After Many Tuneups, A Historic Overhaul

Frank Stronach, chairman and founder of Magna International.
Frank Stronach, chairman and founder of Magna International. (Bloomberg News)
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By Steven Mufson
Washington Post Staff Writer
Sunday, May 31, 2009

In the space of five head-spinning months, the economic downturn and a few strong-willed financial officials in the Obama administration have done what legions of car executives, consultants and policymakers had failed to do in three decades: overhaul the U.S. car industry.

This weekend marks a major turning point for two U.S. giants -- General Motors and Chrysler -- with the federal government, having already replaced their top executives, now set to take majority share positions in both companies. Chrysler, seeking to emerge from a quick trip through bankruptcy, will learn Monday whether a judge will bless a shotgun cross-national marriage that would wed the company with Fiat technology, models and management.

On the same day, GM is expected to file for the bankruptcy protection it long swore it would avoid, with its reorganization already well underway. On Friday, the company relinquished control of Opel, its German-based European arm since 1929, to a large but little-known Canadian auto-parts maker with global ambitions, German government loans and Russian bridge financing. The far-flung parts maker, Magna International, might better reflect the industry's future than GM, which will soon be shorn of other established but money-losing brands, too. Magna agreed to limit job cuts in Germany and, at the Treasury Department's request, keep Opel out of the U.S. market.

If all that were not enough, the Obama administration this month unveiled new fuel-efficiency standards that will change the engines, and perhaps the shapes of vehicles across the industry, challenging long-established American tastes for cars with size and power and stretching the limits of automotive and battery technology.

"It's certainly an inflection point. This is an historic transformation," said David McCurdy, president of the Alliance of Automobile Manufacturers who helped negotiate the new fuel standards. "We'll look back in a number of years and realize it was a significant point of change."

In the new upside-down world of automobiles, the U.S. government will be the majority shareholder of both GM and Chrysler, giving rise to gibes that GM now stands for Government Motors.

"What is the role of the board of directors in this case?" said Maryann N. Keller, an independent auto analyst and author of a history of GM. "To operate in the economic best interests of this company? Or to operate it based on government policy, which may be in conflict with the profit motive? We've never had an entity like this, and we're all going to watch it unfold."

What's good for the country might not be good for GM. Some difficult decisions could include whether to outsource manufacturing to countries such as China, South Korea or Canada where costs might be cheaper. GM has said it would buy components for electric car batteries from a South Korean company, though many U.S. firms are vying for that business.

President Obama has also urged car manufacturers to make fuel-efficient vehicles, but if oil prices stay low, demand for such vehicles could be weak. Last year, U.S. small-car sales held steady at 2.5 million, increasing market share to 19 percent as sales of big cars fell. "Small cars are a bit of a challenge for any carmaker in the U.S.," said Itay Michaeli, an auto analyst at Citigroup. "They are entry-level cars and don't command much premium. So it is difficult to make much money selling small cars without substantial volume and market share."

On Friday, GM said it would build a new small car, about the same size as the Chevrolet Aveo, which is manufactured in South Korea by GM Daewoo, a joint venture. United Auto Workers President Ron Gettelfinger said in a PBS interview that he had pressed GM and the administration to drop plans to make small cars in China for the U.S. market.

The track record is mixed when it comes to government intervention to save and revive big auto companies. British Leyland burned through $16.5 billion of British taxpayer money before going out of business. The French government had somewhat more success as a major shareholder in Renault, which has partnered with Nissan. South Korea's government also intervened to bolster Kia when it was ailing.

The winners in the new world of autos could be a Chinese car company like Geely or India's Tata Motors, which are building on strong domestic markets and looking to expand abroad. Or it could be the Canadian auto-parts maker, Magna International, which next week will take over Opel. Whereas some of the traditional auto companies have seen top executives evolve from founders to creative managers to caretakers (and perhaps undertakers), many of these companies are run by innovators and empire builders in countries with markets expanding much more rapidly than the mature U.S. market.

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