The U.S. auto market is burning rubber. Fueled by red-hot domestic sales, Ford Motor Co. on Oct. 26 announced record third-quarter profits of $1.1 billion on revenues of $30.6 billion. Just two weeks before, Chrysler Corp. had posted record quarterly earnings, too, of $651 million on $11.7 billion in revenues. Little wonder, then, that Wall Street is still fuming over General Motors Corp.'s results. The world's biggest auto company, which reported on Oct. 20, earned just $552 million on sales of $34.5 billion--mainly because its core North American auto operations lost $328 million. In two disastrous days, gm's stock skidded 12%, to a new 12-month low near 41--and appeared likely to stay there for a while.

Triggering the sell-off: growing fears that gm's massive turnaround effort is stalling. After more than two years of strenuous cost-cutting, the company has slashed its blue-collar ranks by 20%, to 244,000 workers. Parts suppliers have coughed up some $4 billion in savings. But it's nowhere near enough. Managers now realize that the next round of improvements must come "within our own four walls," as Chief Financial Officer J. Michael Losh puts it--and that's where gm seems to be having trouble. "The low-hanging fruit has been picked," says analyst David Bradley of J.P. Morgan Securities Inc. "Now you've got to get the ladder out. And by the way, the wind is blowing."

A few of gm's rungs may be rickety, too. Most worrisome: The auto giant's rush to boost its lagging productivity is slackening. gm significantly cut the number of workers it needs to build a vehicle (chart). The average number of hours it spends per vehicle fell 12% in each of the past two years--reaching 31 hours last year, vs. domestic industry leader Ford's 24. But this year, Losh admits, gm's pace of improvement has fallen off.

To be sure, the third quarter is typically Detroit's weakest. Assembly-line shutdowns for summer vacations and the switch to new models always take a toll on output. In addition, gm was hit by two strikes that pared the quarter's net earnings by $150 million. But it could have been much worse. Only an unexpected $200 million tax credit helped keep the company from spilling more red ink in North America. Even its international auto operations, a profits stronghold in the past, slid 40% from a year ago, although analysts expect the improving European economy to help solve that problem.

QUICK CHANGES. Now, with Losh hinting that the company's cost problems will continue to hit earnings in the fourth quarter, analysts are scrambling to slash their gm earnings estimates. Salomon Brothers' John V. Kirnan knocked $1.1 billion off his fourth-quarter forecast--lowering his projection to a profit of $1.1 billion on sales of $39 billion. He cut his 1995 estimate by 19%, to profits of $6.7 billion on revenues of $153 billion, and trimmed 1996's outlook by 14%, to profits of $9.4 billion on revenues of $161 billion. That would hardly be a disaster. But spiraling problems related to gm's productivity woes likely will keep it from matching Ford and Chrysler's performance.

GM'S problem is no longer old bugaboos such as quality and styling. New models such as the Oldsmobile Aurora and Chevrolet Blazer hold up well on those fronts. But when it has new models to sell, gm has botched its manufacturing startups. The latest is the slow launch of the new Chevrolet Cavalier. Last year it was the Aurora, the Chevy Camaro, and the Chevy Lumina. "There has been one consistent thing at General Motors," says Furman Selz Inc. analyst Maryann N. Keller. "Every launch is a disaster." Admits G. Richard Wagoner Jr., president of gm's North American unit: "We've lost some unit [sales] in crank-ups."

Indeed, the glitches cost gm dearly. Because of scheduled downtime alone--vacations and model changeovers--it lost an aggregate 91 weeks of production during the first nine months of 1994. Wagoner won't say how much more was lost by factories that failed to meet schedules. gm extended changeover times to install new, more flexible equipment, "so we can make faster changeovers in future," he says. He also says gm is restarting its factories slowly to ensure top quality.

Another problem is steep engineering costs. In addition to scrambling to meet new safety and environmental regulations, gm still spends too much on future products, Losh says. While Chrysler and Japanese carmakers develop new vehicles in about three years, it still takes gm nearly four. All told, for instance, gm spent 43 months getting the Cavalier out--not counting an additional one-year lag because it was short of cash in the late 1980s. "We need to shorten our product-development time and improve our efficiency," Wagoner says. The company has hired consultants A.T. Kearney to study the problem, and is promising analysts a report next spring on new streamlining plans.

HIGH HOPES. In some ways, even gm's labor unrest is tied to its productivity lag. Take the four-day strike in late September at its huge Flint (Mich.) facility. If gm could build cars faster, it wouldn't be demanding the heavy overtime that pushed exhausted Flint uorkers onto the picket line. Solving the strike cost gm plenty, too. It agreed to hire nearly 800 new workers there, and similar concessions will probably avert strikes at other overworked factories that were threatening walkouts. But while new jobs and profit-sharing for blue-collar workers have brought labor peace to Ford and Chrysler, gm's rocky turnaround could mean more strikes in the next few years.

GM'S stock fell so far in part because Wall Street's expectations were high. After Chief Executive John F. Smith Jr. took charge in April, 1992, he and his crew of young turks began cutting costs at breakneck speed. Savings from plant closings, early retirements, and supplier price cuts often shot straight to the bottom line, generating profit improvements of roughly $1 billion per quarter for eight straight quarters, notes analyst Bradley. gm also is tackling tougher self-improvements, such as reducing the complexity of upcoming models to cut assembly time and designing future models to share more common parts, which could pay off eventually. But faith in gm's ability to do all that is running short.

Wagoner insists gm is continuing to learn from its latest mistakes. For instance, he says that poorly fitting metal parts delayed the Lumina launch. In the future, gm will try to iron out such problems by building prototypes sooner and involving suppliers earlier, he says.

But even Smith reckons gm is only about halfway turned around. Many analysts figure it still has three to five years to go, and they worry it will lose momentum. Wall Street's rebuke could help. "It got our attention," says Wagoner. But solving gm's problems may be harder than its brass ever expected.

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