In its heyday in the 1950s and '60s, no company symbolized the brawn of American capitalism like GM. The company opened the door for legions of blue-collar workers to enjoy middle-class lifestyles, set the benchmark for modern management practices, and with its tailfins and V-8 engines defined automotive style.
Now, instead of symbolizing America’s success, GM has become an emblem of some of the central challenges the nation faces in a new century. The factors paving its road to bankruptcy include rising healthcare costs, intensifying global competition, and making promises it couldn’t afford to keep.
These are all problems that go beyond GM, affecting corporations and America’s government balance sheet as well.
America is not necessarily in a period of permanent economic decline. But the financial climate has become tougher for corporations, the US Treasury, and households in ways that will last beyond the current recession. Some economists wonder aloud if the federal government is headed toward bankruptcy.
“At one point there was concern that GM’s market power was so great that it was a virtual monopoly,” says Jeremy Anwyl, chief executive of automotive information provider Edmunds.com. Now “the car companies are maybe the canary in the coalmine…. As a society we could be having to deal with an era of diminishing expectations.”
An expensive rescue effort
GM filed for bankruptcy Monday morning in New York, the largest US manufacturer ever to enter the Chapter 11 process. (Two nonmanufacturing corporations ranked larger in asset value when they entered bankruptcy: Lehman Brothers and telecommunications firm WorldCom.)
In a bid to preserve jobs and avoid a devastating collapse of the auto industry, the US Treasury agreed to pump an additional $30 billion into GM, on top of about $20 billion already committed.
An Obama administration task force pushed for concessions from various stakeholders in GM, from the auto workers union to debt holders, so that GM could bring its costs down to a level competitive with foreign rivals.
“This will … allow GM to become profitable at a much lower level of car sales than has been the case before,” a senior Obama administration official told reporters in a Sunday briefing.
With the government helping to orchestrate the company’s overhaul, the automaker hopes to speed its way through bankruptcy in 60 to 90 days, with a “new GM” emerging while portions of the company remain in court to be sorted out on a slower track.
Another Detroit automaker, Chrysler, has already paved the way. It’s on track for an even faster exit from bankruptcy, with its own cash infusion from the government. On Monday, a bankruptcy judge in New York approved the overall plan for America’s No. 3 automaker to sell its key assets into a new company, which will be partly owned by the Italian automaker Fiat.
Problems of Detroit's own making
All three Detroit automakers (including No. 2 Ford, which is not in bankruptcy) have faced a similar set of challenges.
Some of the problems involved failings made in Detroit. The firms were slow to address quality and reliability shortcomings, for example.
Critics also say that, since the oil-price shocks of the 1970s, US carmakers failed to take the lead in fuel efficiency – setting themselves up to lose market share when gasoline prices jumped again, as they did last year.
Other problems resonate beyond the auto industry. Rising healthcare costs have emerged as a major burden for the US economy, as the US spends a larger share of gross domestic product on medical care than other advanced nations. President Obama recently launched a push to control medical costs.
According to a 2006 survey by the National Association of Manufacturers, 87 percent of small and mid-sized manufacturing firms ranked escalating healthcare costs as their most pressing problem.
The Detroit automakers have been hit particularly hard, since foreign-based carmakers have lower health costs both in their home countries and in their US plants (due to having a younger US workforce than the Detroit Three).
Global competition, in general, has hit Detroit harder than many industries. Carmaking is a bedrock industry that many nations want to be in, and the rise of Japanese and Korean production has come at Detroit’s expense. As foreign rivals have risen, the Detroit Three have seen their domestic market share drop below 50 percent this year. Up next: imports from China.
But global pressures extend far beyond the auto industry, in a sharp reversal from the era right after World War II. When Presidents Eisenhower and Kennedy were in the White House, the US stood unrivaled as a global manufacturing powerhouse.
It’s not so much that America is declining. It’s that other nations have been moving forward faster, and industrialization has been spreading to new parts of the globe.
Americans adjust household economics
The competitive pressure is one reason many Americans feel it’s harder to keep moving ahead in their own household economics.
In a major survey released a year ago, the Pew Research Center found that Americans were less optimistic about their personal progress than at any time in a half century of polling. One-fourth of respondents said that in the past five years, they hadn’t moved forward in life, while 31 percent said they had fallen backward.
This isn’t to say that the American dream of growing prosperity has disappeared, but it is being tempered. The current recession is prompting millions of households to try to pare down on debt – which had soared to a record level in comparison with incomes.
That’s what GM is doing. For years, it made promises based on assumptions of market share and profits that haven’t panned out. Under bankruptcy, it is lightening its debt load (investors will swap bond holdings for an equity stake in the firm) and paying a retiree healthcare trust with an equity stake rather than cash.
The whole country will soon confront some tough choices like this, economists say. Even as households are individually realigning, the government faces a looming shortfall in covering the promises it has made regarding Social Security and Medicare. It’s not an insurmountable challenge, but in coming years, economists say, the status quo will be no more tenable for the federal government than it was for GM when the recession deepened last fall.
• Material from wire services was used in this story.