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In light of some of the recent news on GM I figured it would be a good time to clarify some of my comments around GM needing to become more efficient to survive, because they could easily be misconstrued as simply advocating for more cost cuts.

Despite all of the posturing around new restructuring plans, the fact remains that GM's basic strategy (for the last 9+ years) has been to do the following when they get into trouble: cut costs, lay off workers and slash prices/offer incentives in an effort to maintain market share/sales volume. The problem with this strategy is that all of these activities arguably cancel each other out, in that they're cutting costs while simultaneously slashing revenues at the same time.

The other issue is that when GM was losing money in '05 (for instance), why didn't they institute some of the more recent (and more drastic) cost cuts, attempt to drastically restructure their debt, etc.?

Answer: GM wasn't really trying to change their entire business model to one that is a better fit for the market, they were simply trying to find the cost savings that would enable the company to survive until things "got better".

See the difference? At the moment GM seems more focused on trying to find a way to keep the old model alive than they are on trying to build a new model altogether. Management needs to confront the reality that the market can no longer support the old way of doing business.

Simply put, if Honda (NYSE:HMC) can be profitable with less than 1/2 of GM's market share, then the only thing stopping GM from being profitable is its business model.

However getting there means a significant mental paradigm shift in terms of moving from thinking in terms of saving the old model, and thinking in terms of scrapping it and building a new one.

One of the main pillars of this model would have to be an emphasis on making a profitable sale, as opposed to the current model of selling cars at a loss just to get them off the lot/to maintain market share. At this juncture there is no point in buying market share because it doesn’t get you anything in the long-run, aside from positioning the company as the low cost provider, and hurting your brand. GM has to change the way it does business so that selling cars at a loss is no longer the best alternative.

When I say "GM needs to become leaner/more efficient," I'm not really talking about cost cuts per se, I'm talking about revising their entire business model to one that can actually be supported by the market. At the moment GM is operating in an automotive marketplace where its dominant market share isn't translating into profits, whilst smaller competitors are still profitable and viable despite the rough conditions currently facing the entire auto industry.

GM's (and Detroit's for that matter) future survival isn't dependent on making the right cost cutting decisions, it's dependent on moving to a business model that can actually be supported by the marketplace. At the end of the day all of the domestic automakers sell enough cars to be wildly profitable. The trick is in changing the way they do business so they can actually reap the benefits of those sales.

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.

Source: GM of the Future: Much Smaller and Actually Profitable