Demise of a great US corporation?

Every so often, American capitalism indulges in a ritual cull of an industry that is deemed to be obsolete. It happened with the Great Railroad Bust of the late 19th century, and the collapse of the US steel industry in the last quarter of the 20th – in the space of 25 years, American steel producers, until 1974 the biggest suppliers in the world, fell more than 90 per cent.

It also happened in the airline industry, with the demise of the great national carriers like PanAm and TWA.

You could argue the same is happening in the financial world now, with Wall Street giants such as Citicorp and Merrill Lynch selling off huge parts of their businesses in the face of the global credit crunch. The "Bulge Bracket" banks will inevitably get smaller as the financial recession gets deeper, but I think there is enough resilience there to bring them through the bad times, even if significantly downsized. It is hard to imagine lower Manhattan as another Pittsburg, which virtually ceased to function as an urban centre for a while during the steel downturn.

But the sector of US industry most likely to experience the next bout of blood-letting is, by common consensus, the motor business, and top of the list of candidates for financial hara-kiri is General Motors. The Detroit corporation that was once a watchword for American business dynamism and marketing expertise appears to be in almost terminal decline, and still makes more cars each year than any other manufacturer in the world. But it is increasingly making a product that fewer people want. We could just be witnessing the demise of a great US business giant.

The Wall Street Journal reported earlier this week that GM, under its mercurial Chief Executive Rock Wagoner, was considering yet another round of job lay-offs in an effort to reduce crippling wage costs, and was also planning to sell or close some of its big portfolio of brands. When you look at the financial state of GM, the reasons are obvious, yet ominous.

With its shares at a 50-year low and falling, GM is now capitalised at less than $6 billion (Dh22bn). It has a cash cushion of some $24bn built up during the "glory days" when its motor brands seemed to symbolise America, but is burning that cash at a rate of $3bn per quarter. Analysts believe it will need a $10bn cash injection to ensure survival beyond 2010. GM seems trapped in a vicious financial spiral from which escape seems increasingly unlikely. The terms "bankruptcy" and "Chapter 11" (the section of the US commercial code that allows companies to seek protective measures from its creditors) are being regularly mentioned in connection with GM.

What was its great strength – its almost iconic collection of brand names – is now being regarded as its most serious weakness. It has eight main brands that read like a history of Americans' love affair with the motor car – like Cadillac, Chevrolet, Pontiac, Buick and Hummer. But there are also some names in there that symbolise the problem – Saturn, Saab and GMC do not have the same cachet as the others, and analysts are beginning to question why GM needs them at all.

The belief in Detroit now is that, rather than being a great strength that demonstrates the breadth of GM's product offering, GM's brand portfolio is now a serious handicap. It is costly to develop new models across such a wide range of brands, and the products are increasingly competing with each other in the sales forecourts.

A prospective buyer of a mid-range saloon car in the US will find six on offer from GM – two from Buick alone – in contrast to Toyota, which sells as many Camrys in the US as all of GM's six models combined.

So GM has apparently decided that only Cadillac and Chevrolet are "core" brands, and is considering the future of all the others. Closure, mothballing or sale are all real possibilities. GM has already announced the proposed sale of Hummer, the gas-guzzler which is unviable as oil prices soar above $140 per barrel, while Saturn and Saab are also marked for disposal or closure.

With fewer cars to sell, GM will require fewer people to manufacture and sell them. Employee numbers have been falling every year of this century, and GM now employs around 270,000 people, both blue and white-collar. But while the manufacturing workforce can be quite easily downsized, the salaried staff bill is harder to tackle. It is in this area, among the 70,000 or so white-collar staff in the US, that the axe is likely to fall.

Ironically, GM's global business is doing rather well, with Chinese and Middle East demand for some of its brands increasing. Last year GM sold more cars abroad than in North America, for the first time in its history. One option is for GM to move production of Buick to China. GM is not alone in the US automotive industry to be contemplating such drastic surgery. Ford has sold Land Rover, Jaguar and Aston Martin, and is thought to be considering the future of Volvo. Chrysler – having sold its eponymous building in New York to UAE investors – is said to be considering the future of the brand name itself, to rely on marks like Dodge and Jeep.

But it is at GM that the crisis is at its most severe. With the cash rapidly running out, its financial options are severely reduced. It could cut dividend payments to save money, but this would put further pressure on the shares. One plan to ease it through the inevitable round of job cuts is to offer its workforce a share of its equity in return for sacrifices on wage costs, but this too could just add to the unwanted equity washing round the market.

Wagoner's course of action over the summer – decisions are reportedly looming at the August board meeting in Detroit – will decide the future of this one-great American corporation. Will it go the way of the railroads, steel and the airlines? If so, it would be the first major victim of the global recession.