Debt, Toyota imperil No. 1 GM

Auto giant doesn't seem able to stop foreign rivals

Bonds may soon be rated `junk'


DETROIT - Since the Great Depression, General Motors Corp. has reigned as the world's largest automaker and a pillar of American economic might. But now the company is broadly struggling and facing the humbling possibility that within a few years it will be displaced by Toyota Motor Corp.

General Motors, which controlled nearly half the American market as recently as the late 1970s, held just over one-quarter in February.

Last week, the company said that it would produce 300,000 fewer cars and trucks in North America in the first half of this year, a 10 percent drop from a year ago.

Earlier, it announced plans to close its Baltimore van plant May 13, cutting 1,100 jobs.

GM's important European operations have lost money for five consecutive years, and rising interest rates are expected to cool its lending division.

With its shrinking profits dwarfed by those of Nissan Motor Co. Ltd. and Toyota, GM's debt is threatened with a downgrade to a "junk" bond rating, a move that could force it to pay more to borrow money.

The company's financial health is no trivial matter. With 7,600 dealers across the country, its eight brands, from Chevrolet to Cadillac, have long been American icons.

The company has operations in 32 states; in Michigan and Ohio, both GM and Delphi, its struggling former parts subsidiary, are among the top 10 employers. GM is also the nation's largest private health care payer, giving coverage to 1.1 million Americans. Hundreds of thousands of retirees depend on the company's pension checks.

GM is in better shape than it was when it lost $20 billion more than a decade ago and was on the brink of bankruptcy. But many analysts say it will be treading water for years to come and extending economic distress across the industrial heartland.

Company executives, while acknowledging that GM faces serious problems, say they are confident they can weather any storm.

"We've been ahead for 73 years in a row," G. Richard "Rick" Wagoner Jr., GM's chief executive, said in response to a question at a January news conference about Toyota's looming presence. "I think the betting is we'll be ahead for the next 73 years."

"Is it a birthright?" he added. "Absolutely not. Could we blow it next year? I doubt it. Could we blow it in 10 years? For sure. We could do anything in 10 years."

Wagoner declined to be interviewed for this article. With the company's stock down more than 50 percent on his watch, his legacy is on the line as is the company's.

Five years ago, at 47, Wagoner became GM's youngest chief executive. He was a protege of John F. Smith Jr., who became chief executive after a boardroom coup in 1992. Smith pulled the company from the brink of bankruptcy to a record profit by 1999.

Wagoner did not promise to reinvent GM.

"The state of business at General Motors Corp. is strong," he told shareholders in 2000, adding later that the company's success "gives us a great chance to build off what we're doing."

Today, however, many analysts say GM is still unable to solve some of the problems it had in 1992, namely the seemingly unstoppable surge of efficient foreign competitors like Toyota.

The strategy of Wagoner, now also GM's chairman, has been to continue his predecessor's work of pushing global expansion even as he is now moving to shrink GM's disparate global operations into a single manufacturing, design and engineering organization.

Few industry analysts call him a visionary leader, but many see him as a skilled executive who has held the company together despite being dealt a difficult hand. Others say GM needs a more radical approach to ensure its survival.

"It's not like this tide can't turn," Wagoner said in January. "It's not going to turn by cheerleading or me convincing you here; it's going to be great products. It's going to be helped if exchange rates get in line with what they should be, so companies that don't need to get subsidies aren't getting them."

The prevailing view among financial analysts is that GM is not close to bankruptcy because it is still clinging to profitability and has more than $23 billion in cash in its automotive operations. While it has about $30 billion in debt, those payments are stretched out over decades.

A few analysts offer a bleaker assessment. Sean J. Egan, managing director of the independent debt rating firm Egan-Jones, said Wagoner was performing "miserably," adding that "some drastic action is needed in the very near future to even have a chance of turning around this slow slide to irrelevance."

Egan thinks bankruptcy is a real possibility because, he says, GM can burn through large amounts of cash quickly; he does not recommend buying GM bonds with maturities of more than 2 1/2 years.

But B. Craig Hutson, an analyst at another independent bond rating firm, Gimme Credit, thinks GM has "the liquidity to withstand even a worst-case draconian scenario."

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