Is General Motors set for crash?

GM has been roundly criticised for not recognising the trend to smaller vehicles and for still concentrating on gas-guzzlers such as the Hummer. Production of the latest Hummer, the H3, began this week in Shreveport, Louisiana. GM says the H3 will get 16 miles per gallon against the H2's eight.

At Janesville, Wisconsin, where it produces the monster Chevrolet Suburban, the carmaker is spending $170m to retool the plant to make the next generation of full-size SUVs and trucks even though the once-constant overtime at the plant has been replaced by lay-offs.

Industry analyst Maryann Keller says the full-size SUV market has peaked and is probably shrinking, and GM doesn't seem to be adjusting. 'The reality is that gasoline is very expensive and people have alternatives,' she says. Full-size SUVs used to be practical and affordable, she adds. 'They now are very expensive as vehicles and expensive to operate.'

With its big vehicles no longer in favour, GM is getting little help from its cars. Wags say the only people buying them are employees, their families and rental fleet operators. Reviews have been poor and the lack of good Press meant that even a 300-plus car giveaway on the Oprah Winfrey TV show couldn't generate anything other than tepid sales for the much-hyped Pontiac G6 coupe.

{3} A harsh review of the vehicle by Dan Neil in the Los Angeles Times caused GM to retaliate by saying it would pull all its advertising from the newspaper. Neil wrote: 'This is an uncompetitive product, an assertion borne out not by my say-so but by sales numbers. When ball clubs have losing records, players and coaches and managers get their walking papers.'

In a nutshell, he was calling for the ousting of chairman and chief executive Rick Wagoner and other executives for several reasons, including the fact the company has 11 brands with many wastefully overlapping and offering similar vehicles. He was also scathing about the fact that GM does not have a hybrid petro-electric vehicle 'of consequence' despite sky-high fuel prices.

Buyers are flocking to cars made by Toyota, Honda, Nissan and Hyundai but Devine insisted this week that there was nothing wrong with GM's vehicles - it was the public's perception of them that was faulty. 'One of the issues we are confronted with is that the perception of our products in terms of quality, in terms of their product attributes, lags well beyond what we think the products are.'

He said the company was going to spend more on marketing to try to change that perception. But he added that GM was no longer going to provide guidance to financial analysts and investors. Confirming that in its earnings statement, the company said:

'Given the uncertainty affecting key elements of our financial forecast, such as resolution of the healthcare cost crisis, GM has determined that it will not provide earnings guidance for the 2005 calendar year at this time.'

{4} GM's share price took a small hit after the results were released and, at about $26, hover just above multi-decade lows, but its bonds are attracting most attention. Because of the lack of confidence in its outlook, GM said its worldwide cost of borrowing at the end of the first quarter was 0.46% above the 10-year Treasury note, up from 0.22% in the year-earlier period.

GM's strife has led to speculation that it might file for Chapter 11 bankruptcy protection to give itself the manoeuvrability to extricate itself from some of its financial commitments. 'Without some radical surgery, GM may be on an irreversible downward spiral,' Robert Miller, chairman of car parts maker Federal-Mogul, said recently. 'If they are resistant to change, then the change may be ordered by bankruptcy, instead of being settled at the bargaining table.'

Domino effect could bring global havoc

IF THE demise of MG Rover is a severe blow to the West Midlands, it would be dwarfed by the collapse of General Motors, the effects of which would reverberate around the world. GM employs about 350,000 worldwide, 150,000 of whom are in the US and 60,000 in Europe.

In Britain, GM has its Vauxhall plant at Ellesmere Port on Merseyside and its Luton van factory in Bedfordshire, and employs about 4,500, writes Jane Padgham.

The future would be uncertain for these hundreds of thousands of employees, but up to a million other jobs at dealerships and component suppliers would also be at risk.

Mark Swift at the Engineering Employers' Federation says: 'With MG Rover, you can chronicle back the situation over the last 20 to 30 years and it's easy to see why it failed. But it's a whole different ball game with GM. If a company with the huge financial muscle of GM collapsed, you've got to ask who's safe in the car industry. The effect on confidence would be severe.'

{5} GM's woes come at a time when the cracks in the US economy are widening. As business confidence crumbles and consumer sentiment sags, economists are concerned the slowdown is more serious than last summer's 'soft patch'. In Europe, the economy is still on its knees. The danger is the collapse of a company the size of GM could tip the global economy into recession.

Philip Shaw at Investec says: 'If GM was to go under, not only would there be significant knock-on implications, it would represent another blow to the UK's beleaguered manufacturing industry. It would also demonstrate once again that the old order is changing and the global economy is becoming more and more service orientated.'

A Transport & General Workers' Union spokesman said simply that the effect on the global economy would be 'devastating'. GM's troubles are already being felt in financial markets. The company is the second-biggest borrower in the European corporate bond market with about $300bn (£156bn) of debt, and its shock profits warning last month has been seen as the turning point in the credit cycle.

Credit rating agency Standard & Poor's revised the outlook for GM from stable to negative and warned that its present BBB minus investment grade rating was 'tenuous'. Analysts believe a downgrade to junk status is only a matter of time. That would force armies of investors unable to hold high-yield paper to dump the bonds.

The worries are spilling over to the rest of the car sector, with Ford and DaimlerChrysler bonds also under pressure. A GM collapse could have a domino effect, with the entire credit market hammered and borrowers forced to pull bond issues.

Shaw says: 'It would not be impossible to see a credit crunch, which would put the brakes on the global economy.'