American auto industry seen at a crossroads

Are better times ahead for GM and Ford? Few analysts think the U.S. automotive business is out of the woods. For its part, GM is burning through its hoard of cash at the rate of about $5 billion a year. It sold a controlling stake in its GMAC financial services unit earlier this year to raise funds, having lost nearly $4 billion in the first nine months of 2005. There’s even talk of bankruptcy.

One year ago, the outlook for American automobile makers looked brighter. Interest rates were still unusually low and attractive incentive programs in America’s auto showrooms kept Americans spending heavily on new vehicles. Yet at the 2005 Detroit Auto Show Rick Wagoner, CEO of General Motors, warned of a difficult year ahead.

His prediction was right on the money.

Trouble for GM started early in the year when it reported a $1 billion loss for the first quarter and credit agencies cut its credit ratings to “junk” status, citing skepticism about the troubled automaker financial future. Just before Thanksgiving, GM announced plans to cut 30,000 hourly jobs and close 12 facilities by 2008 to restore profitability in the face of a shrinking market share.

But this year the answer to whether GM can regain its footing in North America or slips into bankruptcy can be found in the current negotiations between Delphi, GM’s former parts unit, and its organized labor.

Delphi, which is now in bankruptcy court after declaring bankruptcy in October, argues it needs to void labor contracts that run through September 2007 and cut workers’ pay, but unions say their members should not be penalized for the mistakes of management and have threatened a strike if labor contracts are canceled, and that could bring operations at GM to a standstill. Delphi supplies products ranging from satellite radios to steering wheels to every major automaker.

“How Delphi deals with the union, and also GM’s plans to recover and get to profitability will be important for the broader marketplace,” said Erkut Uludag, a partner at Roland Berger Strategy Consultants in Detroit, which tracks the automotive business.

“Lots of suppliers are highly exposed to the Big Three — their product lines; their platforms, and any changes in manufacturing or new products,” he said. “Anything they decide could significantly impact the market, and so everyone’s looking at these signals.”

If GM continues to lose market share in North America and comes under financial pressure because of its dependency on SUV sales, “Then I think that for the good of the company there will have to be concessions on both sides,” analyst Rebecca Lindland said. “For the GM side, that will be concessions on products, and for the unions it will be concessions on the side of letting the company close down plants and cut back on pensions.”

Ford announced its own restructuring plan on Jan. 23. The number two U.S. automaker, which had its own share of turmoil in 2005, including an expensive bailout for its former parts division, Visteon, said it will cut up to 30,000 jobs and idle 14 plants as it seeks to reverse a $1.6 billion loss last year in its North American operations.

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