GM Tries to Show Who's Boss
For a company run by conservative finance guys, General Motors Corp. (GM ) is taking some big gambles these days. Case in point: GM agreed in late February to spend $99 million on a joint venture with beleaguered Russian auto maker Avtovaz. GM is interested in a cheap, small sport utility vehicle designed by the Russian company, even though AvtoVAZ is known for poor quality. The Detroit giant will put its reputation on the line by selling the Russian-designed sport-ute as the Chevrolet Niva, for $7,500 or so, in emerging markets worldwide.
Betting on such overseas ventures with other auto makers has become standard procedure for GM. The grand design is to exploit emerging markets and develop small vehicles for Europe and North America. So, since buying the remaining 50% of Saab for $125 million early last year, GM spent $2.4 billion for a 20% stake in Fiat, $1.3 billion for a fifth of Subaru parent Fuji Heavy Industries, and $653 million to double its 10% position in Suzuki Motor. Now there's the Avtovaz deal.
To put this spending in perspective, the $4.6 billion acquisition spree is twice GM's earnings target for this year. Meanwhile, the North American business is feeling the pull of a slowing U.S. economy and Adam Opel, the German operation, is trying to right itself.
Pricey as it is, this global hunt is a vital piece of CEO G.Richard Wagoner Jr.'s vow to build market share and find new technology fast. GM in the U.S., for example, has proven inept at building successful small cars for entry-level buyers, yet both Suzuki and Fiat are whizzes at this. Getting a hold of such expertise and building a global presence is worth the effort to Wagoner. "Sure, there is risk," he concedes. But "I would challenge [anyone] to find a better overseas footprint than we have."
A skeptic, though, would also point out that last year, GM's international operations lost almost $900 million, mostly from the travails of Isuzu and Opel. Revenue from outside North America is essentially flat at around $35 billion. And overseas cooperation with Detroit has resulted in some notable duds. Neither the Cadillac Catera nor the Saturn L-series--both jointly developed with Opel--have been successful.
Wagoner's response has been a major review of GM's overseas management. With many of GM's foreign partners, "we didn't have a formal alliance strategy," Wagoner says. Before, foreign alliances tended to be loosely monitored. To rectify this sloppiness, over the past year GM has installed a much tighter network of senior managers who work in the headquarters and product development centers of its partners and report directly to the top-ranking GM executive in each region of the world. Those executives send ideas to Lawrence D. Burns, GM's vice-president of research & development in Detroit. Wagoner now meets regularly with top executives at partner companies, spending a quarter of his time travelling overseas. In a sign he is getting serious, he has, at long last, intervened at ailing Isuzu and handed it a tough recovery plan.
The new approach is paying off in some areas. GM has had early success with the Opel-designed Celta in Brazil.
In Europe the Suzuki-designed Opel Agila compact wagon, built in Poland, has recorded strong sales numbers. In the U.S., GM is jointly designing an entry-level Chevrolet with Suzuki.
But the approach may not solve a kind of psychological complex GM has: It often declines to buy outright control of a partner, as Renault has essentially done with Nissan Motor Co. And when GM does acquire control of a foreign operation, the process can be so ponderous that the benefits of a takeover are lost. Says Prudential Securities Inc. auto analyst Michael Bruynestyne: "When you can't control a company, that means making compromises."
TOO DISTANT. Many of these issues are apparent in GM's forays in Europe. Witness Saab. GM bought half of the struggling Swedish carmaker in 1990. But a decade later, Saab still has a measly two-car lineup, sales have inched up 40,000 units, to 130,000 cars annually, and it has lost $1 billion since GM bought it. In all, say sources close to the deal, GM spent nearly $1 billion to get all of Saab. Yet GM often let the operation sputter along without giving Saab the new products it needed to transcend its status as a niche player. Now Wagoner concedes that this arms-length relationship hasn't helped the Swedish auto maker.
Undaunted, GM plans to double Saab sales, to 250,000 a year, by 2005. A sport-utility vehicle is coming, and an all-wheel-drive version of the 9-5 flagship sedan may be in the works. But Saab is so debt-laden that financial payoff is unlikely soon.
Saab is just the beginning of GM's troubles in Europe. At the $16 billion Opel subsidiary, President Robert W. Hendry plans to quit in March. Opel executives feel they are getting direction both from the Americans sent to run Opel and those dispatched to GM Europe's headquarters in Zurich. Last year, Opel lost $472 million. It badly misread the shift to diesel-powered cars, and a lack of sharp styling has made many of its models also-rans. To fix Opel, GM has cut 15% of its capacity and is sacking salaried workers. Concedes Michael Burns, head of GM Europe: "Our goal is to be profitable by the end of 2001, but a lot has to go our way to make that happen."
Opel's crying need for more diesel engines offers GM a chance to test its new strategy of close coordination. GM ally Isuzu Motors Ltd. has a Polish plant that can crank out 200,000 small diesel engines a year, and will share the output with Opel. By late 2002, GM will start putting Fiat diesels in its cars, including the Opel lineup. That spreads the expense: Designing all-new high-tech diesel engines and tooling up to produce them can cost between $1 billion and $2 billion if done in-house, says Michael Robinet, managing director of forecast services for CSM Worldwide Inc., an auto-manufacturing consulting firm in Northville, Mich.
GM expects the Fiat deal to hasten its recovery in Europe in other areas besides engines. The chief executive of Fiat Auto, Roberto Testore, has said that thanks to the GM deal, Fiat Auto could achieve savings of $1 billion a year by 2005. GM Europe is expected to save the same amount.
There could be a payoff for GM North America, too, if it follows through on its plan to sell Fiat's Alfa Romeo cars in the U.S. The stylish Italian marque could be the third leg of a premium car strategy in America that would include Cadillac and Saab, says Ronald L. Zarrella, president of GM's North American operations.
SHORT NOTICE. This is just what Wagoner envisioned. But there are signs that the old GM way of doing things may slow the execution of the alliance. Even though cooperation between Fiat and Opel is a key part of the plan for Europe, Hendry was the only Opel executive in on negotiations for the deal. Other Opel execs were notified just two hours before GM and Fiat announced the alliance. Says one former Opel manager: "It's like your mother and some outsider decided together that this is what you'll be doing." Opel insiders say there are too many levels of decision-making, with GM Europe executives and now Fiat managers all in the mix. Such resentment could turn a dream alliance into a troubled marriage. GM executives say the synergies emerging from the Fiat deal will put these concerns to rest.
GM has similar troubles in Asia, where weak oversight has built up the problems. GM owns 49% of Isuzu, which accounted for nearly all of GM's $107 million fourth-quarter loss in Asia. Rudolph A. Schlais Jr., president of Asia-Pacific operations, told Wall Street analysts in late February that Isuzu has not had good cost controls. Hence GM's decision to install a new president at Isuzu and insist on cuts in capacity and layoffs.
Even without the hassle of dealing with Isuzu, GM has found East Asia and Japan nearly impossible to crack. In early February, GM decided to yank Saturn from its Japanese dealerships after a three-year attempt to build the brand there. GM has less than 4% of the 11-million vehicle market in Asia.
So GM is again turning to its partners. GM and Suzuki have jointly developed the YGM1 subcompact, a car built expressly for Asia that seats five people in a small format and features four-wheel drive. A larger version of this sport utility vehicle, dubbed the YGM2, is now on the drawing boards.
In China, GM is looking at some of Suzuki's subcompacts and minicars to sell besides its Opel-based Buick Sail compact, says Philip Murtaugh, chairman and CEO of General Motors China. GM has invested $2 billion in China, selling the Buick Century sedan, minivans, and Chevrolet Blazer SUVs, but has just 3% of the market. The $12,000-$15,000 Sail, which goes on sale this year to compete against the Honda Civic and Toyota Echo, could be the company's last chance to grab significant share in China.
A FEW HITS. If General Motors gets the green light to build other cars in China, its partners would be the source for some of the vehicles. It might be a while, though, before any agreement is struck. "We would like them to move faster," says Koichi Arasawa, Fuji's senior vice-president of product planning. "But with so many people working on so many different things, GM's structure can be very bureaucratic." The Fuji partnership has yet to announce a jointly designed vehicle that they can market.
Sometimes cooperation produces clear hits. The Opel-derived Celta minicar being built in Brazil should push GM's profits in South America up above last year's slim results, says Frederick A. "Fritz" Henderson, group vice-president of operations in Latin America, Africa, and the Middle East. In the U.S., pickup trucks jointly designed with Isuzu could help liven up General Motor's line. Sadly, though--no matter how clear the vision at the top--there's always the problem of the GM bureaucracy itself. Wagoner has the right idea. He still needs the right organization.
By David Welch in Detroit with Christine N. Tierney in Frankfurt, Chester Dawson in Tokyo, and bureau reports