MUNICH: For years, the overseas operations of Ford and General Motors helped buoy Detroit when times were tough in the United States.
But now, with the administration of President George W. Bush announcing Friday that it would step in to keep General Motors from falling into bankruptcy, and with Ford in serious trouble as well, fears are growing that the U.S. problems of the automakers will drag down their more successful units in Europe, Asia and Latin America.
And no matter what happens in Washington, the potential of an ultimate collapse by GM and even Chrysler, which sells almost exclusively in the United States, has stirred deep fears that the industry's problems are likely to do even greater damage to the already-battered European and global economy.
"There would be no winners, only losers," said Ferdinand Dudenhöffer, director of the Center for Automotive Research in Gelsenkirchen, Germany.
Dudenhöffer warned that the knock-on effect of a GM collapse for U.S. parts makers would be so severe that German manufacturers in the United States like Mercedes and BMW would have to rethink not just their American supply chains but their global ones as well.
"There's a big risk here," he said. "This would create a huge mess around the world."
Both GM and Ford were profitable in Europe last year and in the first half of 2008. But neither of the European operations is large enough to survive on its own, said Graeme Maxton, an independent economist who has long tracked the car industry.
"They'd need a parent of some sort," Maxton said. But it is not clear that another automaker would want to assume that role, given the slack sales hitting European giants like Renault, Fiat and Daimler. The tight credit markets would also inhibit any megadeals.
"Two drowning men clinging together don't make a good swimmer," he said.
Already, Dudenhöffer said, the image of Opel, GM's German subsidiary, is suffering among German consumers because of the bankruptcy speculation.
While an actual filing no longer looks imminent, any future move in that direction would cripple Opel's ability to obtain components from nervous suppliers, Dudenhöffer predicted, and hammer the entire car-parts industry, especially in Germany.
That is only one of the reasons many analysts are skeptical that Opel could survive as an independent company were GM to seek bankruptcy protection. A more workable solution might be to combine GM's entire overseas business, which would produce roughly three million to four million cars annually.
The parallel downward moves in both the U.S. and international automotive markets mark a turnabout from the usual pattern in which strength in one market offsets weakness in another. And markets outside the United States have generally been much more stable, in part because governments keep gasoline prices steadier by imposing hefty fuel taxes.
"Normally, North America and Europe don't move in tandem," said Louis Lataif, a former president of Ford in Europe who is now dean of the Boston University School of Management.
In fact, he said, one reason that Chrysler is in even worse shape is because its overseas business is so minimal. Chrysler had a German base when it was owned by Daimler from 1998 to 2007, but its operations are now largely confined to North America.
Despite record sales in 2007, GM earned only a razor-thin $55 million profit last year. It did better in the first half of this year, earning $297 million, but the second half is expected to be hit hard with losses.
Ford has performed far better overseas: It earned $1.4 billion in Europe in the first half of 2008, and nearly $1 billion in 2007. But it, too, is expected to be hurt by the severe downturn of recent months.
Over the years, Ford has tended to be stronger in Europe while GM has been more successful in China, said Peter Morici, a professor at the University of Maryland School of Business. And in recent years both companies have enjoyed fat margins and outsized profits in Latin America, especially Brazil.
In the first nine months of 2008, GM earned nearly $2 billion in Latin America, Asia, the Middle East and Africa even as its North American operations recorded a $5.7 billion loss. Similarly, Ford earned more than $1 billion in Latin America while it lost $4 billion in North America.
"Up until now, overseas operations have not been drains on cash," said Rod Lache, a Deutsche Bank analyst in New York. "But with sales now down 35 percent-plus in Brazil and off 30 to 35 percent in Western Europe, every market in the world looks like it will burn cash."
While it has been largely obscured in the current debate in Washington over aid to the ailing industry, Detroit and Europe are closely intertwined. Ford and GM employ a total of 120,000 workers across Europe and together sold roughly four million cars there last year. In fact, nearly a quarter of the 9.37 million cars GM sold worldwide in 2007 were purchased by European customers. In a statement Friday, GM Europe said, "We are working with our labor representatives and the European governments where we have big operations to provide liquidity for sustaining operations, while the U.S. team pursues its options." European executives at General Motors have appealed to Chancellor Angela Merkel of Germany for more than $1 billion in loan guarantees, while the Swedish government said Thursday that it would provide $3.5 billion in aid for Volvo and Saab, as well as suppliers. Volvo is owned by Ford, while GM controls Saab. The state of Aragón in Spain, which is home to GM's largest European plant, in Zaragoza, has also agreed to provide up to $200 million in credit guarantees.
In late November, the head of GM in Europe, Carl-Peter Forster, who has long compared his efforts to revitalize the carmaker's European business to those of a long-distance runner, told engineers at an internal meeting at Opel's headquarters in Rüsselsheim, Germany that they were now more like running a marathon up the side of a mountain. On Friday, with the financial situation of the company even worse than it was last month, Forster said in an interview that he would not speculate on the future of GM's operations in Europe or overseas in the event of a bankruptcy filing in the United States. But he acknowledged that parts suppliers were nervous. "They ask, 'Can you guys survive?"' he said. "We can. We do have cash in hand, and that's also why we've asked governments for help. We need the credit guarantees to sustain the relationship with suppliers."
Besides profits in the good years, GM's European operation "drives a sophistication in small to medium-sized cars," Forster said. "The know-how created in Europe has benefits in the U.S. and around the world, especially because the small-car market is so competitive here." John Fleming, the chief executive of Ford in Europe, said he was concerned about the "ripple effect" on suppliers if GM were to fail. "In the current financial situation," he said, "you'd have to worry about the implications on the supplier base."
Both companies have deep roots on this side of the Atlantic: Ford's British business dates to the era of Henry Ford, and GM acquired Opel in the 1920s.
While Volvo, Saab and other luxury brands have been financial sinkholes for their U.S. owners in Europe, it's a different story in the small-car market. More than 60 percent of their sales come from the Focus and Fiesta at Ford, and the Corsa and Astra at GM.
That is in striking contrast with the United States, where Detroit has long depended on light trucks and sport-utility vehicles to generate most of its profits and has ceded small-car dominance to the Japanese.
Ford, in fact, plans to reintroduce the Fiesta in the United States in 2010 to tap into resurgent demand for smaller, more fuel-efficient cars. But actually making money on those small cars has proved more difficult than moving them off the lot, especially for GM.
With 55,000 workers spread across 20 plants, GM's European work force is now down 40 percent from a decade ago. But with market share shrinking from roughly 12 percent to about 9.5 percent currently, GM remains under pressure to cut overhead.
Though Ford lost billions trying to crack the luxury market with brands like Jaguar and Volvo, industry experts say it has done a better job of reducing capacity, slimming payrolls and coming up with global winners like the Fiesta over the past five years. Still, when Ford reports sales for November on Monday, it is expected to show drastic declines from last year.
Fleming suggested that overseas units benefited the North American parent in profit as well as better products, like the fuel-efficient Fiesta, which Ford could adapt to North America quickly because it already existed in Europe.
He also pointed to his success in turning around Ford Europe as a template for what both automakers could do in the United States if they get through the current crisis.
"We didn't have the right products, we didn't have the right capacity," he said of the early years in the decade, when Ford lost billions in Europe. "We had the same issues as the U.S. industry does now. But we were able to accelerate development of the right products and get capacity in line with demand."
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