The Hindu Business Line : Icons in distress

GENERAL MOTORS AND Ford now share the embarrassment of being the biggest companies in the world ever to be rated below investment grade by the rating industry. Cars are the backbone of American manufacturing and the fortunes of Detroit a health-indicator of the US economy. The motorcar industry directly or indirectly keeps one in seven Americans employed. After the steady decline in net profits for several years, most perhaps knew that a `downgrade' was coming. Yet, the formal announcement by Standard and Poor's is bound to send ripples through markets and boardrooms around the world, and may well have lessons for captains of other industries.

Making and selling cars generally is a razor's edge operation. With a nearly $200-billion business, GM makes less than 1.5 per cent net operating margin; not all of it on manufacturing cars but elsewhere, notably financing and insurance. Ford and GM losing market share to Asian rivals Toyota, Honda and Hyundai and a resurgent Nissan, is only a symptom. Given the variety of interpretations, there is surprising consensus on root causes. Legacy labour costs, all-powerful auto workers' unions, rising oil prices driving customers away from the American models to more fuel-efficient foreign brands, merger and acquisition troubles in Europe, mounting contractual health and pension costs, generally higher paid workers than competition — all make a witches' brew of negatives.

Slower and less exciting new models are, however, a significant reason for the downslide in competitiveness. Asian carmakers have continually upstaged the Big Three, and now threaten the pick-up truck business, after big dents in sedans and SUVs. They have fewer legacy costs, higher margins and, above all, a more customer-sensitive product design. General Motors is in deeper trouble. It recently took a hit in buying off the option in Fiat in Europe. Alfred Sloan's famed decentralised, divisional structure is now notoriously cumbersome, expensive and too slow. Carrying the once separate companies as independent brands such as Buick, Cadillac, and Chevrolet, means disproportionate marketing spending. The threat of continued rise in oil prices will certainly drive funding towards more fuel-efficient vehicles, in which there may be hope. The situation of Ford is a little different. At least there are current profits. And one visible, strong, global brand name.

When Detroit is on the mat, Washington D.C. cannot ignore its plight. What was good for General Motors was for years believed to be good for America. Today, the converse may be true, as jobs, industrial infrastructure and national pride are at stake. The remedies will be neither quick nor simple. Rehabilitation will be long and costly. Among options the companies must favour are greater emphasis on innovative alliances and more international sales. Both companies have trimmed costs, cut production, closed factories, reduced workforce and lowered unsold inventories, which are still higher than for their rivals. One view is that the prospect of collapse could persuade the unions into making reasonable concessions, as happened in the airlines industry. Market capitalism exacts a conspicuous price from those unable to compete.

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