By David Welch
Given the financial crisis facing General Motors (GM ), the carmaker's many watchers have been waiting for Chairman and CEO Richard Wagoner Jr. to drop a big bomb of a restructuring plan. GM said in March that yearend profits could easily fall below $1 billion -- a big drop from its January earnings guidance of as much as $3 billion. Analysts from Wall Street to Detroit have opined that cutting union medical benefits and shrinking the giant company are the only options to restore profits in North America, where expectations are that GM might lose more than $1 billion in 2005.
That line of thinking makes sense. GM will pay $5.6 billion in 2005 in health-care benefits for its 430,000 union workers and retirees. That cash drain and GM's weak sales make it difficult to support eight divisions and 89 different nameplates. Market share in the first quarter was 25.6%, vs. 27.2% a year ago.
"NEED TO FOCUS."
GM relies on offering rebates and sales to rental-car fleets to keep plants running and cash coming in. Analysts reckon that by shrinking the workforce, dumping weak-selling models, and whacking a division or two, GM could downsize itself to a market share of about 20% but end up a more profitable company.
Don't expect that kind of major restructuring plan -- at least not yet. Instead, count on Wagoner saying a combination of aggressive cost cuts and realigning GM's vehicle divisions can stave off the need to shrink the company. On Apr. 4, Wagoner seized control of GM's U.S. operations from Vice-Chairman Robert Lutz and former GM-North America President Gary Cowger.
Wagoner and newly promoted Mark LaNeve, vice-president for sales and marketing, will assume responsibility for fixing weak brands like Pontiac and Buick. Neither marque will die soon. "I don't think we necessarily need to kill off any brands," says LaNeve. "We just need to focus them better."
To buy time for that, GM must cut its health-care costs. Cowger was moved over to his old job as group vice-president for manufacturing and labor relations. During contract talks in 2003, GM didn't have the nerve to tell the union that its health-care plan -- which has no co-pay -- is too rich.
Cowger now says he wants union workers to have the same plan as salaried workers, which means they would have to pay at least $100 a month toward their premiums, along with some other contributions. That move alone could save GM at least $1.2 billion a year, says the Center for Automotive Research in Ann Arbor, Mich.
While Cowger contends with labor in regard to health-care costs, Wagoner is taking over marketing and the chore of realigning GM's divisions. The biggest move, pairing up Pontiac, Buick, and GMC dealers, has been in the works for some time and is now being accelerated. Most of the dealers selling those divisional brands already carry all three. This will allow GM to get rid of redundant models without angering dealers, who are constantly asking for more vehicles to sell.
"BMW FOR POOR PEOPLE."
Plans to consolidate GM's huge and overlapping lineup of cars and trucks also are under way. Big Pontiac sedans like the Grand Prix and Bonneville are mostly just overstylized versions of the Buick LaCrosse and forthcoming Lucerne sedans. The bigger Pontiacs will go away, sources say, leaving Buick to sell big, comfy cars. When all of the dealers are paired up, GM could get rid of a minivan, since Pontiac and Buick each produce one. Says a GM spokesman: "The days of Pontiac selling one of everything are over."
Instead, GM may finally give Pontiac some pizzazz. Later in the decade, the brand could get a small, sporty car built on a version of the Pontiac Solstice roadster chassis. "That could be a BMW 3-Series for poor people," says John Wolkonowicz, an analyst with Global Insight in Boston. "It's a really good position for Pontiac."
Will it work? That depends on whether Lutz and his product-development crew can get some hot models for these struggling divisions, and fast. Daniel Gorrell, a partner with San Diego-based Strategic Visions, says Buick needs a lot of work. Its buyers are older, and it isn't bringing in enough new customers.
Pairing up dealers has another advantage: That makes it easier to kill a brand. After GM announced the end of Oldsmobile in 2000, it took four years and millions of dollars to take the badge off the market. GM had to buy dealers out of their franchise agreements, and it's still in litigation with some former dealers. But those selling Pontiac, Buick, and GMC brands in one location would be less likely to sue if one were eliminated, since they would still have two brands and plenty of vehicles to sell. Says Gorrell: "This could be an interim step to doing away with a brand."
Still, Wagoner's plan could fail if GM lacks the resources to turn around all of its weak divisions. But it has a better chance of fixing them if it has fewer models to keep fresh. And it'll be easier to kill them if the market decides that Pontiac or Buick is no longer relevant. Either way, expect a long and bumpy ride.
Welch is BusinessWeek's Detroit bureau chief
Edited by Patricia O'Connell