GM and Ford in need of a big overhaul
Oct 20th 2005
From The Economist Global Agenda
MOTORING folklore has it that a pair of women’s stockings knotted into a loop will provide a useful emergency replacement for a snapped fanbelt, keeping you on the road until a more permanent fix is available. The worse than expected losses that General Motors announced on Monday October 17th—of $1.6 billion net in the third quarter—show that something is very wrong under the bonnet at the giant Detroit carmaker. Ford's results three days later, though not quite as awful, showed it is in a similar fix.
On the same day as GM announced its dismal trading performance, it also gave details of an agreement with its notoriously truculent unions to cut health-care costs and the possible sale of a stake in GM's profitable finance arm. These may prove to be the knotted undergarment that keeps GM on the road for now—but it is clear that a more permanent fix will be needed.
GM has had its share of problems this year. They began with the firm paying $2 billion to extricate itself from a misguided deal struck in happier times that would have forced it to buy Fiat Auto, a struggling Italian car firm. Then, the firm’s poor performance led to the downgrading of its debt to “junk” status by leading credit-rating agencies (Ford suffered the same fate). Earlier this month, GM’s credit rating was cut again after Delphi, a car-parts business that GM had spun off in 1999, filed for Chapter 11 bankruptcy protection, prompting more speculation that GM could go the same way.
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Disruption to GM’s supply chain is just one of the problems that Delphi’s bankruptcy could bring. Under the deal to spin off the parts maker, GM had agreed to cover some potential liabilities relating to Delphi employees’ benefits, a promise it may now have to keep. The extent of these is unclear but estimates of the cost to GM range between $1.5 billion and $11 billion. However, a welcome side-effect of Delphi’s bankruptcy proceedings is that it may have concentrated minds at the United Auto Workers. GM has been negotiating with its main union for some time to bring down the costs of health-care provision to blue-collar workers. Delphi's fate may have prompted the unions to agree the deal.
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