Car Giants Lose Traction As Americans Fall Out Of Love
The Age
Monday December 12, 2005
The shift to smaller cars in the US is taking a huge toll on GM and Ford, writes Michael Gawenda.
WHAT'S good for General Motors is good for the rest of America, the adage says, but these days the great American gas guzzler is giving way to modest Toyotas and Hondas, and the venerable motor vehicle giants GM and Ford face an uncertain future. On the streets of Motor City Detroit and its shabby suburbs, the vehicles are still mostly big American sport utility vehicles (SUVs) and pick-up trucks. Elsewhere, Toyota Camrys and Corollas and Honda Accords and Civics have become the cars of choice for many Americans amid rising petrol prices and environmental concerns. But in Detroit, where Henry Ford built his first mass-production plant for the Model T Ford, and where Ford and GM retain their headquarters, mid-sized and small cars are rare. Of course, few of the 900,000 or so residents of Detroit proper work in the car assembly plants in the small nearby towns and communities. But perhaps there's a sense of solidarity with the workers and their problems. At those plants, working hearts are beating ever fainter: a little over a week ago, GM, in the face of a $US4.5 billion ($A6 billion) loss in the first nine months of this year, announced it would close nine assembly plants in North America by the end of 2007 and that 30,000 jobs would have to go. A week before that, Ford announced it would slash 4000 white-collar jobs next year, savagely thinning its ranks of middle managers by more than 10 per cent. Ford refused this week to deny reports that it was planning to close five plants in the US, Canada and Mexico next year, and most analysts believe these closures are inevitable. Everywhere you go in Detroit, where the population is 80 per cent African-American, there are signs of what the once mighty motor industry meant to this heartland of American manufacturing in eastern Michigan. The old GM building in downtown Detroit was abandoned in 2002 in favour of a glass and steel skyscraper on the banks of the Detroit River. Its limestone facade, magnificent painted ceilings, marble floors and inlaid bronze elevator doors and windows speak of a long-gone age when GM was the towering symbol of American industrial ingenuity and enterprise.For the two biggest American car companies, those better days will never return. GM, for instance, has long earned more profit from its finance unit than from its manufacturing activities, leaving some analysts wondering why it bothers with manufacturing at all. But the big question is whether the worst is over, whether the decline of these giants, which once dominated the US motor industry and fed the American love affair with cars, can be arrested. Some analysts are even asking the unthinkable: can GM avoid filing for Chapter 11 bankruptcy? For more than a decade, GM and Ford have been losing market share to non-US car manufacturers. GM's share of the American market has fallen to just under 26 per cent this year, from a high of more than 50 per cent in the early 1960s. Ford is down around the 17 per cent mark. The decline in market share is accelerating and both companies, having recorded billion-dollar losses in the first three-quarters of this year and with their credit ratings now at junk bond levels, are looking at downsizing strategies that will devastate communities across the US - no more so than in the suburbs of Detroit. This is where generations of motor vehicle workers built middle-class lives for themselves and their families, where working for Ford or GM was effectively passed down from one generation to the next, and where the all-powerful United Auto Workers union delivered wages and conditions for its members that were benchmarks for manufacturing workers across America. It has been a terrible month or so for GM and Ford in a terrible year, and there is a sense around Detroit that more pain lies ahead. In October alone, Delphi, the giant car parts manufacturer that was spun off from GM in 1999, filed for Chapter 11 bankruptcy and then announced plans to drastically cut benefits and slash around 20,000 jobs; sales of SUVs, the most profitable part of GM's and Ford's operations, dropped by 24 per cent for GM and 20 per cent for Ford, basically because of rising petrol prices; and GM reported a $US1.6 billion third-quarter loss, with Ford's losses for the same period at $US284 million. There was a feeling in Detroit that something had to give, and it did when GM chief executive Rick Wagoner announced, on the eve of the November 24 Thanksgiving holiday, the plant closures and the loss of about 17 per cent of its US workforce. The announcement sent shock waves through the city and through the leadership of the powerful UAW. Al Benchich, a UAW official at a GM engine plant just outside of Detroit, reacted to the Wagoner announcement with resignation, saying: "If they're not selling the cars, I don't know how they can keep running the plants. The UAW has acknowledged that GM doesn't have the market share to support its current structure." GM and Ford blame their woes on cost structures that are significantly higher than those of their foreign competitors, especially Toyota, Nissan and Honda. These Japanese companies have built their US plants in the south, where unions are traditionally weak. Since the early '80s, when the big Japanese car makers started to build cars in the US, they have steadily increased their market share and now assemble 26 per cent of the cars made in America. Toyota has 11 plants in America and has announced plans to build three more, all of them in the south, over the next few years. Most analysts agree that the health care and pension schemes of GM and Ford - their "legacy costs" - add $US1500 to $US2000 to the price of each car they make. GM is paying out billions each year in health care for retired workers. GM and Ford offer significant discounts, especially on sedans and small cars, of around $US3000. This makes their cars competitive in price terms with the Japanese. David Cole, an analyst with the Centre for Automotive Research, says: "GM and Ford do have cost issues, but the major problem is that they are just not producing cars that Americans want - at least not in the sort of numbers that would lift their market share. "There is a perception that their cars, especially in the highly competitive sedan market, are not as attractive as the cars produced by their Japanese competitors." Brian Akre, a senior spokesman for GM, says the so-called legacy costs do put GM at a significant disadvantage compared with what he calls the "low-cost foreign competitors". "It's not a matter of wage rates. But we have an older workforce; we have been around a long time, which means we have many more retirees whose health insurance costs we have to carry," he says. Asked whether there are other factors that account for GM's declining market share, Akre says the recent decline in sales of mid-size and large SUVs, the most profitable part of GM's business, has played a part as well. What seems to be happening is that Americans, at least to some degree, are falling out of love with big cars. GM and Ford clearly gambled that the American love affair with big powerful cars would go on forever, while their foreign competitors punted on increasing demand for smaller, fuel-efficient and more environmentally friendly cars. It seems GM and Ford got it wrong and their competitors got it more or less right. On the streets of Detroit, and on the freeways leading out of town, the big SUVs and pick-up trucks are like relics of another era.
© 2005 The Age