GM and Ford are closer to bankruptcy

BBC NEWS | Business | Triple whammy hits US carmakers

By Theo Leggett
Business reporter, BBC World Service

GM headquarters in Detroit
Strategic mistakes have been made at GM's Detroit headquarters

The city of Detroit in the US state of Michigan is famous for two things - the car industry and Motown Records.

Yet the music label which launched the careers of Diana Ross, Marvin Gaye and Stevie Wonder left the motor city long ago.

Now the car industry is facing a thoroughly bleak future unless the Federal government comes to the rescue.

Of the "Big Three" American carmakers, General Motors is looking the most vulnerable.

Until recently the world's number one car manufacturer, it is moving ever closer to bankruptcy.

Last week it unveiled losses of $4.2bn in the third quarter, and admitted that without new investment it could run out of cash early next year.

Endemic problem

Its great rival Ford is also suffering.

It too is losing money rapidly - bleeding away close to a billion dollars every month. And Chrysler's future is shrouded in doubt, after the apparent collapse of merger talks with General Motors.

So why are the Detroit giants in trouble?

Part of the problem undoubtedly lies with the economic slowdown. When times are tough, people tend to rein in their spending, especially on "big ticket", expensive items like cars.

Hummer
Large vehicles such as the Hummer have fallen out of favour

So perhaps it's no surprise that sales have been falling dramatically.

General Motors sold 45% fewer cars in October than they did during the same period last year, while Ford and Chrysler have both seen their sales fall by more than a third.

Traditionally, manufacturers respond by cutting prices, or offering cheap credit to their customers to shift unsold cars. But discounts erode profits, while the credit crunch means funding for car loans is ever harder to come by.

Costly care

But the Michigan malaise is about far more than a mere short-term economic downturn.

The big three have also been undone by a combination of factors: a hangover from their glory days, strategic mistakes and sheer bad luck.

First, the hangover.

All three manufacturers are paying a heavy price for past success. As well as paying the salaries of existing workers, they're also responsible for the pensions and healthcare costs of hundreds of thousands of former employees.

Last year, GM brokered a deal with the United Auto Workers union that will take about $50bn of these legacy costs off its books. But that won't take effect until 2010 - which may be too late.

This is a burden which the American firms' rivals, such as the Japanese carmakers Toyota, Nissan and Honda, don't have.

The burden makes the US manufacturers' cars more expensive and that is one reason why the big three have been losing market share to their Asian rivals.

Strategic mistakes

But the carmakers can also blame themselves for their troubles. Many analysts believe that over the past two decades, the big three have made serious strategic mistakes.

Toyota Prius
People are turning to greener and more fuel efficient vehicles

During the 1980s and1990s, Asian carmakers began to make serious inroads into the North American market.

They did so by offering products which were generally smaller, more efficient and more sophisticated than the gas-guzzlers traditionally favoured by American consumers.

Critics say the US manufacturers were slow to react and when they did, it was by producing bigger, heavy cars, such as pickup trucks and sports utility vehicles.

Initially it was a very profitable approach. These machines were immensely popular in the late 1990s.

Green revolution

But a few years later, as sales of "green" cars such as the Toyota Prius took off, the strategy attracted a great deal of criticism - something acknowledged by GM's chairman Bob Lutz in a 2005 blog.

"It seems that ever since we announced we were bringing out our next generation of full-size trucks and utilities, people seem to think it's unwise", he wrote.

"I'll admit that on the surface it may seem incongruous to introduce vehicles like this, given today's fuel prices. But, I have to tell you, these products still make a lot of sense."

Yet in mid 2008, when fuel prices rocketed and Americans found themselves paying $4 a gallon for gasoline, GM's policy looked anything but sensible. The market for SUVs collapsed, as buyers turned in droves to more fuel-efficient options.

Of course bad luck has played a role as well.

The American carmakers were in the throes of restructuring when the downturn hit; a couple of years later the damage might not have been so great.

The carmakers could also point out that the oil price spike happened with astonishing speed, just when the credit crunch was starting to take its toll.

But it is arguable that much of the blame for the current crisis should be placed squarely on the shoulders of decision makers in Detroit.