GM of the Future: Much Smaller and Actually Profitable

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 (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.

Comments

[Cobra 1:]

There is nothing more that needs to be said on this issue! You have summed up what I have thought and tried to express here for as long as I have been coming to this forum.

Excellent work!

Mar 31 06:45 AM

[Daniel Herkes:]

For the time being GM should devote it's "vast" resources to perfecting and selling hybrid delivery and waste collection vehicles. and finding a market for consumer hybrid vehicles. GM should perfect and focus on the coming money saving technologies, but only those products that focus on value for the consumer. Does anyone seriously imagine that any more cheap oil reserves are going to emerge?

The public perceives GM as being behind the 8 ball. GM can change that perception. The demand for the old product lines is clear, a lot of them need to be discontinued as soon a possible.

Mar 31 06:58 AM

[FE812:]

I can understand this sentiment, a lot of people feel this way. Out in the market in middle America though, it's not necessarily the case. Take it from a guy in the car business ... as soon as gas prices fell below $2 demand for the old SUV's began to pick up. Not to the extent that it used to be for sure, but it did come back a bit. (Used Market)

I just can't see Hybrids as a viable option for the extended future. Especially considering there are straight combustion motors being built now that can rival Hybrids in MPG at far less cost with a far longer life span. (I submit that I could be wrong ... it's just hard for me to get totally onboard with something so "popular", things like this always seem to flop ... a Hybrid Yukon ... too large an investment for just a 100K miles if you ask me)

One final comment a bit off topic; I can't say exactly why this is happening but ... at dealer only auctions (at least in my market) cars are being bought like crazy and inventory is rising at car lots that have been holding capital through this downturn. The used car market is gearing up for something sometime soon ...

Great Article ... Good Perspective

On Mar 31 06:58 AM Daniel Herkes wrote:

> For the time being GM should devote it's "vast" resources to perfecting
> and selling hybrid delivery and waste collection vehicles. and finding
> a market for consumer hybrid vehicles. GM should perfect and focus
> on the coming money saving technologies, but only those products
> that focus on value for the consumer. Does anyone seriously imagine
> that any more cheap oil reserves are going to emerge?
>
> The public perceives GM as being behind the 8 ball. GM can change
> that perception. The demand for the old product lines is clear, a
> lot of them need to be discontinued as soon a possible.

Mar 31 08:06 AM

[elcopone:]

FE812 - A couple of points. You say "I just can't see Hybrids as a viable option for the extended future"...did you know hybrids have been available for over a decade and there have been over 1 million hybrids sold in the US alone? You are part of GM's problem. Still stuck on SUV's denying the realities that are right in front of your face. GM should not be trying to appeal to only middle America. However, I do agree that focusing on Hybrids would be wrong as well. First things first. They need to cut the number of dealerships down to size where each dealerership has a chance of making a profit. It is old-time dealers, with their franchise laws, and old set mindset (SUV's are the future, hybrids are not viable) that is part of the problem. Which brings me to my next point...

You say "as soon as gas prices fell below $2 demand for the old SUV's began to pick up". That may be true but guess what, GM was not profitable when SUV's were selling like hot cakes. Hence the need for a new business model as the author correctly points out. Second, what makes you think gas prices will ever be below $2 ever again?

GM needs to retool it's business model. That means shedding brands (Hummer, Buick, Pontiac, etc...), cutting dealerships, and focusing on products that people actually want and will get excited about. (No the the new Traverse is not exciting, it's butt ugly!)

Mar 31 08:24 AM

[FE812:]

:) ... The Traverse is flat out sharp!

Look ... I'm sorry, You have every right to disagree with me but the SUV or something similar to it will never completely go away. There will always be a market for that style of vehicle even if it's a smaller version. You would never say that the 4x4 truck is a thing of the past would you? So why is a versitile SUV any different?

You're right gas is not likely to be below $2 but that was simply a reference to fuel prices falling. Remember, it took prices at $4 to cause any real change in driving habits. (Yes, if current legislation is passed prices could far exceed that.)

I almost included a disclaimer in my post on how long Hybrids have been on the market but I decided against it for the sake of brevity. Yes, Hybrids have been out now for some time, but the technology is what it is and the batteries simply do not last as long as they need to, to reach break even. If they were a cheaper vehicle I might better understand but again I reiterate; there are strictly combustion vehicles that get close on MPG and will last you 300K+ miles if you want to drive them that long.

We can both agree that GM needs to make some serious changes and they need to do it soon. We can both agree that huge SUV's aren't what's going to pull them out of this. (Those comments were directed towards demand changes ... not a claim that GM should go back to the old ways) I do however, feel that it would be a huge mistake for them to concentrate excessive energy on Hybrids and/or an excess of small vehicle lines. Just an opinion ... interesting how they vary isn't it. Even on something as simple as how good vs. how "butt ugly" any given vehicle looks :)

Mar 31 08:58 AM

[Cobra 1:]

I could not agree more, I want an 09 Ford Expedition that can run on Ethanol. But I am going to wait until they have been purchased by someone else who took a big hit on price. In the past I just went and bought what I wanted and could care less about the price or gas costs. I have changed drastically! I am driving a 2001 Cadillac Seville that I bought from an older couple with 50K on it. I am getting 23 MPG and am not to disappointed with that.

I am going to buy an Expedition in the near future (about a year) and when I do i will pay cash. I financed in the past and will not do that unless it is 1 or 2%.

My point is I have changed my driving and buying habits. This will not change regardless of what price gas reach's again. I think I am not the only one who has changed. I might be wrong.....

JMHO

Out in the market in middle America though, it's not necessarily the case. Take it from a guy in the car business ... as soon as gas prices fell below $2 demand for the old SUV's began to pick up

Mar 31 09:06 AM

[Mark Bern:]

Good article! The first thing that needs to go is the culture at GM. The next thing would be several levels of management. There needs to be more bottom up thinking instead of top down.

If GM were to consolidate the brands into perhaps 3 or 4 tops, get rid of the smaller, non-core coponents, and reduce the duplication and competition between brands they might have a chance. The company should focus on competing with Toyota, Honda, Ford, BMW, etc.

Leveling the cost playing field may only be achievable by going through the bankruptcy process. They have made considerable progress but the tension and distrust engendered by the negotiations process will linger and continue the old "management versus labor" culture that is another factor that keeps GM from competing. Bankruptcy can create a buffer in the age old internal blame game.

Management needs labor and labor needs the company to be successful and grow to add more jobs. In the short term, the two faction need to find ways to work together against an outside foe. It is totally useless to continue to fight within the walls of the company.

Every employee at every level of the company needs to be vested in the future of the company. Every employee, regardless of stature, needs to feel that they are part of the solution, part of a team. They need a common enemy. Union management could help enormously to help management focus the company in the right direction. Will they? I have my doubts.

Mar 31 10:53 AM

[elcopone:]

Fair enough FE812. I can live with that. :)

Mar 31 11:38 AM

[Happy Mr. C...:]

GM simply needs to consolidate to 2 brands: Chevy and Caddy. The model of 2 brands seems to work well for Toyota, Honda, & Nissan.

Mar 31 12:09 PM

[bobbobwhite:]

All car manufacturing in America needs to be non union to be globally competitive with the foreign brands here that are non union. That means a move away from Detroit. Too bad, so sad Detroit. Also, car makers here should immediately stop gov't lobbying to compromise sensible gas mileage standards that foreign makers support. That lobbying turns people off with the thoughts that Detroit is crooked or using undue gov't influence for things that cause useless waste, bad health and dirty air. And, I'll bet that mileage lobbying costs a thousand per car in nothing of quality or features gained.

Just the above 2 changes would make the car industry in America viable again even if no other changes were made such as reducing model choices( also needed for efficiency).

Mar 31 01:19 PM

[Allan Frain:]

Agreed. The sad part is that the same words could have been published at any time in the last quarter century and would have rung just as true.

Mar 31 02:32 PM

[NetworkKing76:]

I agree with this article completely...which is why I hoping that the Auto Task Force would not just play along. Constant cost-cutting is self-deprecating like you said.

Why aren't hybrids marketed as premium vehicles (GT, XLE, Eddie Bauer, etc)? Ford has come out with "Eco-Boost" (sp?) which is a step in the right direction. Combine that tech with hybrid and you have a faster vehicle with better fuel economy. (Best of Both World's) Plus they could move to fewer engine platforms (or will the union allow that?)

Partial employee (or Union) ownership will align them with the business and provide incentive to increase value and quality (they have made improvements in quality and design).

Mar 31 05:23 PM

[FE812:]

Interesting ...


On Mar 31 05:23 PM NetworkKing76 wrote:

> I agree with this article completely...which is why I hoping that
> the Auto Task Force would not just play along. Constant cost-cutting
> is self-deprecating like you said.
>
> Why aren't hybrids marketed as premium vehicles (GT, XLE, Eddie Bauer,
> etc)? Ford has come out with "Eco-Boost" (sp?) which is a step in
> the right direction. Combine that tech with hybrid and you have
> a faster vehicle with better fuel economy. (Best of Both World's)
> Plus they could move to fewer engine platforms (or will the union
> allow that?)
>
> Partial employee (or Union) ownership will align them with the business
> and provide incentive to increase value and quality (they have made
> improvements in quality and design).

Mar 31 07:08 PM

[Cobra 1:]

Was the idea of not allowing lobbying what BO made his candidacy all about? What a bunch of crap! If we are going to stop lobbying what are we going to do with all the crooks in Washington! Where are they going to get their condos in Vail from, and all the other net worth increases from. If they are not fleecing the American public, these lawyers and thieves, will have to find another way to screw us the US!

Drop the next bomb on DC and lets start from scratch! Get back to the basics with people who are not corrupt and have some sense of reality, not to mention commonsense!

Boy, I have to believe the NSA and FBI are working over time policing all the words being discussed regarding the elimination of our bought (whoops) elected officials on phone calls and internet communications.


On Mar 31 01:19 PM bobbobwhite wrote:

> All car manufacturing in America needs to be non union to be globally
> competitive with the foreign brands here that are non union. That
> means a move away from Detroit. Too bad, so sad Detroit. Also, car
> makers here should immediately stop gov't lobbying to compromise
> sensible gas mileage standards that foreign makers support. That
> lobbying turns people off with the thoughts that Detroit is crooked
> or using undue gov't influence for things that cause useless waste,
> bad health and dirty air. And, I'll bet that mileage lobbying costs
> a thousand per car in nothing of quality or features gained.
>
> Just the above 2 changes would make the car industry in America viable
> again even if no other changes were made such as reducing model choices(
> also needed for efficiency).

Apr 01 09:45 AM

[Cobra 1:]

As I have stated to 303820 all along! GM and the UAW have not changed one iota! They are still us vs. them! BK NOW! Arrogance!

The United Automobile Workers union, an icon of organized labor in the United States, is battling to preserve jobs and benefits at teetering U.S. automakers General Motors Corp (GM.N) and Chrysler with a losing hand.

"The UAW is not going to be a part of the final solution. They are dead meat," said Bill Adams, chief executive of Adams, Nash, Haskell and Sheridan, a labor relations consulting company in Erlanger, Kentucky.

Apr 01 03:48 PM