From the September 2008 issue of Research Magazine • Subscribe!

September 1, 2008

Good for GM?

"What's good for General Motors is good for the country," GM president Charles Erwin Wilson reportedly declared in the Senate in 1953. Historians claim that overly eager newspapermen took Wilson's comment out of context, but the quote stuck and over the years became a classic.

It was a perfect fit. GM was then by far the largest industrial company in the world and an unquestioned leader of the global automotive industry. It was so big that only the Soviet government, which owned all the productive assets in the USSR, employed more workers. Its vehicles dominated the roads in every country whose citizens could afford such luxuries as private motor cars. In the United States, GM's market share peaked at 50 percent. Its vertical integration was such that, according to industry lore, it owned some of the sheep that provided wool for its seat covers.

The importance of the company for the U.S. economy was hard to overestimate. In the early post-World War II decades, the motor vehicles industry accounted for over 5 percent of GDP directly, but taken together with related manufacturing and service industries its weight was far greater. By the mid-1950s, GM became the first U.S. conglomerate ever to pay $1 billion in taxes. It comes up to $8 billion in today's money, but much more in terms of contribution to government revenues. In the 1950s, federal revenues averaged $70 billion per year, of which GM paid 1.5 percent.

Poster Child of CapitalismEven more important, GM's history, ever since it was founded exactly a century ago, closely paralleled the history of America's economic development. Relations between management and its organized labor were constructive and cooperative. The company earned sizable monopoly profits and it readily shared them with its workforce. A card-carrying member of the United Auto Workers union became a poster child of American capitalism: skilled, well-paid and confident of his family's future, since he was protected by generous company-funded medical and pension benefits.

GM was also one of the first U.S. conglomerates to initiate worldwide expansion. In the 1920s, it bought Vauxhall in the U.K. and Opel in Germany. Together with Ford, it shaped the automotive styling in Western Europe and the rest of the world. Over the years, GM added Saab and Daewoo to its stable, and only recently it held stakes in such companies as Subaru, Isuzu, Suzuki and Fiat.

Decline and Fall?Over the past decade, however, there has been an accelerated contraction and retrenchment at GM. Not only in foreign markets, where it sold off most of its Japanese holdings and a stake in Fiat, but at home as well. Parts production was amalgamated into Delphi Corp. and spun off in 1999 -- just in time, since the world's largest parts supplier is now bankrupt. GM sold a controlling interest in GMAC, its financing arm, to Cerberus Capital Management, a private equity group -- also just before the company's residential mortgage portfolio became a drag on profitability.

This year, the deterioration in GM's financial position has accelerated. It has shut down plants and curbed production as demand for motor vehicles -- and especially for its gas-guzzling SUVs and light trucks -- tanked. It appears to have abandoned preoccupation with safeguarding its market share, as the proportion of imported motor vehicles in the U.S. market continues to climb. The Detroit giant is now considering more asset sales, and may place on the block one of its newest divisions, Hummer, the symbol of American over-consumption.

GM's share price fell below $10 in July, the lowest level in some 55 years, going back to the time when Wilson made his unforgettable statement. Adjusted for inflation it is lower still, priced at $1.25 in 1950s dollars.

Even though GM still vies with Toyota for the global No. 1 spot among volume sellers, its market capitalization has dropped toward $6 billion, or around 4 percent of Toyota's. Rating agencies have downgraded GM's debt further into junk category, citing the possibility that the once-unassailable American industrial giant may actually go belly up.

Industry ProblemsWilson's dictum seems to be holding true in times of trouble as well. GM's difficulties reflect those of the U.S. economy at large. U.S. industry is not competitive, despite the dramatic decline of the U.S. dollar, which lost some 50 percent of its value against the euro over the past decade. At a time when price competition has become the main marketing point for generic goods and services, the United States is among the world's costlier producers.

Wages are only one problem. Employers across the U.S. are also battling rising costs of health insurance and pensions -- which are also at the root of GM's problems. Unfunded liabilities to current and retired employees have sunk the company's creditworthiness and added over $1,000 to the cost of producing every GM vehicle.

The U.S. is facing the dual problem of skyrocketing medical costs and a growing army of uninsured, but political paralysis in Washington has prevented any meaningful solution from emerging.

On the other hand, along with the rest of the U.S. economy GM has benefited from Americans' willingness to over-consume. We have imported more and more oil despite the fact that world prices were rising alarmingly. The oil bill is a major reason why the U.S. trade deficit now stands around $800 billion and why the U.S. dollar is so weak. We have used easy, plentiful consumer credit to buy larger, more expensive motor vehicles than we needed. Consumer debt has nearly doubled in this decade and now stands at $14 billion, roughly the size of America's annual GDP. The double whammy of the real estate crisis and unsustainable oil prices is bringing down the pyramid of U.S. consumer spending -- with deplorable results for GM.

Measured by the GM yardstick, the U.S. economy and its global economic leadership may be in trouble. Looking through the prism of a Detroit skyscraper, such signs as the weakening of the U.S. dollar and the worst monthly decline on Wall Street since the Depression in June appear extremely troubling.

An Obsolete Yardstick.But the truth is that GM and the United States, even if they were once joined at the hip, have long since parted company. The automotive industry is still fairly important in GDP, making up around 3 percent. However, GM -- and all the Detroit Big Three for that matter -- are no longer dominant in the industry. There are now plenty of other automotive producers in the U.S., with their plants dotting the rural landscape in the South.

More to the point, industry is no longer what makes a modern economy great. The technology revolution of the past three decades has solved the problem of producing generic material goods. In the process, manufacturing became a race for the bottom, where cost-cutting and slim profit margins are the rule. Successful manufacturers -- such as German carmakers -- sell not so much well-engineered cars but, increasingly, their prestigious brand names.

High-paying U.S. manufacturing jobs in a wide variety of industries have drifted to Mexico, Eastern Europe, Southeast Asia and China. Those that remain are either heavily subsidized by the Department of Defense or have seen their "high-paying" status become a distant memory.

While profits evaporate in manufacturing, fat profit margins accrue to technology companies, idea genitors, financiers and marketers. In many of these areas, the U.S. not only hasn't lost its leading edge but, if anything, has increased its lead over international competitors. Global high-tech brands that have emerged over the past three decades, such as in software and the Internet, are predominantly American. Moreover, North Americans are reclaiming their dominance even in electronic gadgets, such as mobile telephony.

GM has an opportunity to join those companies that earn strong profits. It remains strong in marketing. It has a sales network across the U.S. that is the envy of the world: It still sells some 4 million motor vehicles per year in the home market. It has also emerged as a leader in some new markets, such as China and Russia.

GM could retain its high-margin luxury brands, such as Buick and Cadillac, concentrating on this segment and competing with Mercedes and BMW. As for the mass market segment, it will never be able to nurse it back to health. Instead, the company should use its marketing muscle to sell cars produced by others -- for instance, by Korean, Chinese and Indian manufacturers.

However, if the company keeps trying to resurrect itself as a mass-market automotive manufacturer, the writing is on the wall and its likely fate will be that of the world's other dinosaurs throughout natural and economic history.

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Alexei Bayer runs KAFAN FX Information Services, an economic consulting firm in New York; reach him at abayer@kafanfx.com. His monthly "Global Economy" column in Research has received an excellence award from the New York State Society of Certified Public Accountants for the past five years, 2004-

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