The Hindu Business Line : GM: No easy solutions

GM’s share of the US market, at one time over 50 per cent, fell to 19 per cent last month. Faced with bankruptcy, the new CEO, Fritz Henderson has to make some tough calls. He and his team have no easy solutions in creating the blueprint for a leaner, rejuvenated General Motors, says V. SUMANTRAN.

President Obama’s response to the US auto industry’s request for additional support has been characterised as tough love. The much larger bailout of investment banks last quarter was read as government indulging big business. Yet, the auto industry’s linkage to blue collar employment and labour unions meant that the administration could not ignore reality — unemployment in the state of Michigan had crossed 10 per cent and the industry had shed 400,0 00 jobs across the country over the past year.

The message of asking GM and Chrysler to go back to the drawing boards and re-craft a recovery plan (in 60 days for GM and 30 days for Chrysler) left the door open for intervention and further assistance. Further, to send a signal that new ideas and bolder moves would be called for, GM’s Chairman and CEO was asked to step down. Rick Wagoner, a well-regarded CEO, had been a GM insider for over 30 years.

Yet, the pointed message of President Obama — that responsibility for the decline of the US industry could only be attributed to leadership — left no alternative. Wagoner will be replaced by Fritz Henderson as CEO and Kent Kresa, the emeritus chairman of Northrop Grumman, as Chairman.

GM, which held the title of the world’s largest automaker for most of the century, had conceded global leadership to Toyota by 2008. On home turf, GM’s share of the US market, which at one time was in excess of 50 per cent, slowly lost ground to imports over the past four decades. However, the perceived beachhead of 30 per cent was breached in the last decade. By last month, this had further declined to 19 per cent.

Early lead

In a global business that demands leverage of global resources and markets, GM had assumed an early lead by the 1940s. Its strategy was to operate a global collection of local brands. By 2000, GM’s reach included prominent local brands such as Opel, Vauxhall and Saab in Europe, Holden in Australia, and Daewoo in Korea. GM also enjoyed alliance support from Suzuki, Isuzu and Subaru in Japan and SAIC in China.

For decades, this helped GM orchestrate a global strategy with local responsiveness. However, merits of local responsiveness did not seem to outweigh the value of global integration.

Notwithstanding two separate phases of developing “world cars” in the 1980s and 1990s, US automakers had not fine-tuned the art of creating a single global platform like the Toyota Corolla or the Honda Civic. As a result, market-share was achieved with a larger variety of models which, in the long run, was expensive.

Equally, in the US market, GM’s long-standing practice of offering a staircase of brands, ranging from Chevrolet to Cadillac, had long outlived its value. The cost of supporting so many separate brands required expensive product development, network expansion and marketing spend.

Wagoner’s bold decision to recruit Bob Lutz was seen as a very positive step. Lutz, who lived by his own motto “frequently wrong, but never in doubt”, was a truly gifted and decisive product czar and may be justifiably credited with the 1990s renaissance of Chrysler. He brought a focus on quality and execution that is just beginning to pay dividends for GM – some might say a little too late.

Awards

In 2008, the Chevrolet Malibu (a critical yardstick, to fight the segment standard bearers – Toyota Camry and Honda Accord) won the North American International Show Car of the Year title, while the Cadillac CTS won the Motortrend magazine Car of the Year Award. Further, Buick toppled Lexus in the 2009 JD Power dependability study.

But how well was GM prepared with future technologies? Anticipating global trends, Toyota had staked its claim as the world’s most environmentally responsible automaker. Stemming from the Prius hybrid vehicle, Toyota had launched a barrage of hybrids. GM had bet big on hydrogen and fuel cells but, as it turned out, fuel cells would be longer in development. Very late, GM decided to broaden its bets and has now launched a “plug-in” hybrid — the Volt.

Unlike Toyota, GM had failed to leverage its global base and execute multiple bets including fuel-cell cars, hybrids and clean-diesels, the favourite choice of green transportation in Europe. GM grew dependent on erstwhile alliance partner Fiat for its diesel technology in Europe and, when that alliance was dissolved, it suffered a significant strategic setback.

Another historical drawback that the US automakers faced was relatively lower manufacturing productivity. Starting from design complexity and manufacturing philosophy, the Japanese automakers had demonstrated efficiencies that had eluded GM. Through a combination of platform strategy and manufacturing process improvements over the past decade, GM has closed the gap in manufacturing productivity to Honda and Nissan and was just trailing Toyota, based on the 2008 Harbor Report.

Productivity

GM and its Tier-one supply chain still face legacy costs and employee obligations that are not easily re-written. In hindsight, its last labour contract may have gained little progress in the overall battle to lower cost and saddled it with long-term obligations.

Henderson has many difficult choices ahead of him. Like Wagoner, Henderson, an accomplished finance executive, had gathered global experience with stints in Brazil, Asia-Pacific and Europe, before being brought back to the US. He will, no doubt, be thankful for President Obama’s message of urgency. This must allow GM the cover needed to take some of those tough decisions.

At the start of 2009, GM had $62 billion of debt – this after $13.4 billion of assistance received in December 2008. Of this, over $20 billion is related to employee obligations. To compound matters, the spin-off of its erstwhile auto component group — Delphi — has left GM with lingering contingent obligations, should Delphi fail.

Globally, GM was forced to encash its stake in Suzuki, Isuzu and Subaru. The latter two firms have now moved into Toyota’s orbit. GM has now also been forced to seek local government support for its operations in Europe — Opel and Saab. The Swedish government has declined and Saab has now filed for bankruptcy.

Warranties, reliefs

The US administration, recognising the danger of eroding consumer confidence in its domestic brands, has offered a form of insurance for product warranties. President Obama has also promised a combination of tax relief and easing of car loans to encourage demand. Beyond this, GM, like some of its competitors, has offered monthly payment support in case its customers face layoffs or job losses. These stimuli will provide some value in the short term.

For the long term, Henderson will have to use the current 60-day window to maximum effect in re-structuring debt and obligations. Along the way, some brands may have to be shed. Draft plans had called for the closing of 14 more plants, and job cuts affecting 47,000 persons globally. At least 1,500 US dealerships may be terminated.

Above all, with the threat of bankruptcy, Henderson has the backing to make the tough calls. He has been frank to admit that these changes would be made either outside of bankruptcy or with its protection.

In his book, The Rise and Fall of Great Powers, Paul Kennedy argues that global expansion associated with leverage and control of global resources create great powers whose influence starts to wane when the cost of such global orchestration and protection of widespread interests exceeds the value of such reach.

Over the past century, GM had grown to a globally dominant enterprise and provided the US an industrial face. It pioneered many innovations, including the electric starter and catalytic converters. It allowed astronauts to drive the first car on the moon. Henderson and his team have no easy solutions in their task of emerging with the blueprint for a leaner, rejuvenated General Motors.

(The author, Executive Vice-Chairman, Hinduja Automotive Ltd, was an employee of GM in the US and Europe for over 15 years. blfeedback@thehindu.co.in)

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