing: James R. Healey in Northern Virginia