The dinosaurs were big too

Anti-globalisers and socialists demand special curbs on multinational corporations, saying these are far bigger than entire countries and so have too much power. Well, General Motors has long been the biggest MNC in the world in terms of sheer assets ( $ 479 billion). It has been so equated with American prosperity that a popular slogan in the 1950s went “what’s good for General Motors is good for you.”

So, the ordinary reader may be surprised to hear that mighty General Motors lost a whopping $ 1.1 billion in the last quarter, and looks like losing more. In consequence, its bonds have been downgraded to junk status by rating agencies. Worse, the rating agency says the future outlook is negative. Translation: the company may lurch into bankruptcy unless it does something drastic.

General Motors is not alone. Its old rival Ford has also been demoted to junk status. Both companies have steadily lost market share to nimbler, smaller companies. All this has happened without any special measures to curb these giant corporations. Global competition alone has done it. So much for the myth that the size of MNCs makes them dangerous superpowers.

Even as General Motors and Ford have sagged, Tata Motors has zoomed. There lies a lesson. The global system is not rigged in favour of giant MNCs and against newcomers.

The same lesson flows from auto ancillaries. The biggest auto ancillary company in the world, Delphi, had sales in 2004 of $ 28.7 billion, yet lost $ 36 million. Its main competitor, Visteon lost a mammoth $ 1,499 million. Even as American auto ancillary giants struggle, Bharat Forge has enjoyed revenues and profits rising at 30% annually, has taken over a German company CPD, and become the second biggest forging company in the world. Even a medium sized Indian company, Amtek, has taken over GWK (UK), New Smith Jones (US), and may take over Sigma (UK).

Size made the dinosaurs look pretty powerful for a time. But, as they saying in boxing, the bigger they come, the harder they fall. The dinosaurs became extinct because they could not adapt to a changing environment. The cockroach could, and so flourished while the dinosaurs disappeared. The lesson should be clear for both MNCs and anti-globalisers.

Size has both advantages and disadvantages. For a long time size enabled General Motors to borrow at the lowest interest rates, buy out competitors, and bargain for the lowest prices with suppliers. It gave the company the status of a national champion and huge lobbying power.

But size had disadvantages too. When something went wrong, it did so on a massive scale. In recent years, General Motors and Ford left the standard car market to Japanese rivals, and focused on giant SUVs, crosses between jeeps and cars. SUVs yielded bumper margins for a time. But they guzzle petrol. The rising price of oil has hit sales of SUVs, and thus hit the core profitability of GM and Ford.

Something similar happened in the 1980s. American companies initially dismissed Japanese cars as small, cheap, and of low-quality. But Japanese companies relentless improved quality while keeping costs low, and caught the American giants napping. By the early 1990s the American giants were in crisis. In 1993 General Motors escaped bankruptcy only by shutting over a dozen factories and sacking 73,000 workers.

General Motors proved more adaptable than the dinosaurs. But it learned that size was irrelevant in a competitive marketplace, that sometimes downsizing alone ensured survival.

It currently has other problems of size. In its dominant decades, it signed contracts providing generous health and pension benefits to retirees and employees. Big size and profits translated into big entitlements. Alas, these became a millstone as the company shrank its workforce. General Motors now spends more money on health benefits to workers and retirees than on buying steel! Retiree benefits cannot be fixed by sacking workers.

Some experts fear that General Motors will have to opt for Chapter 11 bankruptcy proceedings. This chapter provides companies the temporary right to default on debt and labour obligations pending attempts to arrange survival by shedding part of its debt and union obligations.

Junk status expresses the market’s belief that General Motors is on the Chapter 11 path. Trends in the credit default swap show the market believes that there is a 29% chance of default.

General Motors may yet downsize again and survive, as it did in 1993. But this carries the key lesson that size should not be mistaken for financial power, and MNCs are not financial superpowers. The global market system is not rigged by them. On the contrary, the global market provides plenty of opportunities for good, small companies to beat the biggest giants. That is why what is good for Bharat Forge is good for India.

What do you think?