News: Analysis & Commentary
Commentary: GM: "Out with the Olds" Is Just the Start
Finally, some harsh medicine at General Motors. After years of excusing away its steady market-share decline, GM CEO Richard Wagoner announced on Dec. 12 that the company will ax its limping and stodgy Oldsmobile division. The auto giant will also sack 10% of its salaried workers--6,000 in the U.S. and 1,700 in Europe--and drastically cut production in Europe, where losses have been mounting.
To help him manage those tough issues, Wagoner tapped a high-powered industry veteran. On Dec. 13, he brought in John Devine as vice-chairman and chief financial officer. Well respected in the industry and on Wall Street, Devine had been Ford Motor Co.'s chief financial officer from 1994 to 1999 before leaving to briefly run a venture capital firm. "One of the things we have to do is make our business more even-keeled in the good times and the bad times," Devine says. "That's not easy."SKEPTICAL STREET. Certainly, Wagoner deserves credit for finally pulling the plug on Oldsmobile. There's no good reason why GM took so long to get rid of the ailing division. More important, Wagoner's moves may not go far enough in addressing GM's problems, which include excess capacity and bland offerings elsewhere. Despite the news, Wall Street wasn't buying. GM's shares only nudged up one dollar, to 52.
Truth to tell, the Olds brand should have been retired long ago. It has been slowly dying since the 1980s, when the 103-year-old marque sold more than 1 million vehicles a year. Now it sells fewer than 300,000. The Olds closure combined with the job cuts will incur a one-time charge of some $2 billion in the fourth quarter. But Wagoner, who became GM's top exec in June after nearly two years as president of the company, is counting on the restructuring to finally help the auto giant get a handle on excessive costs.
Wagoner's strategy is a smart first step. But even by shuttering Oldsmobile, GM hasn't addressed the critical problem of excess production. That's a key reason why GM's profits are much skimpier than at its smaller rival, Ford. Just to cover costs at its plants and other overhead, GM needs to sell about 5.2 million vehicles a year, says Merrill Lynch & Co. analyst John A. Casesa. With most analysts forecasting GM sales of about 5.3 million vehicles next year, that portends slim profits. "This is a slight step in the right direction," Casesa says. "But unless (the strategy) involves plant closings, it won't do anything to address GM's overcapacity."
Analysts estimate GM has 34% of North American production but just 28% of sales--and last month it fell to less than 26%. So even if its market share climbs back to 30% this year--which analysts say is unlikely--there's still plenty of room to cut. "More tough moves may be coming," admits one GM executive.
So far, GM hasn't been willing to bite the bullet. To thin inventories, the company is temporarily cutting production by 14% in the first quarter. It will also lay off third shifts at some plants and cut overtime at others, says GM product development chief Tom Davis. But without permanent cuts, GM can only boost profits with strong sales growth. Yet the carmaker has rarely delivered on promises to win over more car buyers.
Certainly, GM is trying. It's overhauling its lineup by adding new entry-level vehicles to lure young buyers that have forsaken its brands. Fresh sport utilities should also help fatten profits. But it still has a long way to go. Once-strong sellers such as Saturn have lost momentum. And even its premium brands, Cadillac and Buick, have lost out to imported luxury autos.
Wagoner called the decision to drop Oldsmobile "emotional." But GM may be forced to make many more tough decisions before it reverses its slide. At least the auto maker's critics won't have Oldsmobile to kick around anymore.By David Welch; Welch Covers GM from Detroit.Return to top