GM's Race Against the Clock
Workers at General Motors' Pontiac assembly plant, a half-hour's drive north of Detroit, got a rare bit of good news last month. The increasingly troubled auto maker will not only invest $545 million to upgrade some of its Michigan factories, it will also add an estimated 280 jobs at the Pontiac plant later this year.
The announcement comes in sharp contrast to others the auto maker has made recently. Just last week, GM (GM) revealed plans to reduce its pension liabilities by shifting white-collar workers to plans that depend on higher employee contributions. Also, GM has sharply cut back on salaried pension and health care, while sharing the pain with stockholders, who'll lose half their dividends, and senior executives, who'll lose up to half their pay. Last autumn, Chief Executive Rick Wagoner announced plans to close five assembly plants and trim around 30,000 jobs.
Even the latest, upbeat announcement has fueled skepticism. The Pontiac plant is being readied for a new line of full-size pickups GM will start producing in October. They share their underlying platform with a generation of new sport-utility vehicles, such as the Chevrolet Tahoe, which went on sale in January.
When the giant auto maker began work on those SUVs, it envisioned a market segment of at least 1 million vehicles annually. Now, however, it's more likely to run in the range of 750,000, according to "car czar" and Vice-Chairman Bob Lutz.
Even if GM can maintain its current share of the market -- an eye-popping 60% -- that's a significant shortfall. Like the big SUVs, next-generation pickups face a new world order of high-priced petroleum, as well as some increasingly serious import competition from GM's most feared rival, Toyota Motor (TM). The 2008 Toyota Tundra, unveiled at this month's Chicago Auto Show, is no underpowered runt. It has the muscle to become the first serious import contender in the last segment unabashedly dominated by Detroit.
That would be devastating to GM, in particular, as one senior truck executive -- who spoke only on background -- has acknowledged. During a test drive of the Tahoe's sibling SUV, the GMC Yukon, he heard worries from colleagues across the company. "You've got to save us," said one, admitting his project was almost certainly not going to meet its sales and profit targets.
With the exception of the obscenely profitable full-size trucks, few recent GM products have lived up to expectations. The auto maker's ungainly sport vans proved an unmitigated disaster. Specialty vehicles, such as Chevy's "Corvette pickup," the SSR, and convertible/sport-utility, have answered questions consumers weren't asking.
All the while, sales and market share have continued to plunge. Just a few years ago, workers at GM world headquarters in Detroit's Renaissance Center wore buttons that simply said "28." Points of market share that is, a figure the auto maker came tantalizingly close to realizing -- before heading into a downward death spiral.
Last year's giveaway "employee pricing" incentives offered nothing but a brief reprieve. So now, more than a few analysts, such as Joe Phillippi with AutoTrends Consulting, fear the auto maker may soon be struggling to keep its head above the 20% mark.
Considering the crowded nature of the American market, where more than 30 brands and close to 300 different models compete, no one expects GM to regain the awesome 50% share it commanded at peak. But at some point, the giant's business case no longer remains sustainable.
CEO Wagoner is stuck in an awkward public position. He needs to emphasize the carmaker's problems, in order to encourage rapid change in the organization. He's painted a dire enough image to even win multibillion-dollar health-care concessions from a normally recalcitrant United Auto Workers union. But that's clearly not enough, as Wagoner struggles to bring structural costs down from the current 35% of revenues to about 25%.
Why has GM's share slumped while the competition steadily gains strength? Company executives are quick with answers designed to offload blame. There's no way to prevent brands like Toyota from picking up sales and share as they enter new segments, such as full-size trucks, insists GM North American marketing chief Mark LaNeve.
That's true, to a point, but over the past two decades the biggest declines have occurred in segments GM simply walked away from, or where it fielded a clearly uncompetitive product. Until the late 1980s, for example, the auto maker owned the midsize sedan segment. Not today.
CLIMBING IN QUALITY.
That's all the more frustrating for longtime GM managers, who, for the most part, have only just begun to get the products they've been calling for. Wagoner himself admitted as much at GM's annual meeting last year. "If I had a chance to rerun the past five years," Wagoner conceded in a talk with reporters, "we probably would have done a little more thinking about making sure that each product was distinctive and had a chance to be successful."
Far too many GM products still fall well short of leadership status. The auto maker is only grudgingly coming to recognize that cheap, plastic interiors don't work. It's offering too many 4-speed transmissions, where the standard is now the 5- or 6-speed. And it has been painfully slow to the hybrid market.
Yet as reviews of the new full-size SUVs suggest, there are now a growing number of GM products that really are world-class, such as the Chevrolet Corvette. O.K., one might counter, that's a low-volume specialty vehicle. So then there are the new, full-sized SUVs, and some surprisingly competent sedans, such as the latest-generation Chevrolet Impala.
Better yet, the latest GM vehicles are climbing in the quality charts, according to the oft-quoted J.D. Power & Associates (like BusinessWeek, a division of The McGraw-Hill Companies Inc.). Indeed, three General Motors brands outperform the Toyota division in Power's Initial Quality Survey, and Cadillac has been breathing down the back of the vaunted Lexus luxury brand, long the undisputed quality benchmark.
But does it matter to consumers? In large swaths of the country, General Motors has become virtually irrelevant. With the rare exception of a couple recent models, such as Cadillac's bling-heavy Escalade SUV, you aren't likely to see many GM products in Southern California, Seattle, or Secaucus, N.J. The Red States may have provided enough votes to elect a President, but they're not powerful enough to reverse GM's decline.
Compounding the situation, the longer GM's problems remain in the news and the dreaded "b-word" (bankruptcy) is in the headlines, the more consumers walk away. "Folks don't like to do business with companies they fear might not be there" when it's time for an oil change or warranty repair, laments a divisional marketing director, also requesting anonymity.
Can GM avoid bankruptcy? Analysts and investors seem evenly split on the idea, despite Wagoner's passionate assertion that Chapter 11 is "not part of our strategy." The smaller GM gets, the harder it becomes to come up with funding to cover its massive legacy costs. And it's facing new federal rules that could force it to cough up even more.
Worse, as it pushes to bring capacity in line with demand, it actually worsens the situation, sending still more union employees onto the retirement rolls. And then there's the seemingly intractable dilemma with Delphi, its former auto-parts division that's now in bankruptcy, which could offload countless more of its workers back onto the GM payroll.
"I think they'll struggle mightily to avoid bankruptcy," says the CEO of a major supplier -- which is currently preparing to emerge from Chapter 11 itself. "But I don't see how that can happen, not without huge concessions from the UAW," added the executive, who began his career at GM. UAW President Ron Gettelfinger recently ruled out further concessions, certainly before the two sides return to the bargaining table in 2007.
CASH CRUNCH COMING?
In January, Jerry York, the front man for billionaire investor Kirk Kerkorian, warned that GM had perhaps 1,000 days worth of cash reserves left at its current burn rate. It's possible, some GM insiders suggest, York will change that tune now that he has been given a board seat. Maybe not. The latest financial figures seem to indicate he's on target.
So pumping some of that cash into the Pontiac plant is risky. Of course, it would be even riskier to scrimp. GM has to invest in product and hope that it's finally delivering what customers expect. The challenge is to then get consumers to believe that message. "It could take a generation, warns analyst Phillippi. If that's the case, GM simply may not have enough time.
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