Big trouble for Big Three automakers
Shares of General Motors are trading at prices last seen in the 1950s.
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"We're past the point of a minivan rescuing a company," says Peter Morici, a University of Maryland economist who follows the industry. "We're getting to the point with Ford and Chrysler where, if they get any smaller, they may not be viable… My guess is that one of these two companies will have to go away."Skip to next paragraph
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GM has the advantage of being the largest of the three, in the range of its product lines and in global sales. But its struggles are evident in its stock price: A shareholder who bought in the 1950s would have lost lots of money, after inflation is factored in.
On Tuesday, auto companies reported a sharp slowdown in sales compared with a year ago. GM sold nearly 17 percent fewer vehicles in the first half of the year than in the first half of 2007. Ford's six-month sales volume was down 14 percent. And its June volume was 28 percent lower than the prior June.
A weak economy and rising energy costs have led consumers to postpone big purchases.
Even before the current slump deepened, rising competition was pushing all three carmakers to cut workers, close factories, and streamline the number of products for sale.
The problems include high labor costs and what analysts say was a failure to be ready with new products as gasoline prices began rising several years ago. Now executives in Detroit are coming to the conclusion that, in a world of rising demand for energy, high fuel prices are probably here to stay.
An agreement reached last year with the United Auto Workers union means that labor costs will be coming under better control. Starting in 2010, the burden of retiree healthcare shifts from the employers to a union-administered trust.
That could save GM $3 billion a year, for example.
The companies have a range of other options to make ends meet: selling assets, cutting dividends, borrowing more (Chrysler recently tapped a $2 billion credit line), and trying to find deep-pocket investors who believe in a turnaround.
Washington may also provide some help, though not necessarily with a direct bailout. The oil spike will make energy policy, including higher-mileage automobiles, a priority for whoever wins the White House. Democratic presidential candidate Barack Obama has proposed helping with the carmakers' healthcare tab in exchange for new efforts in developing clean cars. And Republican candidate John McCain recently proposed a $300 million prize for whoever comes up with a leapfrog improvement in electric car batteries.
Ultimately, the survivors will need to find a way to put endless restructurings behind them. "The challenge and the elusive goal has been stabilizing market share," Lemos Stein says.