May 31, 2009 - The American Auto Industry Overhaul, Washington DC

After Many Tuneups, A Historic Overhaul

A Global Industry Is Transformed In Race to Reinvent U.S. Automakers

In the space of five head-spinning months, the economic downturn and a few strong-willed financial officials in the Obama administration have done what legions of car executives, consultants and policymakers had failed to do in three decades: overhaul the U.S. car industry.

After Many Tuneups, A Historic Overhaul

In the space of five head-spinning months, the economic downturn and a few strong-willed financial officials in the Obama administration have done what legions of car executives, consultants and policymakers had failed to do in three decades: overhaul the U.S. car industry.

This weekend marks a major turning point for two U.S. giants -- General Motors and Chrysler -- with the federal government, having already replaced their top executives, now set to take majority share positions in both companies. Chrysler, seeking to emerge from a quick trip through bankruptcy, will learn Monday whether a judge will bless a shotgun cross-national marriage that would wed the company with Fiat technology, models and management.

On the same day, GM is expected to file for the bankruptcy protection it long swore it would avoid, with its reorganization already well underway. On Friday, the company relinquished control of Opel, its German-based European arm since 1929, to a large but little-known Canadian auto-parts maker with global ambitions, German government loans and Russian bridge financing. The far-flung parts maker, Magna International, might better reflect the industry's future than GM, which will soon be shorn of other established but money-losing brands, too. Magna agreed to limit job cuts in Germany and, at the Treasury Department's request, keep Opel out of the U.S. market.

If all that were not enough, the Obama administration this month unveiled new fuel-efficiency standards that will change the engines, and perhaps the shapes of vehicles across the industry, challenging long-established American tastes for cars with size and power and stretching the limits of automotive and battery technology.

"It's certainly an inflection point. This is an historic transformation," said David McCurdy, president of the Alliance of Automobile Manufacturers who helped negotiate the new fuel standards. "We'll look back in a number of years and realize it was a significant point of change."

In the new upside-down world of automobiles, the U.S. government will be the majority shareholder of both GM and Chrysler, giving rise to gibes that GM now stands for Government Motors.

"What is the role of the board of directors in this case?" said Maryann N. Keller, an independent auto analyst and author of a history of GM. "To operate in the economic best interests of this company? Or to operate it based on government policy, which may be in conflict with the profit motive? We've never had an entity like this, and we're all going to watch it unfold."

What's good for the country might not be good for GM. Some difficult decisions could include whether to outsource manufacturing to countries such as China, South Korea or Canada where costs might be cheaper. GM has said it would buy components for electric car batteries from a South Korean company, though many U.S. firms are vying for that business.

President Obama has also urged car manufacturers to make fuel-efficient vehicles, but if oil prices stay low, demand for such vehicles could be weak. Last year, U.S. small-car sales held steady at 2.5 million, increasing market share to 19 percent as sales of big cars fell. "Small cars are a bit of a challenge for any carmaker in the U.S.," said Itay Michaeli, an auto analyst at Citigroup. "They are entry-level cars and don't command much premium. So it is difficult to make much money selling small cars without substantial volume and market share."

On Friday, GM said it would build a new small car, about the same size as the Chevrolet Aveo, which is manufactured in South Korea by GM Daewoo, a joint venture. United Auto Workers President Ron Gettelfinger said in a PBS interview that he had pressed GM and the administration to drop plans to make small cars in China for the U.S. market.

The track record is mixed when it comes to government intervention to save and revive big auto companies. British Leyland burned through $16.5 billion of British taxpayer money before going out of business. The French government had somewhat more success as a major shareholder in Renault, which has partnered with Nissan. South Korea's government also intervened to bolster Kia when it was ailing.

The winners in the new world of autos could be a Chinese car company like Geely or India's Tata Motors, which are building on strong domestic markets and looking to expand abroad. Or it could be the Canadian auto-parts maker, Magna International, which next week will take over Opel. Whereas some of the traditional auto companies have seen top executives evolve from founders to creative managers to caretakers (and perhaps undertakers), many of these companies are run by innovators and empire builders in countries with markets expanding much more rapidly than the mature U.S. market.

Time magazine covers were once graced by icons like GM chief executive Alfred P. Sloan and Lee Iacocca (once as Ford's chief and once as Chrysler's), but the man in automotive news this weekend is Frank Stronach, chairman of Magna. His company shows the industry's key trends and challenges.

Stronach, who began as a tool-and-die maker, moved at age 21 from his native Austria to Canada with a few hundred dollars in his pocket in 1954. He rented a garage and bought some machines. Today he has 85,000 employees. A quarter of Magna's $26 billion sales are to GM, but with the major manufacturers downsizing, Magna also assembles cars for Chrysler, BMW and Mercedes.

Unlike the ailing major manufacturers, Magna began conserving cash five years ago and has $1.5 billion in cash and no debt.

In an interview, Stronach said that Detroit's Big Three suffered from years without competition followed by years of labor strife. His company has a "constitution" that promises workers 10 percent of profit -- half paid in cash and half in stock -- over and above wages.

"The Obama administration is doing the right thing by saying they have got to do everything to preserve jobs, to preserve hope and create an environment where things will get done," Stronach said. But, he added, "you don't change a culture in a few years."

Magna's strategy for Opel also reflects the future of the auto industry: The fastest growing markets are in Brazil, Russia, India and China. But getting a foot in the door of emerging markets can be tricky. Magna has already overhauled an assembly line owned by Gaz, part of the corporate empire belonging to Russian aluminum tycoon Oleg Deripaska. Stronach said that he hopes Opel -- which last year sold about 1.5 million cars worldwide -- can make 300,000 to 400,000 there.

But Russia wants a joint venture there with Russian partners owning a major stake. Stronach said Magna would accept a minority, but controlling, share while GM would retain the same 35 percent interest it will keep in Opel. Deripaska, who is close to the Kremlin, could be a partner, but he was so pressed for cash last year that he was forced to forfeit his $1.5 billion stake in Magna, which he had pledged as collateral for a loan. The Russian state-owned bank Sberbank has pledged financing.

Political complications aren't limited to emerging markets. The Treasury has imposed a condition on the Opel deal that flies in the face of free markets, but is designed to shield existing U.S. jobs; Opel must be barred from selling cars or setting up manufacturing plants in the United States. And the Treasury insisted that, at least for a time, Opel stay out of China, where GM is strong.

Original Story - Washington Post