The Rough Road Ahead For G.M. and Ford

THE American automotive industry is facing its darkest hours in decades, says Dietmar A. Ostermann, vice president and auto industry specialist at the consulting firm A.T. Kearney and a former BMW engineer. Huge layoffs, he says, are the only solution. Here are excerpts from a conversation:

Q. How serious is the situation that General Motors and Ford are facing?

A. It’s the worst it has been in the 20 years that I’ve been associated with the automotive industry.

Q. What is at the root of the problem?

A. Consumer demands are shifting. General Motors and Ford have not been at the forefront of those demand shifts. Quality is a very significant issue, whether perceived or real. Companies such as Toyota have been given a lot of credit on that score. There’s a lot of volume shift away from Ford and G.M. toward Toyota, Honda and Nissan. This trend will continue.

 At the same time, we have increasing raw-material costs. We have massive overcapacity in North America. We also have increasing health care costs. The situation is actually getting worse, not better.

Q. Do you blame management of G.M. and Ford for the companies’ difficulties?

A. If you are top executives of a large American corporation, you have to be responsible for the actions that the company has taken. Management is not responsible for increasing raw-material prices, clearly, but management is responsible for the design of the vehicles. It’s not entirely management’s fault. But if you’re competing in the North American marketplace against Toyota and Honda and Nissan, you can’t say that it’s all unfair. That’s not the case.

Q. What would you do if you were Rick Wagoner, chairman and chief executive of G.M.?

A. You have to design cars that are exciting to people. That’s improving at G.M. and will continue, but I don’t think at this point in time that you can design yourself out of the problems you’re in.

 G.M. has to aggressively cut its capacity in North America. They’ve announced the closure of two assembly plants. I don’t think that’s anywhere close to enough in view of the volume drop that has already occurred and future market-share losses that are coming. If you look at the entire infrastructure of assembly plants, power train plants and stamping plants, they need to do a lot more.

Q. What can G.M. and Ford do about their health care costs if the United Auto Workers resist changes to their contracts?

A. There’s a lot you can do within the framework of the union agreement. It’s not a surprise to me that the contract will not be terminated early. It’s not a surprise that union insists on keeping its contract.

 But there are two big areas which need to be worked on. The first is pharmacy benefits — the way you buy drugs — which is entirely within the control of G.M. and Ford. The situation is not satisfactory. Medco, which is the pharmacy benefits manager, has way too much control and is gaining way too much profits. That supply chain of how drugs are acquired and distributed to employees needs to be rethought and better managed.

 The second area is how the health care plan is designed. That needs to be aggressively studied, not only by benefits professionals but also by business managers.

 That might mean you choose certain service providers and deselect others. You might choose certain treatments and deselect others. You would focus a lot more on preventive activities and management of the people who are really sick. Disease management techniques, one would call them.

Q. Are health care costs the dominant problem facing the American auto industry?

A. No, it’s just one element. If they have combined automotive sales of $150 billion-plus a year, G.M. has $6 billion in health care costs and Ford has $4 billion. Even if you drastically reduce those costs by 25 percent, which would be dreaming, that saves a billion, maybe two. The cost problem, however, is significantly larger than that. That’s why consolidation of manufacturing needs to happen. Unfortunately, it will not be pretty.

Q. Both companies are spending billions in marketing to improve the image of their brands. Will that work?

A. The consumer is significantly influenced by the brand cachet around quality. Like it or not, Toyota has that cachet. It didn’t have it 20 years ago.

 Look at the latest quality publications. Jaguar was terrific. It ranked No.2 in North America. Unfortunately, they will have to do it for 10 more years before the consumer will actually believe that Jaguar is a high-quality car because it has been hampered by the image of 10 years ago that it spent more time in the shop than on the street.

Q. How many G.M. and Ford jobs might go?

A. It could be tens of thousands. That’s not surprising if you look at what the automotive supplier industry is going through. Some of those companies are shedding half of their work forces. It could be pretty massive for General Motors or Ford.

Q. Is government action desirable or appropriate to help the American automotive industry survive?

A. No. I think that would be absolutely the wrong thing to do. That’s what happened in the airline industry. I would not suggest it should happen in the automotive industry. Thank goodness, President Bush has already opted in this direction. Let Ford and General Motors compete.