May 8, 2005
By Ed Garsten and Louis Aguila
The Detroit News
Fifty years ago, more than half of the cars and trucks sold in the United States carried a General Motors Corp. brand. The giant automaker's annual revenue accounted for more than 1 percent of the gross domestic product, driving the vibrant post-World War II economy.
Flush with fat paychecks and unbridled optimism, the emerging middle class was anxious to be seen motoring about town in new, flashy GM cars. What was good for General Motors was good for the country, went the bromide coined in the 1950s.
But with steadily falling U.S. market share, reduced employment and shrinking manufacturing reach, the "General" has lost much of its authority over the American economy, with its first-quarter revenue accounting for just 0.4 percent of the GDP.
Yet even in its current weakened state, GM remains an important force in the U.S. economy, affecting consumer confidence across the industrial Midwest and casting a huge shadow over investor sentiment on Wall Street. Its future success or failures will have major repercussions across many communities and industries, from advertising to health care, where GM employs thousands of people and spends billions of dollars.
"This is not a minor player," said Diane Swonk, chief economist at investment services firm Mesirow Financial. "GM is still in the ranks of IBM, even though both are smaller, but it's not like AT&T is AT&T anymore."
While it controls just 25 percent of U.S. car and truck sales now, GM can still rock Wall Street.
The automaker sparked a broad rally in U.S. equity markets and battered industrial stocks last week when billionaire investor Kirk Kerkorian offered to buy a chunk of its depressed shares. A day later, it sent jitters through the bond market when its massive debt load was rated "speculative" by a major credit rating agency.
While the downgrade was expected, traders were caught unprepared and braced for a flood of GM junk bonds in the coming weeks.
Its payroll -- $21.8 billion last year -- is still the main source of consumer spending in towns like Janesville, Wis., Shreveport, La., and Lansing, where GM has provided thousands of manufacturing jobs at assembly plants for years.
When consumers stopped buying big-ticket items after the Sept. 11, 2001, terror attacks, GM was credited with saving the U.S. economy with no-interest financing on new car and truck sales. It touched off an incentive war that powered vehicle sales to record levels that year and reinvigorated sales of major appliances and other durable goods.
But GM's latest financial woes are creating a wave of unfavorable economic ripples. It has suspended merit pay increases for thousands of white-collar employees that will stymie consumer spending in southeast Michigan. Wall Street analysts are divided over whether GM will eventually be forced to trim or cut its cash dividend to save more than $1 billion in cash a year.
COMPANY'S SLIDE REVERBERATES
Madison Avenue, hospitals, physicians and auto parts makers fear cuts in the nearly $2 billion GM spends annually on advertising, $5.6 billion on health care, and $85 billion on supplies and services. In Oklahoma City, government officials are rallying to preserve an SUV plant in case GM is forced to shutter more plants.
When the automaker reported a $1.1 billion first quarter loss last month, the price of its shares nosedived, dragging down the overall stock market and depressing employee and retiree 401(k) plan balances.
Once the biggest employer in the United States, GM now employs 148,000 Americans, compared to more than 1.6 million at Wal-Mart. In 2004, GM earned $3.7 billion, while the ever-expanding retailer made a profit of $10.3 billion.
A big reason for GM's shrinking influence is the expansion of manufacturing by foreign automakers on American soil. Factories operated by European and Asian automakers have sprouted up from the Midwest to the deep South over the past 20 years. As recently as 1990, GM operated 30 assembly plants from Massachusetts to Southern California, but has been forced to close 10 factories because of slumping sales and market share.
"GM is obviously ... much less dominant in the auto industry and its woes aren't a big deal for the economy at large as long as other car companies are doing better," said Dana Johnson, senior vice president and chief economist at Comerica Bank.
As other car companies have gobbled up big chunks of U.S. car and truck sales, GM has been forced to downsize and consolidate factories. By summer, the automaker will have shut down assembly plants in Lansing, Baltimore and Linden, N.J. It has also pared its salaried work force by 2,800 this year and may be forced to shrink even further.
The result has been depressed financial results for GM parts suppliers and even nonrelated businesses that depended on revenue from workers from nearby plants and offices.
"It just makes the whole region less vibrant. There's a lot less discretionary income to be spent on things," said Comerica's Johnson. "There's no question it has a dampening effect on the whole region in virtually every business."
PONTIAC'S WOES TELL THE STORY
Six years ago, embattled downtown Pontiac was surging, thanks in no small part to GM's decision to move 1,800 white-collar workers to office buildings near Saginaw Street downtown.
Saginaw Street had struggled ever since a big chunk of downtown was demolished in the 1960s and Wide Track Drive was built, looping around the city center to steer traffic from downtown. The shift in traffic left the core of the Oakland County city nearly empty for nearly two decades.
But by the late 1990s, the old downtown -- viewed as vital history -- was billed as the "Soho of Oakland County," referring to a trendy area of Manhattan. At least two dozen art galleries opened and during warm months crowds of art lovers jammed the streets on First Fridays, when galleries stayed open late. Lofts were being rented for $1,000 a month.
At least five new restaurants and cafes set up shop. Pontiac native Tony Bellisario opened Giovanni's Café Italiano on the corner of Saginaw and Lawrence in an Art Deco building empty since 1970. Giovanni was the name of Bellisario's father, who worked on the GM assembly line much of his adult life. Sheila Teas, a small café, opened above it.
But as GM's economic fortunes worsened, many of the 1,800 white-collar workers were transferred from downtown.
"Foot traffic just died," said Sheila Tinnion, former co-owner of Giovanni's, who also ran Sheila Teas. "When it first opened, it seems so many of our customers were General Motors employees. And that slowly went away."
So has the resurgence. All but a handful of the businesses have left Saginaw Street. The galleries have relocated or gone out of business. Most of the new restaurants didn't survive. Tinnion moved Sheila Teas to Rochester Hills two years ago.
Like many former shopkeepers on Saginaw Street, Tinnion doesn't blame GM.
"GM is reacting to the larger economic situation and that is understandable. But it's the local government types who don't know how to react," Tinnion said.
"Things don't stay the same and they pretend that it will."
RECENT MOVES LEND JOLT
But it was two jolts last week -- Kirk Kerkorian's bid for a bigger chunk of GM shares and a downgrade in the automaker's credit standing -- that underscored how the industry's mood, momentum and outlook can change in a flash.
"The soup d'jour right now is 'let's pile on GM.' They've got some good products coming," said Lynn Thompson, a Springfield, Mo., GM dealer. "They have some problems but they're trying to address them. It's a big ship trying to turn around."
GM's descent into junk status, along with Ford, created a psychological pall over the auto industry that may spook investors enough to avoid buying bonds the companies sell to raise cash.
It could also very well drag down the companies that supply GM and Ford with the parts used to build cars and trucks.
"GM is still 28 percent of North American production, and for most of our members, they are the largest customer and critical to their success," said David Andrea, vice president of business development at the Original Equipment Suppliers Association.
But it's also another distraction for the wounded automaker that seems destined to lose its standing in the next few years as the world's No. 1 automaker to Japan's Toyota Motor Corp.
What's good for GM is still pretty important to America, the experts say, but what's bad for the automaker is no longer as cataclysmic.
You can reach Ed Garsten at (313) 223-3217 or egarsten@detnews.com.
http://www.detnews.com/2005/autosinsider/0505/08/A01-175048.htm