August 1, 2009
With GM and Chrysler both undergoing bankruptcy restructuring procedures, the North American automotive industry of late 2009 and beyond will be forever different from that which preceded it.
The Detroit Three that emerge from this crisis will be smaller but infinitely more focused. GM has jettisoned Saab, Saturn, Hummer, and Pontiac, and a majority of GMAC. Ford, even though it is not in bankruptcy, has already shed Jaguar and Land Rover and will likely shed Volvo soon.
These reductions do more than shrink three giants. They also undo the much more recent bloating that took place during the 1990s, when, flush with SUV and pickup profits, Ford and GM went shopping.
But competition, desperation, and fear of liquidation have a way of providing clarity more lucid than a consultant's flip chart. The Detroit Three have done their homework to identify which assets are critical to survival.
Ford, the only member of the former Detroit Three not surviving on government funds, will, for a time, be the only publicly traded American car company.
Both Chrysler and GM will have to handle the delicate situation of being partially owned by the United Auto Workers (UAW) union. Negotiations between the union and company management will be delicate in a situation where partial ownership effectively makes the union a de facto participant in company management.
Both the UAW and the U.S. government, of course, have described themselves as reluctant shareholders who plan to sell their stakes in GM and Chrysler in the near future.
But we've heard these words before. When the Nixon administration consolidated several failing railroads to create Amtrak in 1971, Nixon also pledged that the federal government would sell its stake as soon as it was prudent. Nearly 40 years later, Amtrak is no closer to private ownership than it was when those words were uttered.
The World Trade Organization (WTO) also is likely to weigh in on the matter, claiming that government ownership stakes create unfair advantages, conflicts of interest, and so forth. So far politicians from Japan have stated that they support the U.S. government's efforts to save GM and Chrysler despite the fact that they believe these efforts violate WTO rules.
The key to everything, including the reasons for bankruptcy and the goals of the restructuring efforts, is proportion of costs to market share and revenue.
As overseas competitors took ever-larger portions of the U.S. market, the Detroit Three gradually became companies with the revenues of small companies but the cost structure of large ones. Everything they have done is aimed at bringing this ratio back to sustainable levels.
Before the global financial crisis that began last September, it appeared that the changes the Detroit Three had made up to that point, including the landmark 2007 contract with the UAW, would suffice. But the crisis proved too much to handle when combined with the companies' already fragile financial situation.
Before bankruptcy, GM had about $74 billion in debt. Managing to keep up with the interest payments on such a debt load was a daunting proposition. After emerging from bankruptcy, it will have about $17.3 billion in total debt. Thanks to VEBA, it will also have no employee retirement obligations.
Suddenly it becomes possible for GM to meet its debt obligations and have enough money left over to invest in new products and, perhaps, make a profit and pay dividends, with market share less than 20 percent.
What does it all mean for suppliers? After all, many were already pushed to their limits even before all this began. Still, financially healthy automakers are more likely to be good partners for their suppliers than struggling ones.
If GM and Chrysler follow Ford's lead when they emerge from bankruptcy, North American automotive suppliers—at least those still around—might finally breathe a sigh of relief.
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