Detroit, Prepare For Big Changes

G. Richard Wagoner is chief executive of General Motors, which along with Chrysler is asking the government for aid.
G. Richard Wagoner is chief executive of General Motors, which along with Chrysler is asking the government for aid. (By Carlos Osorio -- AP)
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By Steven Mufson
Washington Post Staff Writer
Wednesday, February 18, 2009

Only one thing lies at the end of the pothole-strewn road for America's automobile industry: smaller companies making fewer cars with fewer workers and dealers.

Getting there will be a hair-raising ride -- for workers, dealers, investors and taxpayers. Yesterday, General Motors and Chrysler beseeched Washington to give them massive new infusions of financial aid in an effort to avert bankruptcy, which they say would depress sales even more than they have been depressed by the slumping economy. But whether the restructuring process the ailing giants undertake is called bankruptcy may be largely a matter of semantics.

"I don't know what you're going to call it, but they're going to go through bankruptcy, whether outside the bankruptcy system or with the benefit of the courts," said Maryann Keller, who has written about the U.S. auto industry for three decades. "At the end of the day, the United Auto Workers are going to have to take a haircut, creditors are going to take a huge haircut and equity is gone. What will effectively happen is exactly the same as bankruptcy."

Financial experts close to the Obama administration say that any financial aid given to the ailing U.S. automakers will come fully loaded with wrenching restructuring plans.

"I think the new administration's hope is that we come to a thoughtful and sensible outcome. Walking away and saying 'Let the private market figure it out' is not either politically or economically the right outcome," said one financial expert who has talked with administration members and spoke on condition of anonymity because he is not authorized to speak on their behalf. "But I also don't think giving money without being sure of a better outcome is right, either."

Among the most nettlesome stakeholders are dealers, who are protected by a variety of state laws and franchise agreements that usually can be broken only in bankruptcy court. One way or the other, the dealers are bound to suffer as brands die off. Stephen Girsky, a former Morgan Stanley analyst who now works for the private-equity and consulting firm Centerbridge Partners, has said that U.S. carmakers should close 70 percent of their dealerships, far more than GM recently set as its restructuring goal.

Even these restructuring plans are no guarantee that the onetime automobile behemoths will make money, analysts said. The current credit crunch will pass eventually, but the loose lending that spurred sales in recent years will probably not return. And high federal fuel-efficiency standards and California's proposed limits on greenhouse emissions from tailpipes will require changes in engines.

As it is, GM has been steadily losing market share for decades. Its profits in the early part of the decade were inflated by a mortgage business it owned. Profits overseas disguised weakness in the United States for years, and now those markets are weakening. Plans for a new plug-in hybrid vehicle, championed by members of Congress as the car of the future, come equipped with new uncertainties. It will have a tiny production run and a large, expensive battery that many analysts say will make it a sure money-loser.

"GM has been dying for 30 years. We're only now writing the obit," said Keller, who 20 years ago wrote "Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors."

Chrysler, on the other hand, is still suffering the aftereffects of its broken marriage to Daimler. After the German automaker acquired Chrysler in 1998, it all but eliminated Chrysler's ability to design and engineer new cars in an effort to cut duplicative costs. Then Daimler sold the company to the private-equity firm Cerberus. Chrysler now has primarily two valuable vehicles, the Chrysler minivan and Jeep; the Dodge pickup truck is also popular in some areas of the country. Chrysler has touted a proposed affiliation with Italy's Fiat as a way to introduce new small-car models in the United States, though the two have yet to finalize a partnership.

"We believe Chrysler will be viable and will play a vital role in supporting the American economy and in providing American jobs," Chrysler chief executive Robert L. Nardelli said yesterday.

But Keller said: "Chrysler's the harder one. When the Germans took the last flight to Stuttgart, they didn't leave a lot of infrastructure in Chrysler to enable Chrysler to be self-sufficient in designing vehicles." She added, "In GM, you at least have a company that has resources, that has talent, that has technology and assets that are important and a scale that frankly enable it to emerge from this process as a healthier company. GM at the end of the day can conceive, engineer and assemble a car. Those skills have been lost in Chrysler because they were drained out of the company during the 10 years Daimler owned it."

One measurement of pessimism about the fate of leading brand names is the Automotive Lease Guide's estimate of their residual values after 36 months. This week, the guide slashed its estimates on Dodge, Jeep, Saturn, Saab and Hummer by four to nine percentage points because of uncertainty about their future. That would deliver another blow to sales by making it more expensive for consumers to lease new vehicles. Last month, 3.3 percent of Chrysler's new-vehicle sales were leases, down from 24.7 percent in January 2008, according to Power Information Network. GM leases also fell sharply.

Even the Detroit companies' rivals are sympathetic to their plight. "All of us, not just Americans but Europeans, are running through the same stuff, and Japanese are, too," said Bill Reinert, national manager of Toyota's advanced-technology group in the United States. He predicted "smaller, leaner organizations" that will "need to look at product planning and whether it is in line with where the public is going from an economic and environmental point of view."

But Reinert said that simply shrinking auto companies isn't enough. Big companies benefit from economies of scale, so smaller companies will have to be more nimble. He said that "in the end . . . what you'll see is a much more competitive market and two models of automobiles: one as an appliance for people who don't care about cars, and the next as a social icon much like the iPhone and iPod." And because of new climate regulations, he added, automakers will have to "do that within an ever smaller carbon footprint."

That's more than Reinert had to worry about when he started working at age 17 in the same Ford plant where his father worked, making models of yesteryear: Fairlane, Comet, Maverick. He worked there before going to serve in the Vietnam War and again when he came back.

Now the auto industry is stuck in its own quagmire. Toyota is suffering from big losses and plunging sales. But Reinert is not ready to say that the Detroit three will fail to transform themselves into viable companies. "Never underestimate your competition," he said. But he added: "I'm not saying it's going to be easy. Or pretty."

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