Crisis looms in Motor City

GM, the world's largest car maker, is in big trouble. Falling sales, rising costs and huge legal bills are threatening to bring this motoring superpower to its knees. Mark Bursa reports

A disintegrating home market share. Fuddy-duddy cars that nobody wants. A black hole in the pension fund. Massively paid directors. Difficult relations with the Chinese.

A disintegrating home market share. Fuddy-duddy cars that nobody wants. A black hole in the pension fund. Massively paid directors. Difficult relations with the Chinese.

Rover's demise is well documented - but these statements apply just as well to General Motors, the world's largest car maker. There was a chink of light this week with the news that US billionaire Kirk Kerkorian had made a bid for a part of the company, but GM could still follow Rover into bankruptcy.

It's difficult to pin down what has gone wrong. Like Rover, the General has been in steady decline for a long time. While Rover's problems are a combination of weak management, underfunding and multiple changes of ownership, GM's seem rooted in its own stifling bureaucracy.

Even Rick Wagoner, the company's youthful and energetic CEO, has failed to stop the rot. In fact he's contributed to the problems, having been a prime mover in the disastrous failed alliance with Fiat that cost GM $2bn earlier this year.

The company is haemorrhaging money. It reported a net cash outflow of $3bn (£1.57bn) from its automotive business in the first quarter of 2005, despite earlier forecasting a positive cashflow of $2bn for the year. Now it won't give any forecasts at all.

In 2000, Wagoner hired septugenarian industry legend Bob Lutz to revitalise the company's dismal US products. He came in with all guns blazing, describing GM's cars as "from the trash compactor school of design". But apart from some good new Cadillacs, Lutz has struggled to get the product right. Mainsteam GM cars such as the ridiculed Pontiac Grand Prix and Chevrolet Malibu have flopped, with Grand Prix sales falling by 44 per cent compared to their performance in 2004. GM's response has been to announce it will stick "GM" logos on its wretched US cars as a "badge of trust". They'd be better off disowning them completely.

Lutz bemoans the bureaucracy that makes it hard for GM's designers to compete. He told a Society of Automotive Engineers conference in Detroit earlier this month: "We are training our engineers to be managers while the rest of the world trains them to be doers. Asian and European engineers are trained in drafting and can draw a new design on the spot when they run into problems. But US engineers often need to call in designers."

The only things that prop up GM's US market share are strong sales of pick-ups and 4x4s, and the excellent performance of its finance arm, GMAC. Most of its saloon cars are pumped straight into rental fleets and out the other side as used cars. The only way to shift them to retail customers is to offer deep discounts - hardly the way to go when each car carries the burden of $1,500 in healthcare liabilities before it rolls off the line.

Tackling this issue is crucial for GM's future. The company's healthcare costs have risen by $1bn to more than $5bn this year. Negotiations with the unions are scheduled for 2007 - but GM doesn't have that long. The unions are reluctant to play ball, so GM might take unilateral action, removing healthcare benefits from its staff simply because it cannot afford to pay for them.

In a bid to save money to help tackle the problem, costs have been cut - leading to a fall in quality and therefore prices, residual values, customer satisfaction and company profits. All the while the Japanese, and increasingly the Koreans, are making inroads to GM's US heartland.

GM denies it, but one or more of its US brands is likely to go the same way as Oldsmobile, which produced its last car a year ago. Pontiac - once a muscle-car brand to rival Dodge but now a maker of warmed-up Chevys, and Buick, the retired US middle-manager's carriage of choice, must be the ones most at risk. Saturn, the "lifestyle" brand launched in 1990 but hampered for years by dreary cars, is relying on new models developed in Europe and Korea for its survival.

At least GM has made positive steps elsewhere. Wagoner swallowed his pride and paid Fiat $2bn to get out of a deal signed in 2000 that could have seen GM forced into buying Fiat's ailing car division (and taking on $6bn of debt), but the company has gained from this potentially disasterous situation. The big bonus is that GM now has access to Fiat's excellent diesel technology - something that it, unforgivably, lacked. Quite how GM Europe's product planners didn't notice that every other car sold on the Continent was a diesel simply beggars belief, and gives an indication of how deep-rooted was the malaise within the company's European division.

The Fiat settlement solves GM's diesel dilemma in a stroke. The deal gives GM 50 per cent of the Fiat engine plant in Poland, which makes the superb new 1.3-litre diesel engines for the Fiat Panda. GM now owns half the intellectual property on these engines and of the larger Fiat 1.9-litre JTD common-rail diesels built in Italy, and can use them in its own models.

While its US operations are in turmoil, GM has been getting on with sorting out its European problems. A major restructuring programme plans to eliminate about 12,000 jobs, and will result in savings of more than $650m. So far 4,500 workers have taken voluntary redundancy, but GM has also talked darkly of plant closures, with much of the speculation centering on Saab's plant in Trollhattan, Sweden. Saab, acquired in stages between 1989 and 2000, has been another disaster, losing $200m last year alone.

Rumours have gone so far as to suggest that GM has been hawking the brand round to potential buyers - a story the company has dismissed as "preposterous". But Lutz said the plant's output would have to be doubled for Saab to attain profitability. "We like the brand and we want to retain it," Lutz told journalists at the recent Amsterdam show. "But we can't subsidise a factory building as few cars as Saab."

One ray of light for GM has been the rebranding of Daewoo as Chevrolet, turning Chevy into a global budget manufacturer with appeal in Europe and emerging markets - notably China.

Chevy has launched three new models so far this year, including the three-door Kalos compact in January and the all-new Matiz last month. In the pipeline is a larger saloon and a 4x4. These cars, developed and built in Korea, are likely to play a key role in the future of GM - if the company can avoid Rover's fate.