What's Good for General Motors

When Chrysler, the No. 3 Detroit automaker, was teetering on the brink of bankruptcy in 1979, the Carter administration stepped in with $1.2 billion in loan guarantees that bailed out the company and helped it return to profit. Chrysler repaid the loans four years later.

Since then, like a yo-yo, Chrysler has gone repeatedly from success story to goat and back again. Recently, it carried its German parent through a difficult patch mid-decade before falling on bad times now. Exasperated, Daimler sold an 80 percent stake in the company to Cerberus Capital Management, a private equity fund. The price paid, $7.4 billion, was about 40 percent of what those loan guarantees were worth in today’s dollars.

Curiously, this up-and-down pattern has characterized most global automakers for years. Nissan had a near-death experience in the second half of the 1990s, only to be rescued by Brazilian-born naturalized Frenchman Carlos Ghosn, then relegated to Japan’s No. 3 automaker by its business partner, France’s Renault.

But once Ghosn the Savior became the head of both companies in 2005, they went into sharp decline, as their market share and profitability dwindled. Meanwhile, Italy’s Fiat, long believed to be on its deathbed, enjoyed a miraculous revival. The same may be happening to General Motors. The Detroit giant may no longer be the world’s No. 1 automaker by volume, having been passed by Toyota this year, but at least it no longer hemorrhages red ink. Its stock price, after plunging to its lowest level in nearly a quarter of a century, nearly doubled over the past 18 months.

Demand ParadoxCountries around the world that currently enjoy the fastest economic growth also have far lower private car ownership rates on a per capita basis than mature economies in North America and Western Europe. But they are catching up fast. China came out of nowhere to become the world’s second largest automotive market after the United States. Russia and India have become car-crazy, too, and all of Latin America has been a consistently strong market for global automotive companies in recent years.

This suggests, on paper, strong demand growth for motor vehicles going forward. However, the auto industry is suffering from a structural overcapacity problem. It is perhaps currently most acute in the United States, where plants are being closed and production line jobs eliminated rapidly, but it has been seen in Western Europe as well. In one form or another, excess capacity plagues most automakers.

In this respect, the automotive industry is quite typical of other goods-producing industries. Like other goods producers, automakers are constrained to go into two opposing directions — either competing on price, engaging in relentless cost cutting and contenting themselves with paper-thin profit margins, or going for the high end, where brand positioning, quality, innovation, design and snob appeal play a crucial role.

Renault-Nissan opted for the former option. Ghosn proudly wears the nickname “Le Cost-Cutter,” after he nursed Nissan back to health by relentlessly slashing and then jealously watching its costs. But sooner or later this strategy becomes a race for the bottom. Korea’s Hyundai can do pretty much everything Nissan can do, only cheaper — the advantage that catapulted it into the sixth spot globally among car makers, despite a small domestic market and the fact that it didn’t begin exporting cars until 1976.

But with Chinese and, soon, Indian automakers coming into the picture, Hyundai’s position is vulnerable. Even mighty Toyota, despite reaping monstrous profits, is starting to see its drive for world domination fray around the edges.

While the luxury end has been doing much better — along with luxury segments of other goods and services — driving strong profits at Porsche and BMW, for instance, this end may now also start to suffer from overcrowding and commoditization, now that Daimler is getting its act into gear and Japanese carmakers are marketing Acura, Infiniti and Lexus globally.