As recently as two years ago, General Motors Corp. (GM ) was widely considered the dog of the car business. Despite its industry-leading $176.6 billion sales in 1999, GM generated less profit than smaller rival Ford Motor Co. (F ) Its productivity and quality lagged the Japanese by a mile. Even worse, most of the industry thought GM lacked the talent to design the hot cars needed to turn its business around.
Now Ford is reeling, its CEO, Jacques A. Nasser, having been shown the door. And GM's leader, G. Richard Wagoner Jr., 49, is looking pretty bright. Sure, the comparison with Ford is suddenly a lot easier. But Wagoner has also made some real gains. On Mar. 1, GM reported that its bread-and-butter Chevrolet Div. outsold archrival Ford Div. for the first time in more than a decade. A week earlier, GM Chief Financial Officer John M. Devine wowed investors by upping the company's profits forecast for the first quarter by $110 million, to $660 million. Meanwhile, Ford and DaimlerChrysler remain in the red. For the first time in years, many Wall Street analysts are recommending GM's stock. Says Sanford C. Bernstein analyst Scott Hill: "GM is doing all the right things right now."
How has Wagoner stopped GM's slide? Since becoming CEO in May, 2000, he has slashed costs, replaced GM lifers with top outside talent, and made significant gains in both vehicle quality and manufacturing productivity. The cost-cutting gave him the financial flexibility to wage a price war. That has helped him halt, for now, the company's two-decade free fall in North American market share. In the all-important truck market, for example, GM has taken the lead from Ford, thanks to hot-selling SUVs like the Chevrolet TrailBlazer and Tahoe, which have dramatically upgraded engines and interiors. All told, GM earned $601 million last year on sales of $177.3 billion.
Wagoner hasn't turned it all around yet. GM gets its profits from a narrow base--mostly from a handful of pickup trucks and SUVs, where it competes mainly with Ford and DaimlerChrysler. But that won't last forever as the Japanese rev up in that segment. Nor has GM figured out how to spice up its passenger cars, which typically lose money. And just like Ford, GM's European operations are bleeding red ink. Furthermore, GM has huge pension and health-care costs, which will be a drag on earnings for the foreseeable future. Says Wagoner: "We've made strides, but we still have our challenges."
Give him credit for fixing a lot of problems, though. The biggest improvement is in how GM actually builds cars. These days, the process is both faster and better. For the past decade, the company has been steadily forcing its assembly plants to get leaner. It has used early-retirement packages to thin its plant workforce. That enabled GM to introduce technology and work procedures that require less labor and to replace some aging factories with more efficient ones. In fact, GM's variable costs--including labor, warranties, and inventory--fell below Ford's in 2000 as GM got cheaper and Nasser lost his focus. Those costs weigh in at 61% of GM's revenue, vs. 65% at Ford, says UBS Warburg analyst Saul Rubin.
You can see the results in the productivity numbers. Where GM once lagged all of its big competitors, it now is ahead of Chrysler and essentially tied with Ford. GM took 40.5 hours to build a car at the end of 2000, according to the latest figures available through research firm Harbour & Associates LLP. That's down from 48.3 hours in 1997 and compares with 39.9 for Ford today and 44.8 for Chrysler. GM still has a ways to go to catch Toyota (31.1 hours), Honda (29.1), and Nissan (27.6).
All of that gives GM a cost advantage over Ford and DaimlerChrysler that it has used adroitly as a weapon in the auto makers' price war. GM has been able to use its stronger balance sheet and lower cost structure to jack up incentives and sell more cars and trucks. Its 0% financing campaign and $2,002 rebates in January forced competitors to spend money when they were cash poor.
The ploy worked. Last year, GM stole buyers from Ford and DaimlerChrysler, stabilizing its tumbling market share at 28%. Ford's share fell 1.1 points, to 21.9%, and DaimlerChrysler dropped 1.3 points, to 13.2%. The victory had its price: GM's profit per vehicle fell from $773 in 2000 to $367 in 2001. But both Ford and DaimlerChrysler lost money.
GM has also seized the lead in quality from its domestic competitors and is catching up to the Japanese. A lot of that has to do with designing cars to be built more easily and just being more careful during assembly. Consider that in January, 2000, 43% of GM's cars were flunking inspection as soon as they rolled off the line. Today, the figure is down to 16%. Its cars and trucks now average 146 problems per 100 vehicles, barely trailing Nissan at 145 problems and not too far behind Honda, with 133 problems, and Toyota at 115 problems per 100 vehicles, according to J.D. Power & Associates' 2001 initial quality survey. DaimlerChrysler had 154 problems per 100 vehicles, and Ford had 162.
Wagoner had a lot to tackle when he took over from John F. Smith Jr., but not a lot of in-house talent at the top. He hasn't hesitated to reach outside GM's headquarters when necessary. GM needed a better car guy than Wagoner could find in his own ranks, so last summer, he hired former Chrysler Corp. guru Robert A. Lutz as head of product development. Lutz, who has since been elevated to head of North American operations, is charged with bringing taste and style back to GM's lineup. And he has to do it within a budget. The cocky and ever-macho executive, who was responsible for such hits as the Chrysler PT Cruiser, has already trimmed GM's fat product-development organization. Lutz disbanded the separate design studios for each vehicle division that were set up under former GM North American President Ronald L. Zarrella, who left shortly after Lutz was hired. In its place, GM has three studios that will compete to style new vehicles.
The Lutz hiring created plenty of buzz in Detroit, but tapping Devine may have been just as vital. He has rebuilt tattered relations with Wall Street, forced GM to spend more wisely, and strengthened its balance sheet. Among his moves: landing a deal to sell GM's Hughes Electronics satellite business to EchoStar Communications Inc.
But Wagoner still faces formidable problems. In Europe, where its Adam Opel subsidiary is struggling to cut production and get fresh models to market, GM lost $1 billion in the past two years. GM bought a 20% stake in Italy's Fiat Auto two years ago. To save money, the two companies are sharing purchasing and engine development. But Fiat lost $478 million last year, and starting in 2004, parent company Fiat Spa has a "put" option that could force GM to buy the remaining 80%. Add that to GM's 49% stake in money-loser Isuzu Motors and its interest in owning a piece of bankrupt Daewoo Motor, and "GM has allied itself with some of the worst car companies in the world," says Burnham Securities analyst David Healy.
Meanwhile, GM labors under a huge disadvantage because of its pension and health-care costs. It has 2.5 retirees for every active worker; Ford's ratio is 1-to-1. When the stock market soured last year, GM had to cut $1.2 billion from this year's earnings to pad its pension fund. Add in cushy benefits--GM's union workers have no co-pay for health care, for example--and GM pays almost twice what Toyota Motor Corp. pays in human-resources costs. That adds up to a $1,300 to $1,800 per-car cost penalty against the Japanese Big Three, says Hill.
That's why it's so important for Lutz to turn out some hot cars. When he took the job last September, he ordered GM's design studios to come up with a sleek, sporty car for Pontiac. They drew up a European-looking roadster, the Solstice, that GM showed to great acclaim in January. Now, Lutz has ordered his staff to find a way to produce it.
GM needs those fresh designs, fast. It can't rely forever on incentives and hot SUVs to buy market share. Concedes Lutz: "For a company to achieve a market-share turnaround, you have to have a winning car line and a winning truck line." If GM can do that, Wagoner can rightfully claim victory.
By David Welch in Detroit