GM Needs to Be Leaner and Meaner if It Wants to Survive

Here is the latest on GM's attempt to convince bondholders to swap debt for equity. At present many of the bondholders think the plan is too risky and have written a letter to the treasury articulating their position on the matter. Their main point is that GM's survival plan seems to be predicated on car sales recovering to previous levels in the near-term, a prospect that looks less and less likely as the days (let alone weeks and months) pass on.

Personally I think that the key to GM's survival shouldn't be to gear up for a recovery to the car sales of old, but to become lean and efficient enough to be profitable despite having smaller market share and operating in a less robust market for car sales. If Honda (HMC) can be profitable despite having 7% of the U.S. market than so can GM. The real challenge is in shifting GM's thinking from being the biggest, protecting market share, etc, to one where they realize that selling far fewer cars for a profit is smarter than selling a larger number of cars for a loss.

GM (and Detroit for that matter) needs to think in terms of profit share as opposed to market share, because focusing on the former is what will lead them down the path to recovery. Each domestic automaker already sells enough cars to be profitable, the problem is that they're not efficient enough to be profitable at their current sales levels. Fix the efficiency problem, make their manufacturing operations more agile, adaptive to market demand, etc., and Detroit can easily survive.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[Jeff B.:]

Markham, I agree with you about being smaller, more efficient & profitable. BUT, GM has to start making more cars that people want to buy first. It's nice to be more reliable (JD Power survey), and more efficient, but GM still does not make a singel vehicle that leads it's class in any segment it serves (maybe the Silverado comes close). It needs to build winners, not also-rans. My company provides me with an 09 Malibu as a fleet vehicle. It's a decent car, and most people woudl probably love it, assuming they do not own, or have not driven a Honda, Mazda, Niassan, etc.

Mar 24 09:12 AM

[stefalb:]

The main problem, why the lean an mean strategy has not happened so far, are the unions. More automatization would have meant more union job cuts in the automotive industry but it would have meant more jobs in automatization and robotics. It also would have made the auto industry competitive and able to survive with fewer, but still a lot of union workers. In Europe the process worked because there is a metals worker union, covering all metals workers, not only automotive workers. A loss in car jobs means gains in other high tech metals union jobs. Greed did not only destroy Wall Street, union greed did also destroy the American car industry!

Mar 24 09:28 AM

[Thadeus Tho...:]

I don't know. In 41 years of driving, I, my wife, and kids while they were home, owned Nissans, a few Toyotas, as well as a Dodge or two, a few Chryslers, one Subaru, one Isuzu, and numerous Chevys, a couple Oldsmobiles, and now a Saturn Aura. I've also driven/rented a Toyota Camry a few times, a Ford Taurus or two, and several GM trucks. I also remember 1979-1981 Honda Accords that had fenders rusting off in 18 to 24 months, and my Nissans had premature oil seal failure [a common problem for them]. So I can not say foreign cars were anymore reliable or durable then American brand cars. I know many times parts were more expensive. My 1990 Subaru rear breaks were an $800 repair, said the dealer.
On the other hand, I know of many people who have a Buick or Olds with the GM 3.8L engine that is still going strong after over 230,000 or even 300,000 miles. That with only a water pump, maybe an alternator, and the usual tires, shocks, and other routine maintenance.
Regarding " cars people want", I think Ford has an excellent car in the Focus and the Chevy Cobalt is very close. The Ford Fusion is also a great value, but not my style. I find my Saturn Aura [similar to Maibu} very European, upscale, and a value for the money. I believe that the perception of American brand cars has been unduly handicapped by some mismanagement and market choices of the Big 3, but even more so by automotive journalists hyping foreign car attributes and quality that wasn't necessarily there. That also appealed to the egos of certain demographic groups that perceived they had to drive a Lexus, BMW, Honda, Mercedes, VW, or Toyota to fit into their peer groups. It became "trendy" to do so. Madison Ave. advertising made the most of that too, I'm afraid.
As to actual quality, ride , styling and handling; I have driven both a recent Honda Accord {seats are not comfortable for more than an hour} and a Toyota Camry {transmission shifts lurch and not smooth, interior as mundane as any} . I find them pricey and not any better than some American brand counterparts, in my humble opinion.

Mar 24 09:46 AM

[Deweyp:]

The population is growing, third world demand is steadily increasing and the US auto fleet is getting older. Why would you think that demand will not increase as the economy improves? My read on the demand issue is that any of the major car companies that survive the recession will benefit by the demand growth that is sure to come. The economy will surely come back, the stock market will rebound to normal levels, employment rates will increase and auto sales will jump dramatically once this happens. We are a mobile society and the independence provided by the auto will always be attractive. GM and Ford will once again be profitable, especially now that the runaway union craze has been reigned in. Thats my story and I'm sticking to it.

Mar 24 09:56 AM

[eastcoaster...:]

Until the US government revises it schizophrenic policies towards GM, Ford and Chrysler these companies will always be disadvantaged.

Policy problem #1: Cannot have one set of manufacturers shackled to unions and one set not in the U.S. This is the only country in the world with a two pronged approach to auto labor. In Japan, Europe and Korea, all manufactureres deal with unions, the rest of the world pretty much does not. Is it a surprise to anyone, that GM, Ford and Chrysler when shackled to the Unions are in trouble? Their competitors have been allowed to set up shop in the U.S. without unions and in addition have no retirees or legacy costs? All US auto manufacturers should have to deal with Unions or none of them.

Policy Problem #2: Free Trade is not free. Europe, Japan and Korea import cars into the US at 5% tariffs. US made cars are imported into Europe with 10% tariffs, the effictive tariff rate into Korea is in the low teens and the Japanese market is effectively closed. Toyota last year imported 1.5M cars or half its US sales volume...it also shipped in a number of engines and transmissions at the 5% tariff. The playing field is not level.

3) Corporate Average Fuel Economy rules further tie GM, Ford and Chrysler to Unions since any vehicles imported from foreign operations are counted as "Imported" vs. "Domestic." Having two ledgers for Fuel Economy accounting means the manufacturers with highest proportion of US assembly are at a disadvantage...they get no credit for importing anything on one hand and therefore have to updgrade the entire fleet of domestic made in order to move the fuel economy average.

4) The state franchise laws basically only tie the hands of GM, Ford and Chrysler. These laws were set up in the 50's and need total overahaul. Besides the prohibitive costs of shutting down dealerships outside of bankruptcy, this is one of the few industries left that turns the product over to someone else, after it leaves the factory. At one extreme, Dell, McDonalds, WalMart etc. control the product from the raw material stage to the consumer sale stage. The middle of the road approach is McDonalds, it allows private franchisees and corportate owned retail to exist side by side. Neither of these models is allowed to exist currently in retail automotive sales.

Bankruptcy will not change the broken laws and poor policies of the past...the government needs to realize it has been a big part of the current problem so that once these companies restructure, they can flourish and not have their hands tied behind their backs.

Mar 24 10:20 AM

[TomWilkinso...:]

GM's viability plan calls for the company to break-even at a U.S. total industry volume of 11.5 to 12 million units. For reference, the industry as run at the 15 to 17 million unit range for the past 20 years. That's pretty lean.

Mar 24 10:52 AM

[Tomas04:]

Every company now has an income statement problem. GM is working to resolve the balance sheet problem but remember, even Toyota is bleeding billions.

Mar 24 11:29 AM

[User 382086:]

Jeff b, I bet we could find some asian workers who could replace the job you do and could find reasons they do it better. Then when you go to the american unemployment office for your benifits to pay for your foreign car, you can feel really good that you support another country.


On Mar 24 09:12 AM Jeff B. wrote:

> Markham, I agree with you about being smaller, more efficient &
> profitable. BUT, GM has to start making more cars that people want
> to buy first. It's nice to be more reliable (JD Power survey), and
> more efficient, but GM still does not make a singel vehicle that
> leads it's class in any segment it serves (maybe the Silverado comes
> close). It needs to build winners, not also-rans. My company provides
> me with an 09 Malibu as a fleet vehicle. It's a decent car, and most
> people woudl probably love it, assuming they do not own, or have
> not driven a Honda, Mazda, Niassan, etc.

Mar 24 12:40 PM

[Markham Lee_:]

It's a combination of being lean and being more responsive to the consumer, and letting of old thinking.

The Ford Mondeo competes very favorably against Accord, Camry and the VW Passat in Europe. But instead of bringing the vehicle over here (designed by Ford of Germany), we get the Detroit designed Fusion on a similar platform.

The reason?

Ford believed that American buyers would like the Fusion better, despite the fact that Mondeo competes (or beats) the same foreign cars in Europe that are sold here.

It's a critical misstep and indicative of the mistakes Detroit has made.

I also think that there is sort of ideological argument going on, where Detroit is determined to win via doing things "their way" and/or some people just want to like the American cars better.

In the end unless your objective and acknowledge your competitor's strengths you can't win, Detroit has to embrace the very valid reasons why some people prefer foreign cars. Going with the attitude of "We're better the consumer won't admit it" isn't going to cut it.

Finally as I said before if Honda can make billions with 7% market share, there is NO reason why GM and Ford can't do the same. It's time to get right sized for marketplace.

Also the fact that Toyota is having issues is all together irrelevant really, all that's relevant is who is better positioned to get their ship on the right course again. Toyota's problems was introducing some inefficient engineering vanity projects into the manufacturing process, once they ditch those items they'll be fine.

GM's road isn't so clear cut.

Thanks for reading everyone.


-Markham

Mar 24 06:21 PM

[Kman58:]

The article we are responding to, posited that the company, General Motors, needs to become more lean and, more competetive.

Recognizing that GM is losing far more money than nearly every one, if not all, of their competetors, does anyone think differently?

If you actually do think that GM does not need to become more competetive, then please - why would you think that?

I personally think that, at this point, one would have to be barking mad to believe that GM ought not to cut costs. It is losing money, so it needs to cut costs - well, and increase revenue if that is possible. Period.

What do you think?

Mar 24 07:50 PM