The Tough Road Ahead for GM and Chrysler

Bankruptcy would produce leaner automakers, but it would still leave lots of debt and do nothing to fix their images—or the disastrous marketplace

By David Welch and David Kiley

Related Items

• Special Report: General Motors' New Landscape

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• suggest a story
• digg this
• save to del.icio.us

Illustration by Brian Stauffer

• View Slide Show

When President Barack Obama explained in March that his Administration was bailing out General Motors (GM) and Chrysler, he promised that the two battered automakers would "stand on their own, not as wards of the state." He and his team are betting that Chrysler and, likely, GM can use an accelerated bankruptcy process to remake themselves into smaller and nimbler companies that can compete in the global marketplace (and eventually pay back $28 billion-plus in federal loans). The Treasury Dept.'s restructuring plan is creative and comprehensive. Assuming the two car companies do what the government wants them to, they will be much stronger than they were.

Still, getting this far has required the government to lend them billions and possibly take stakes in the companies. The question is when, if ever, they will be able to kick away the state props. After all, the reborn GM and Chrysler will reemerge in a marketplace that is more hostile than anything they have faced before. It's simple arithmetic: Too many auto companies chasing too few buyers—partly, it should be said, because governments from Beijing to Berlin have been propping up their domestic industries. What's more, foreign automakers in many cases are doubling down in the U.S., where GM and Chrysler have typically made most of their money. "It's going to be a horrible marketplace because you won't have a quick rebound," says IHS Global Insight (IHS) analyst John Wolkonowicz. "Then you have the foreign companies trying to figure out how to get their pound of flesh."

We all know what normally happens to an overcrowded industry when the economy crumbles: Weaklings die or get gobbled up by stronger competitors. That's what's happening with retail. Amid a consumer pullback of historic scale, the U.S. is pockmarked with the boarded-up storefronts of liquidated companies. The auto business has endured its worst recession in memory, so one might expect the mother of all shakeouts to be under way there, too. Yet the industry has shed not one sizable player. "Auto companies rarely die," says GM CEO Frederick A. "Fritz" Henderson. "You'll still have the same number of companies. We're trying to keep only brands we can support."

The Fear of Death

Yes, the likes of Volvo, Hummer, and Saturn are for sale, Pontiac has been axed, and others such as Saab may go away. But a number of second-tier car companies are still with us because governments fear the consequences of letting them die or are determined to have a domestic auto industry. The Japanese government has helped out Mitsubishi. France and Germany have done the same for their carmakers. The Russians have given money to AvtoVAZ, a struggling player that sells vehicles domestically. China is actively supporting domestic carmakers, which are starting to give GM and other foreign players serious competition.

The upshot is that some 30 significant players worldwide are fighting over a pie that has shrunk by more than 30% in the past 12 months. The industry can make about 90 million cars worldwide, but it's selling only about 55 million. Not exactly a forgiving environment for a pair of wounded car companies. That, partly, is why Chrysler's rescue has struck some as misguided. Speaking of the government's decision to save the weakest and smallest Detroit player, industry consultant Michael Robinet says: "We needed to take a patsy out, and we didn't. We may have missed an opportunity. The Japanese, Hyundai, and the Germans will still be here."

Many of these players smell opportunity and are keen to grab customers from Detroit. The world's carmakers will launch 60 or so models in the U.S. every year for the next five, says J.D. Power & Associates (MHP). Kia and Volkswagen (VLKAY) are building new U.S. plants. Toyota Motor (TM) has a factory in Mississippi slated to manufacture more Prius hybrids—but it could build other models there once the market rebounds. And if someone buys GM's Saturn retail network (two dealer chains are bidding for it), it could give Chinese carmakers or India's Tata Motors (TTM) a launching pad. Meanwhile, India's Mahindra & Mahindra plans to start selling cars in the U.S. next year.

Business Exchange

Track and share business topics across the Web.