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Industry Giant Falling Behind: GM Reports $1.1 Billion Loss

By Greg Schneider
Washington Post Staff Writer
Wednesday, April 20, 2005; Page A01

General Motors said yesterday that it lost $1.1 billion during the first three months of the year, as poor sales and rampant health care costs hammered the world's biggest automaker. Once the premier symbol of American industrial might, GM is staggering under the same pressures that have weakened other industries such as steel and the airlines.

A generation ago, half of all the vehicles Americans bought each year were made by GM; today it's just over a quarter. While past downturns in GM's business coincided with bigger problems in the U.S. auto market, the current problems come during the hottest five years of auto sales in history, raising the question of whether the glory days are gone for good.

GM expanded market share in China, where GM Asia Pacific President Troy Clarke spoke yesterday. It didn't do as well in North America. (Aly Song -- Reuters)

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"The industry is shifting. The old rules are gone, the new global thing is in. The offshore -- and read that as Asian -- companies are in hot pursuit of the domestic brands, and they are succeeding at it," said Gerald C. Meyers, an adjunct business professor at the University of Michigan and former head of American Motors.

It is an all-too-familiar trap for big American companies. Boeing has watched Europe's Airbus fly past it to become the world's leading plane builder, and IBM struggled to grasp the era of personal computers before selling that line of business to a Chinese company. Now Detroit's auto industry is trying to flog a few more miles out of old business models while nimbler competitors seize the day, said Peter Morici, professor of business at the University of Maryland.

The marketplace is changing faster than the companies are, he said. GM has resisted jumping into the market for gas-electric hybrid vehicles, for instance, even as Toyota's Prius has become a huge hit. And GM chief executive G. Richard Wagoner Jr. continues to insist the company's sales will get better next year with a new line of large pickups and sport-utility vehicles -- even as gas prices climb and public taste is turning against larger trucks.

"In a lot of ways, GM is grappling with just about the whole panoply of challenges that face all of American enterprise," Morici said.

That means costs -- for labor and management, for health care, for pensions -- that far outstrip those of overseas rivals, he said. GM's loss of $1.1 billion ($1.95 per share) was a steep drop from the $1.21 billion ($2.12) in profit the company posted for the corresponding quarter a year earlier. This year's loss included a few one-time expenses related to restructuring in Europe and job attrition programs, but even excluding those the company lost $839 million.

Auto companies control a vast supply chain stretching from raw materials through component suppliers to retail products, touching every layer of the U.S. economy. GM's problems stem from mismanaging that chain, Morici said. It is similar to the airline industry, where a few old stalwarts can't keep up with more efficiently run rivals.

Just as discount airlines make more money on cheap fares, Asian car companies get higher profits on vehicles that consumers perceive as having better value, said George Hoffer, an economist and auto industry expert at Virginia Commonwealth University in Richmond.

It is not that the economy is hurting GM's sales, because Americans are continuing to buy cars on a near-record pace. Consumers just don't feel compelled to buy what GM is offering.

In what Hoffer took to be an extraordinary admission that its brands no longer command respect from consumers, GM dumped long-standing nameplates when it rolled out a new slate of cars this year. The Chevrolet Cavalier became the Cobalt, the Venture became the Uplander, the Pontiac Grand Am became the G6 and the Buick Regal became the Lacrosse.

"With the Japanese companies, when they introduce a new model they keep the old name, so they can extol the virtues of the product and people know where it fits," Hoffer said. "Who knows what the G6 is or where it fits in the line? Who knows what an Uplander is?"

Sales of those new products have been disappointing, and the North American market that GM once dominated is now the primary source of its troubles. "While most of our business units exceeded expectations, the results at GM North America were clearly disappointing," Wagoner said yesterday in a statement announcing the first-quarter loss.

Revenue fell to $45.77 billion, from $47.83 billion a year ago, partly because GM has been cutting back on production to help reduce costs. Wagoner, who recently took personal control over U.S. market operations, pledged to be more aggressive in promoting new products and in cutting costs.

GM had warned last month that its numbers were going to be worse than expected, and yesterday's results were in line with that. But because the company's fortunes have become so uncertain, GM said yesterday that it won't make projections for earnings for the rest of the year.

The major credit-rating agencies have signaled that they could drop GM's bonds one notch to junk status later this year, and they have put rival Ford on notice as well.

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