2006 – General Motors
By David Cole, Peter DeLorenzo, Arthur Wheaton, Steven Szakaly, & Charles Fleetham – Chartered Financial Analyst – March 2006
In recent times, the debate over the fate of General Motors (GM) has only heated up as time appears to be running out for the world’s no.1 carmaker while it struggles to save its future. Accumulating pension and healthcare obligations coupled with falling market share continue to haunt the auto giant from Detroit. The problem is that being a gigantic company, no solution seems to be perfect. Does that mean that the company has reached the end of the road? The Analyst invited eminent experts like David E Cole, Chairman, Center for Automotive Research, Michigan, USA; Peter M DeLorenzo, Automotive Consultant and Editor, Autoextremist.com; Arthur C Wheaton, Workplace & Industry Education Specialist, Institute for Industry Studies, Cornell University, USA; Steven Szakaly, Economist, Center for Automotive Research, Michigan, USA; and Charles Fleetham, President, Project Innovations Inc., USA, to share their perception on what the future holds for GM.
How do you see GM in the global scheme of things (business), and especially in the auto industry?
David E Cole (DEC): GM is a very strong global player in the industry and, in fact, their sales outside of the US are greater than in the US now. I believe they will solve problems in the US and be a stronger company because of the present challenges.
Peter M DeLorenzo (PMD): GM will continue to struggle while trying to shrink its size to meet its market share level in the US. They do have very competitive and in some cases class-leading products in the pipeline. However, if they can hang on and get the intransigent UAW to get in touch with the dire reality of the situation facing the company, they have a shot. Time is the enemy, and they may in fact run out of it before they can emerge in a healthier state. Globally, I think GM is in much better shape with a huge upside potential. GM’s future profitability will come from the Asia-Pacific region. Future profitability is out of the question in the North American market for years to come, if ever.
Arthur C Wheaton (ACW): General Motors will continue to be one of the three largest auto companies of the world in the foreseeable future. There is, however, a good chance that Toyota will surpass GM in sales in the next three years. GM will continue to gain more sales in Eastern Europe, Asia (especially China) and South America. It will also continue to struggle in the US; especially, if there is a strike at Delphi.
Charles Fleetham (CF): In 100 years, if GM collapses today, I think business historians will see it as a turning point in America’s leadership of the world’s economy. Currently, GM is a wounded giant and has lost control of its destiny. It faces a sustained and ferocious attack by Toyota and Nissan on its US truck business, its last bastion of profitability in the American market. It has huge healthcare costs, retirement liabilities and is on the hook for several billions with Delphi. A strike at Delphi, which looks imminent, could mortally wound GM. Kirk Kerkorian, the infamous corporate raider had bought a sizable chunk of GM and is pressurizing GM to make dramatic changes. GM’s relations with the UAW are poor and will continue to deteriorate as GM cuts back, and cost-cutters zero in on the lucrative UAW-GM con- tract as the remaining untapped source of cash reserves. Given the aforementioned (and there are certainly more wounds that could and have been tallied), I think that GM is struggling for its life.
Steven Szakaly (SS): GM is a weakened automotive producer. It has a huge stable of talented engineers, but requires the management to take advantage of those talents instead of squandering resources, buying and then selling at loss stakes in other companies.
What kind of solutions would you suggest for the problems being faced by GM?
DEC: They must do several things. First, on the cost side—restructure their healthcare costs with the Union (underway); eliminate excess capacity; eliminate about 30,000 jobs (this will be mostly done with attrition); continue the good progress on product development and manufacturing issues; take full advantage of economies of scale on a global basis (underway); continue to restructure work rules in Union contracts (making excellent progress) and a lot more. Second, on the revenue side—accelerate the development of new products; partner with competitors in key areas (underway in the power train area); improve styling, etc.
PMD: I have said repeatedly that GM must get smaller in order to regroup and eventually get better. They have too many models, divisions and dealers for a company that is barely hanging on to 25% of the US market. CEO Rick Wagoner is trying to manage the contraction of the company, but the urgency of the situation is outpacing his measured approach. GM is still operating with a business model designed to maximize its advantage during its heyday of the 60s. And the make-up of the company is simply rendering them almost powerless in the face of relentless change and competition.
ACW: GM needs to revitalize its lineup of cars and reduce its dependence on large SUV’s and trucks. It needs to learn to work more cooperatively with its suppliers and to build long-lasting relation- ships to stabilize quality, reliability and profitability of both GM and its suppliers.
CF:
- Immediately cut compensation of all salaried workers (38,000) by 10% and suspend all bonuses and raises until profitability is achieved.
- Find a leader within GM who is committed to making the personal changes in his or her leadership style required to energize the company and the marketplace. When I read a
headline in the Detroit Free Press that says: “GM President Promises Personal Change”, that is, the day I will buy GM stock. - Reverse their traditional “we are on top—you are at the bottom” relation- ship with suppliers, starting with heartfelt apologies for years of dis- courteous and disingenuous treatment.
- Openly acknowledge the strength of America’s negative feelings about GM and its highly compensated workforce, design a communication campaign that faces this negativity with
brutal honesty and tap its energy for a turnaround. - General Motors, Invite Steve Jobs of Apple Computer to sit on the Board of Directors and become a catalyst to create a culture of design.
SS: Design, design, design! There is no excuse for GM not to build cars as good as a Toyota or a Honda. GM must design cars that capture people emotionally and provide a high quality, long-term product.
Do you think GM is suffering due to industry-related problems, or are the problems specific to GM?
DEC: Most problems are industry-related. Some are worse at GM, like healthcare; but others are similar for long-term manufacturers in the US. Generally, older, well- established organizations (private and public alike that have a stable workforce and a responsibility for retirees) have problems in competing with newer organizations without retirees.
PMD: Both. GM has its own built-in structural problems, but the industry, as a whole, has crushing legacy costs to deal with in terms of healthcare and pensions; along with union contracts that are simply obsolete in the face of global competition.
ACW: The problems facing GM at the moment are also being faced by Ford and to a lesser extent DaimlerChrysler. The problems are also directly linked to and causing major problems in tier I and tier II suppliers. When GM and Ford face profitability issues they have an immediate and direct impact on Visteon, Delphi and American Axle as well as other suppliers. The reduction in scheduled vehicles for production has a devastating impact on the viability of the sup- pliers to stay in business, as witnessed by the excessive number of bankruptcies and reorganizations in the suppliers to- day.
CF: Of course, GM is suffering from an onslaught of global competition and a glut of industry-wide manufacturing capacity. But, I think that GM’s leadership has uniquely failed to respond to external competition and the internal cost issues that bedevil it. A case in point: Ford faces similar difficulties, yet it is still profitable. And Chrysler has actually managed to increase its market share. In the final analysis, when you sweep aside the UAW, healthcare costs, and other embedded cost inefficiencies, GM is not making cars and trucks that enough people want to buy. I once read that employees, suppliers, and their friends purchase almost 50% of their American products. GM cannot shrink itself to success and that is what it appears to be doing.
SS: Many of the problems are specific to GM, the billions wasted on various in- vestments in other car manufacturers being one example. GM should have concentrated on growing and maintaining GM’s domestic automobile business instead. Imagine what would have happened if GM had invested the $4 bn wasted on Fiat into developing a hybrid car. GM would have been the first to market it; not Toyota.
What are the strengths still left with GM that it could use to wade through its troubles?
DEC: Excellent global presence, strong operational performance (which includes product development, flexible manufacturing, leadership, math-based engineering, capital, rationalized high volume component sets, etc.), and good dealers are some of the strengths. I expect to see a similar turnaround to what we saw with Nissan. Once Nissan got rid of the several lead weights around its neck, it improved rapidly. GM is in a similar situation. Nissan on a gross margin basis is now more profitable than Toyota.
PMD: Make no mistake, GM has some tremendous products coming and this business will continue to revolve around the strength of the product—as it has since day one. But they must be willing to let go of the past and embrace a new future in order to get there.
ACW: GM has the strengths of depth and human resources around the globe. They have significant partnerships with other automakers and countries to help them engineer new products and tap new markets. The relationship with Suzuki is quite important for the Indian market. It has also been largely underutilized in the other Asian markets with GM preferring to rename the Suzuki vehicles and call them Chevrolets.
For GM to wade through this major economic mess, it will have to increase its investments in new vehicle development and reach for more creative styling. They have greatly improved the quality of their vehicles while being unable to change the poor impressions of past mistakes. The cooperation between GM and Daewoo has been vital in producing a good small car for an affordable price. The Fiat partner- ship may have been a huge mistake, but it did yield a decent small diesel engine ready for mass distribution throughout the developing countries.
CF: From my readings and conversations with people who know and/or work for GM, I think GM’s strongest leader is Bob Lutz, and his efforts to implement a culture of innovation could make the difference for GM. Many years ago, Peter Drucker said that GM was a company without a soul. I think Lutz is trying to implant a soul in GM. His determination to open the culture’s doors to creativity and dissent is the best weapon in GM’s arsenal.
SS: GM has a highly talented engineering and even financial workforce, and GM’s UAW hourly workers are some of the most productive in the industry. While GM continues to face quality perception problems it can rebuild if management is able to bring vehicles that capture consumers hearts to the market and impress them with quality and durability. GM is not terminal; it can be cured.
With the present scheme of things do you think GM will file for chapter 11; and if it does, what kind of impact would it have on the industry, economy, employees and, more importantly, on its future?
DEC: I think the only thing that could drive GM to chapter 11 is a major strike with Delphi. I give this less than a 10% chance of occurring. A chapter 11 could trigger a significant economic disaster, since GM represents about 1% of the US economy. It would obviously hurt the employees and shareholders.
PMD: The next 12 months will determine whether GM will be forced to go into bankruptcy or not, right now it’s too early to tell. Let’s face it—there is simply no bigger automotive story than the future of GM and Detroit. All other stories pale by comparison; except for the corresponding rise of Toyota, of course. You can’t talk about the potential demise or massive restructuring of one of the greatest industrial concerns in history without reeling from the thought and the ramifications involved. I continue to be amazed by the media intelligentsia on both coasts here in the US and by certain congressman in Washington (who just happen to have import auto plants in their districts) who dance around this issue, insisting that what’s going on at GM will not negatively affect the entire country in some way, shape or form. That’s simply wishful thinking. The core issues facing GM—global competitiveness, US trade imbalances, healthcare costs and pension funding— are issues that the nation must deal with right now. This is not some isolated bad tiding that will only affect the Rust Belt in the ‘flyover’ states as they’re sometimes referred to here. No, this situation spells trauma for the en- tire country. America as a whole has been severely affected by our poor trade policies for decades; and now that the very manufacturing base of the country is under severe attack, people are finally waking up to the issues at hand. GM (and Detroit) is the lightning rod that will put all of these issues on the table. Yes, GM must build hit products, and it must get smaller and smarter to get better (as I’ve said repeatedly in Autoextremist.com), but without the corresponding serious discussions and actions in Washington, the US will face severe consequences. It can’t be a question of GM’s survival, because GM must survive for the sake of the country. There’s just too many lives and families at stake and too much of this country’s industrial fabric on the line for it to turn out any other way. Detroit and its for- tunes will be one of the national topics next year, particularly with the mid- term congressional elections approaching. It will be interesting to see how the political lines are drawn.
ACW: I think it is premature to speculate about filing for chapter 11. If GM does file for bankruptcy, it would be only if things get dramatically worse; most likely the result of a catastrophic strike at Delphi, and GM not being able to find replacement parts. GM has sufficient liquidity in cash to weather the storm for a few years. They are finally starting to realize that the SUV’s won’t save them and have canceled major redevelopment work on the TrailBlazer. The impact of a GM bankruptcy would devastate the US economy in manufacturing. There is an old American expression that says, “What’s good for GM is good for the US; what’s good for the US is good for GM.” They are tied together and are almost inseparable. When GM faces turmoil it has an immediate impact on its suppliers, as well as its domestic competition. When GM faces a problem it is assumed Ford and Chrysler must have the same problems, since they have the same union and similar con- tracts. The impact on the US labor unions would also be severe not only on the United Auto Workers (UAW) but also on many other companies and unions that base their wages and benefits on what they receive. In many cases, companies will pay equivalent compensation to avoid unions. So if the UAW has been a deterrent to underpay the employees, the GM bankruptcy could cause massive pay cuts and benefits for many companies including unionized and non-union employees.
CF: Without a dramatic change in the leadership process, I think GM will file for chapter 11 in 2007. Assuming they get legal relief from the UAW contract and similar relief from long-term supplier contracts, they could emerge as a successful niche competitor in the truck and specialty vehicle niches. (Hummer, Corvette, etc.) As for impact on the industry, I think it will be marginal. Wall Street and GM’s competitors are already taking their decisions based on a bankruptcy scenario. Although many people have written about the creative destruction that the demise of GM would bring, I don’t see it in Michigan. This region, due to its cultural biases against higher education, innovation, and diversity will find itself stagnating for decades to come.
SS: GM is still in a good financial position in spite of the risks and mistakes of the past. Because of the current strife at Delphi, GM is not likely to file for bankruptcy any time soon. The possibility is there; but it is very small.
Why didn’t GM sort out its present problems in their initial stages itself?
DEC: GM and others got caught in the perfect storm: Fast rise in material and petroleum prices (impacting the market for their most profitable vehicles), double digit increase in healthcare costs, and no ability to raise prices to cover in- creased costs (real prices have declined for almost 10 years). They needed a crisis to get important things done. In the past, the future of the company was never in question; it is, now.
The next few weeks will be critical. This should be a busy winter in Detroit.
PMD: Its bureaucratic structure and its moribund culture. GM managers never, ever thought this kind of scenario could ever happen. And now, they’re up against the ropes and reeling from the repeated body blows that the global economy has wrought.
ACW: GM is a very large bureaucracy, and being the largest manufacturer makes it difficult to change course. Turning the titanic around takes some time and space. There is a largesse that sets in making large-scale change more difficult. The American expression is “if it ain’t broke, don’t fix it”. Well, it is now painfully obvious that the old model and paradigm is broken and needs to be fixed. Many of the executives that are in the GM bureaucracy are more afraid of failure than to take chances on success. The boring design in many of the GM products reflects the unwillingness to take chances. GM has always thought that trucks and SUV’s will pay for all the lack of progress on cars. They gave up designing good and exciting small cars to chase the higher profit margins on trucks. They also failed to recognize the impact of high gas prices on their sales and the negative image of large SUV’s now that gasoline prices have gone up. There is still time to change for GM, but not much time for doing things the same way as before. Time is running out for Rick Wagoner before the share- holders give up on him. Kirk Kerkorian may be able to apply enough pressure on the board to make the right decisions and to get things moving a little more quickly. Bob Lutz was not able to crack all of the bureaucracy, but may have his moment now that the problems have come into the spotlight. Management will have to give up on the past conservative styling and start designing ‘must have’ vehicles.
CF: GM’s leadership culture is based on left-brain thinking. It thrives on the stereotypes of the industrial era of the 19th century—the power of an iron will, a culture of domination, treating the workforce as a giant machine, an internal focus that ignores the marketplace and sacrifices energy, and creativity for short-term efficiency. GM’s left-brain leadership style exacerbated its difficulties at every turn, and two of the biggest pieces of evidence were: It’s failure to forge a partnership with the UAW and its failure to influence the political sector to get the automotive industry healthcare and trade relief.
SS: There seems to have been a real emphasis at GM on securing foreign partnerships; deals like Fiat, Fuji Heavy, and Saab. This distracted GM and also drained away the much needed cash from development and product. It also distracted management from GM’s core responsibility—building cars.