Dazzled by the rising sun

Apr 8th 2005
From The Economist Global Agenda

Dwindling market share in the face of fierce competition from Japan has forced General Motors to shake up its management. Ford faces similar problems. DaimlerChrysler’s American arm is taking advantage of their misfortune but may be held back by problems at the group’s European operations. Detroit has bounced back before. Can it do so again?

AMERICA is the world’s biggest market for cars and General Motors (GM) is the world’s biggest carmaker. In a few years, Toyota’s relentless growth is likely to render this statement only half true. After several recent pieces of bad news and a share price languishing at a ten-year low, GM has revealed how it intends to keep itself at the top, at least for the moment. On Monday April 4th, Rick Wagoner, the firm’s chairman and chief executive, said that he would assume direct responsibility for GM’s North American operations in an attempt to reverse the company’s decline. But it is unlikely that GM and Detroit’s two other carmaking giants, Ford and Chrysler (the Detroit-based arm of DaimlerChrysler), will be able to keep Toyota and the rest of Japan’s high-revving carmakers at bay for long.

Mr Wagoner has had direct control over GM’s North American business before, between 1994 and 1998. At the time, the carmaker enjoyed a market share of over 30% in the United States; by March of this year that figure had dwindled to 26.7%. GM’s light-vehicle sales at home were 1.5% lower in March than a year earlier, despite a 0.8% expansion of the overall market. However, this counts as something of a recovery. In February, GM’s vehicle sales had plunged by 12.7% compared with the year before and a subsequent profit warning seemed to threaten the company’s debt rating, which teeters on the brink of junk status.

The picture at Ford is gloomy too. Although the firm made a net profit of $3.5 billion in 2004, it has suffered a decline in its American market share every month for over two years. In March, sales were down by a dispiriting 4.9% compared with the year before. The problems facing Ford are much the same as those with which GM is having to grapple: fierce competition from foreign carmakers is hurting sales, while costs are rising.

GM’s solution is to give the two executives displaced by Mr Wagoner specific roles in combating these problems. Bob Lutz, formerly chairman of the firm’s North American operations and global product-development chief, is to concentrate on the latter role. And Gary Cowger, president of the North American division, has been charged with tackling the huge “legacy costs” that GM faces.

The company is hoping to enliven its tired portfolio of vehicles with the launch of a range of light trucks and sport-utility vehicles (SUVs) later this year. But reclaiming lost ground will not be easy. Luxury-car buyers in America now largely choose models from Europe and Asia. Asian manufacturers are also looking to sell more cheaper cars in America. And after a faltering start, the Asians, particularly Nissan and Toyota, are beginning to make inroads into the market for light trucks and SUVs, and have a load of new products ready for launch. Mr Wagoner is set to increase spending on advertising and escalate a price war that began during the slump following the September 11th 2001 attacks, in order to claw back some of GM’s lost ground.

The legacy costs are no less worrying. GM and, to a lesser extent, Ford must fund a vast and ever-growing pool of pensions for former employees and health-care bills for current ones. Mr Cowger suggested last month that the firm would save billions if only blue-collar workers would accept the less enticing benefits offered to the firm’s white-collar staff. But he will need to muster all his skills as a negotiator to wrest concessions from the company’s heavily unionised workforce, whose wage packets are much fatter than those of Japanese rivals’ non-unionised workers. At both GM and Ford, further job cuts seem inevitable, both on the factory floor and in the office. On Tuesday, Ford announced that it would aim to eliminate 1,000 white-collar jobs in America to tackle rising costs.

If the clouds over Detroit have a silver lining, it is that Chrysler has profited from its rivals’ adversity. It made a small gain in market share over the year to March (see chart). Buyers were tempted by attractive new models from its Jeep and Dodge marques as well as the firm’s award-winning Chrysler 300 saloon. But as the problem child acquired by Daimler-Benz in 1998 has started to make its own way in the world, its parent has run into difficulties.

Jürgen Schrempp, DaimlerChrysler’s boss, was hit with a barrage of criticism at the company’s annual general meeting on Wednesday. A call for his resignation by a shareholder representative was greeted with resounding approval by the 9,000 investors present. No matter that Chrysler is finally going in the right direction; the merger that Mr Schrempp masterminded has led to a halving of the group’s share price, which has left investors fuming. Few are angrier than Kirk Kerkorian, an American billionaire who was Chrysler's biggest shareholder before the merger. He filed a $1 billion lawsuit against Mr Schrempp and his colleagues, claiming that they had deceived investors by billing the transaction as a merger of equals. On Thursday, however, an American judge threw out the case.

But this bit of good news for DaimlerChrysler's bosses pales beside the various problems that have struck the company in recent weeks. At the end of March, Mercedes-Benz, the group’s German luxury carmaker, revealed that it would recall 1.3m vehicles to fix electrical faults, further denting a reputation for reliability that has suffered in recent years. A couple of days later, Mercedes said that it would restructure Smart, its mini-car brand, at a cost of up to €1.2 billion ($1.5 billion) owing to lacklustre sales. Mr Schrempp promised that Smart would start to turn a profit in 2007, three years behind schedule. Some analysts reckon that Mercedes could make a loss in 2005, its first for 12 years, as a result of these setbacks, putting a drag on the improvements made by Chrysler.

Detroit’s big carmakers have rebounded from unenviable positions in the past. GM brushed with bankruptcy in 1992 but was pulled round by a new chief executive, Jack Smith. Ford suffered its financial ills in the 1980s but was saved by an injection of cash from the founding family. In the same decade, Chrysler almost went bust but was rescued by a government loan guarantee; it avoided bankruptcy again ten years later, partly through the efforts of Mr Lutz. For Detroit’s big three, keeping their heads above the new wave of competition from Asia will prove just as stern a test.

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