Last chance for Detroit

"What is good for General Motors is good for the USA" is not true any more

It used to be said that “what is good for General Motors is good for the USA”. That is not true any more. The company now accounts for less than a fifth of all car sales in the US, while other companies produce and sell better, smaller, fuel-efficient cars that the market likes. And so the dreaded “bankruptcy” word has finally been uttered in the GM context by President Obama, though he wants it to be a “managed” bankruptcy (which will offer a safety net to employees and retirees, but not to management). Mr Obama knows that a full bankruptcy will pretty much destroy what remains of the company, and be a political bomb in terms of its psychological impact on a battered nation. So he has gone for a stage-wise process: giving the company management one more chance, after firing the CEO, in the hope that the union and bond-holders will make the financial sacrifices needed to make the company viable. Labour costs are unsustainable, and the company has such a huge debt overhang that it can never make money without capital restructuring. By playing out these issues over a 60-day deadline, Mr Obama has also given the country time to adjust to the idea of possible closure, break-up and a fire sale.

Only such political calculations can explain why Mr Obama has given GM one final opportunity to produce yet another restructuring plan before it receives more government aid. Given the past failures of such plans, including the one that the White House auto task force rejected over the weekend, it would be risky to bet on a new plan that gets approved, although having a gun held to your head does concentrate the mind. In the Chrysler case, the options are more straightforward: Chrysler cannot survive as an independent company, it has been concluded, and hence government aid will be forthcoming only if the company merges with Fiat. Such shotgun weddings are not guaranteed success, but the option could be sudden-death. Both GM and Chrysler have run through the $17.4 billion they received in government loans without making an appreciable difference, and now seek about $21 billion more. Mr Obama expressed his impatience in no clear terms when he said on Monday, “Year after year, decade after decade, we’ve seen problems papered over and tough choices kicked down the road, even as foreign competitors outpaced us... Now is the time to confront our problems head-on and do what’s necessary to solve them.”

Mr Obama’s interim deal amounts to protecting consumers by guaranteeing warranties, and promising a government car purchase programme (not unlike a plan the Indian government announced a few months ago). That may address immediate, practical problems, but not the long-term issue, which is that the US auto industry produces over-priced gas guzzlers that have a declining market. Or, as any management consultant would put it, the companies are out of sync with the market. In GM, this was no secret, yet the company did little to address the issue and continued to focus on big gas-guzzlers because they were more profitable at the time. Until both costs and the product line change, no rescue plan will work, and the final choice will be slow or sudden death.