Work With Competitors to Survive: A Lesson From GM


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Want to guess what the stock market will do next week? Good luck. With turbulence the new status quo, there's only one economic prediction I'm willing to make with reasonable certainty: 2008 will end go down as a miserable year for U.S. automakers.

The auto industry was already at the bottom of a very steep downswing, thanks in part to the summer's record-high gas prices. Then came the global financial system's near-total meltdown, and it looked like the big car companies were headed for life support.

Not long after General Motors' stock hit a stomach-churning 53-year low, we began hearing whispers about talks between GM and Chrysler, currently owned by private-equity firm Cerberus Capital Management. News that the Big Three might become the Big Two could be taken as yet another sign that the U.S. economy is in serious trouble.

But it could it also could serve as an encouraging sign, a symbol of perseverance against tough odds? This is a make-or-break year for many small businesses, as owners struggle with declining sales and tight credit. When you're in a fight for survival, you have to consider all options -- even working with competitors you once battled against. You may find you have more in common than you think.

Most of the quickie takeovers we've seen in recent weeks have shown clear benefits for the buyers. Bank of America bought Merrill Lynch because Merrill brought with it investment banking and brokerage expertise. Wells Fargo , based in California, wanted Wachovia because it had branches and business ties elsewhere in the country, which would help make Wells Fargo a national player.

A GM-Chrysler deal has no such obvious benefit. Both companies have too many cars in production that they can't sell, too many factories making those cars, and too many workers on the payroll with high medical costs. Joining together would only bring double the problems, right?

"These are unusual times, and they call for unusual measures," says John Wolkonowicz, senior automotive analyst for North America at Global Insight. "A takeover of Chrysler could make sense for GM."

GM, you see, is heading for a serious cash crunch. The company is currently burning through about $1 billion each month, and while it adamantly denies it's headed toward bankruptcy, it can't keep up such spending over the long term.

"The problem for GM is that their restructuring plan was not based on the current economic reality," says Wolkonowicz. "They're not going out of business tomorrow, but short-term cash-flow issues could be a problem. They are probably going to need more cash than they thought."

Chrysler, it turns out, is sitting on almost $12 billion of cash. And GM has GMAC, its credit arm, which got a much-needed confidence boost from the government's bailout plan. If Cerberus were to get a stake in GMAC, it might be willing to hand over Chrysler and its cash.

"Cerberus has a wonderful track record, but they bought Chrysler just before everything started to go down the drain," says Wolkonowicz. "They couldn't make it work, and now it appears they've put Chrysler on the market."

Whether or not GM and Cerberus make a deal, the Big Three already have learned to play nice. Given the high development costs of the auto industry, automakers have cooperated occasionally on big-ticket technology over the years. Recently, a new automatic transmission was developed by GM with Ford helping to shoulder the cost; the transmission is now being built in both GM and Ford plants.

"Sharing costs is one way to survive or stay profitable," says Wolkonowicz. "I think you'll be seeing more of it."

(As for the rumors that Ford may be up for a merger as well, paving the way for a "Big One" automaker, Wolkonowicz says it's unlikely: "Ford is arguably in the best shape of the Big Three, and their act is reasonably well together. They want to go it alone.")

Looking to your competition for salvation is not an obvious (or welcome) option. But they're the ones who know your industry best. Whether it's an all-out merger or sharing the cost of expensive research, it can make sense to join forces with a rival. Desperate times, after all, sometimes call for desperate measures. Photo gallery -- Grocery-Getters to Supercars: The Cars of 2009

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