Low Ratings for GM, Ford Hurt Auto Sector On Thursday, Standard & Poor's cut the debt ratings of GM and Ford to junk status, dealing a serious blow to major automakers and companies that supply them. The move undermined market confidence in the two companies and erased earlier modest gains after the announcement by billionaire Kirk Kerkorian that he has proposed to buy hundreds of thousands of GM shares. To get a sense of the larger issues facing the auto industry, host Liane Hansen speaks with University of Michigan Business professor Dr. Gerald Meyers.
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Low Ratings for GM, Ford Hurt Auto Sector

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Low Ratings for GM, Ford Hurt Auto Sector

Low Ratings for GM, Ford Hurt Auto Sector

Low Ratings for GM, Ford Hurt Auto Sector

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On Thursday, Standard & Poor's cut the debt ratings of GM and Ford to junk status, dealing a serious blow to major automakers and companies that supply them. The move undermined market confidence in the two companies and erased earlier modest gains after the announcement by billionaire Kirk Kerkorian that he has proposed to buy hundreds of thousands of GM shares. To get a sense of the larger issues facing the auto industry, host Liane Hansen speaks with University of Michigan Business professor Dr. Gerald Meyers.

LIANE HANSEN, host:

This past week, two American industrial icons, General Motors and Ford, suffered the indignity of having their bond ratings relegated to junk status. Both automakers have ample cash reserves, so the builders of the legendary Corvair and Edsel will keep turning out Impalas and Mustangs. But the road ahead is pitted with potholes. Sales are worse than sluggish, costs are rising, especially for health care and pensions, and with gasoline prices well over $2 a gallon, consumers are not expected to be lining up any time soon to buy profit-making SUVs. Gerald Meyers is adjunct professor of organizational behavior at the University of Michigan Business School in Ann Arbor. He worked in the auto industry for decades and served as chairman and CEO of American Motors Corporation, or AMC, from 1977 to 1982.

Welcome to the show, Professor Meyers.

Professor GERALD MEYERS (University of Michigan Business School): Oh, hi, Liane. Nice to be back.

HANSEN: Good to have you. Are General Motors and Ford facing identical or even similar problems here?

Prof. MEYERS: They're very similar. All the forces that are working on one are working on the other, and neither one of them are out of cash, but they are suffering on the bottom line. They've got vehicles that aren't selling very well. The top end of the sport utility market is dwindling. And they've got the health-care problem. The onslaught of the Asian brands are coming up at them and the rigidity of the labor contracts. Ordinarily, each auto company, and sometimes other industries, gets in trouble one at a time. But the unusual thing that's going on here is that both Ford and GM are in trouble--in deep trouble, and there doesn't seem to be a way out, at least not a fast way out. There's no silver bullet available.

HANSEN: Could you see a time in the future when there might not be a General Motors or a Ford Motor Company?

Prof. MEYERS: Oh, not in our lifetime, not anytime soon. They're both huge corporations, and big companies don't die quickly. I don't see these companies dying at all, but I do see them going through a very rough period and probably ending up being smaller and different kind of companies than we're accustomed to.

HANSEN: What about mergers? I mean, there's been considerable consolidation in the industry in recent years. Have the mergers helped or hurt?

Prof. MEYERS: Well, I think what mergers there were have helped because it reduces the capacity of the industry, and that's important. There's just too much capacity in the auto industry. I think the numbers are truly astounding that there may be something like 70 million units of capacity in the world industry and we're only selling about 50 or 60. So you can see what the problem is.

HANSEN: Now the marketplace is pretty volatile. Gas prices are going up, the sales of the SUVs going down. Demand for hybrid cars is going up. Do you think the big automakers actually have that kind of internal, cultural agility to respond to these kinds of market trends?

Prof. MEYERS: Not in the usual sense. When you say agility, you think of, well, could they respond overnight or could they respond in a matter of months? And the answer to that is just a clear no. This is a high-tech industry, but it doesn't have the attribute of being high-tech fast on its feet. The need to tool and the need to change production facilities is something that you have to bear in mind when you're in the business. It takes probably six months to nine months to change the mix considerably in what you're producing, and it takes a year or two or three to change what products you're producing as it will take maybe five years, believe it or not, to actually come up with a new vehicle from scratch and get it tooled.

HANSEN: So what's your vision of the future of the automobile business here in the United States and around the world?

Prof. MEYERS: Even more fragmented. I think the United States will look much like Europe in about four or five years from an automobile point of view. No auto company in Europe has more than 15 percent of the market. There are more producers than we have here in the United States, and they struggle on pricing and they struggle on getting their production mix right. And I think that's what the United States will probably look like here in five, 10 years. And, of course, in saying that, I'm saying that GM and Ford will be smaller companies and that other makers, particularly the transplants of the Asians, will become more and more of a force.

HANSEN: Gerald Meyers was chairman of American Motors Corporation, or AMC. He is now adjunct professor of organizational behavior at the University of Michigan Business School in Ann Arbor. I thank you so much for your time.

Prof. MEYERS: Thank you, Liane.

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