US carmakers at crossroads

Charles Knox braved the chill November winds this week alongside hundreds of union colleagues in this blue-collar city to send a signal to auto industry management: We're not going down without a fight.

But Robert "Steve" Miller, CEO of Delphi Corp., is sending an equally stern signal to workers: The giant partsmaker could go down unless you make big concessions on wages and benefits.

On one level, the dispute here over massive pay cuts demanded by a company threatened by bankruptcy is a classic battle between the forces of labor and management that goes back long before the United Auto Workers union was founded in the 1930s.

But now the balance of forces is being tested across America's auto industry by a new kind of financial squeeze. Compared to travails in the 1980s and 1990s, the industry is in some ways healthier, with higher-quality products and flexible manu-facturing facilities.

But foreign competition hasn't let up, shrinking market share - and profits - for General Motors (GM), DaimlerChrysler, and Ford, known as Detroit's Big Three.

The result is a vicious cycle: To reduce costs, the firms cut jobs, which swells the ranks of pensioned retirees. That, along with costly healthcare benefits, adds to so-called legacy costs that are significantly higher than those of foreign competitors. It's a disadvantage that's taking a toll.

"The logical future of these companies is to be smaller," says Kevin Wilson, executive editor of Autoweek in Detroit. "That's what brings these 'legacy costs' into focus." GM just announced a restructuring designed to shed 30,000 workers last week. Ford will announce its major overhaul plans, including job cuts, in January. And Delphi, now in bankruptcy, is asking workers to accept a 55 percent cut in pay.

The emerging battles at these and other firms, analysts say, could result in an industry that makes a million fewer cars each year with a workforce that is leaner both in numbers and in earnings power.

To many here in Flint, which has already lost thousands of auto-related jobs in recent decades, it feels as if the industry's very survival is at stake.

But Mr. Wilson notes that General Motors is "still the biggest automaker on the planet, at least for a little while now."

Toyota could take that title from GM as early as next year, but Asian competition is just part of the challenge facing the domestic industry. Experts say concerns include:

• Vision and leadership. Product quality has improved, but critics say the American automakers still haven't solved the fundamental problem of building the right cars at the right time.

• Energy and the environment. While gasoline prices have edged down considerably since their record highs after hurricane Katrina, they remain in a range that puts sales of Detroit's larger cars and SUVs in jeopardy. The carmakers are scrambling to boost their output of hybrid designs.

• China rising. The foreign competitor most feared by US manufacturers isn't yet a player in the US market. But with one China-based venture already eyeing the US market, that won't be true much longer.

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