What lies below I found pretty shocking. I'm no economist or mba-er, i had no idea just how bad off (it appears) the big 3 are...
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Extinction of the car giants
Jun 12th 2003
From The Economist print edition
Why America's car industry is an endangered species
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MOTOWN is celebrating. One hundred years ago Henry Ford set up in business, and America's love affair with the automobile began. Ford is staging a party that would not have disgraced Jay Gatsby. And why not? The American car market has been roaring, with annual vehicle sales over 16m. It could be close to 20m in a decade's time, with another 26m young Americans clamouring for their first set of wheels.
Yet the ride is not going to be smooth: it will be more like cruising in a Ford Thunderbird while ignoring a nasty rumble from its mighty V8 engine. For all the signs are that things are going badly awry in Detroit. Unless something changes, the industry could go broke—with Ford, the most troubled of the big three carmakers, leading the way (see article). The 100th birthday party could swiftly be followed by a wake.
This quintessential American industry has, admittedly, been written off before, only to bounce back. Chrysler entered the 1980s thanks to a federal bail-out; Ford narrowly escaped bankruptcy around the same time. Washington also came to the industry's aid with restrictions on Japanese imports. Even so, Chrysler nearly came to grief again in the early 1990s, before it was sold to Daimler-Benz. In 1991, the combined losses of the big three topped $7 billion. General Motors (GM) was said to be within an hour of going bust in 1992, with its bosses staring at the fax machine as they waited for a credit-rating downgrade that would have pushed the company over the edge. The downgrade never came, and GM recovered.
Over the 1990s, modernisation and imitation of Japanese techniques helped to raise Detroit's game. But the saviour of the industry was America's growing appetite for sport utility vehicles (SUVs), minivans and pick-up trucks. For years these chunky vehicles have enjoyed such success that Detroit has made most of its profits from them. Today they account for every other passenger vehicle sold in America. Competing Japanese products, where they existed, faced import tariffs. But now Toyota, Nissan and Honda have developed their own competitors in this market—and they are making them where it matters, in America's southern states, far from the citadel of union power that is Detroit. Also in the 1990s, the industry benefited from a booming stockmarket that lightened the car makers' growing pension burden as they shed workers in an effort to become more efficient. There is no sign of any such deus ex machina now.
The industry's leaders, as ever, cast the blame at a weak economy. GM's boss, Rick Wagoner, reacted to September 11th by launching discounts and interest-free financing to “keep America rolling”. Almost two years later the discounts are still there, and he cannot see them stopping without a “significant” improvement in the economy. He pins hopes for the future on America's growing population and China's rising wealth, which is at last igniting demand. But neither American babies nor Chinese yuppies may come in time to rescue Detroit. Nor will a resurgent American economy.
America's car industry is in a trap. It has one-fifth more capacity than it needs. Japan's big three (Toyota, Nissan and Honda) now make a full range of models in America, and manage to sell them without deep discounts. The reaction of any normal industry to such overcapacity would be to shrink, paying attention to profits not sales. But Detroit is not normal. Its labour contracts with the unions restrict its ability to close factories quickly. Jack Smith, a former chairman of GM, used to complain that he would have to wait until his workers retired to get numbers down and make factories more efficient.
Worse, retirement now brings its own peril, as every retiree adds to the car companies' growing pension burden. GM already has a pension-fund shortfall of $19 billion, as big as its market capitalisation. Add the health-care liabilities of both employees and pensioners, plus the presence of the United Auto Workers (UAW) union, and Detroit is at a huge competitive disadvantage to its Japanese competitors, with their younger, non-unionised workforces. GM, which has two-and-a-half pensioners for every employee, reckons pensions and health-care benefits add $1,000 to the cost of each car it makes. Cuts in the workforce make the burden still greater. In Detroit's circumstances, in short, downsizing cannot deliver results.
In the past two years, the federal government has come to the rescue of farming, steel and airlines through subsidies and import barriers. It may be just a matter of time before a big carmaker considers using America's Chapter 11 bankruptcy law to shed its pension liabilities, as several steel companies and airlines have already done. When that happens the federal insurance agency picks up much of the tab. It is, however, cash-strapped already. Moreover, the examples of steel and airlines, with their repeated bankruptcies, suggest that federal bail-outs cannot solve an industry's fundamental problems.
The figures are bleak. Instead of the $2 billion operating profit it once forecast, Chrysler has given warning of a $1.2 billion operating loss in the second quarter. Ford and GM are expected soon to issue similar bleak warnings. Once the Ford birthday bash is over, Detroit will start negotiating a new three-year contract with the UAW. This will be tough, as it will include the carmakers' plans to close some factories—and they already admit that planned closures may not be enough.
Delayed impact
Can Detroit escape the grim reaper a third time? The odds look poor. In the past seven years Detroit's share of the American market has slid from 73% to barely 63%. If SUVs, pick-ups and the like are excluded, the big three's share of the passenger-car market is already under half. The backlash against gas-guzzling vehicles can only be bad for Detroit. And the Japanese and German car companies have begun to produce models that compete head-on with such American icons as Ford's F-150 truck. If the Japanese repeat their success with smaller cars, the big three's last profitable redoubt will be overrun. The extinction of America's car giants is no longer just a bad dream: it is coming closer to reality.
