How GM Could Become Arrogant Once Again

Includes: F, GM, HMC, TM
by: Rick Newman

Well, well. General Motors (NYSE:GM) is back.

Barely a year and a half after its epic bankruptcy filing and government bailout, the shrunken automaker has taken a huge step back toward normalcy, with a public offering that begins to dispel the "government motors" stigma. By almost all accounts, GM's stock float has exceeded expectations, raising nearly $23 billion and reducing the U.S. Treasury's stake from 51 percent of the new GM to about 26 percent. It will still take a few years to sell off all the government's shares, but investor enthusiasm toward GM has restored some of the luster that disappeared over a quarter century of decline.

GM's comeback is partly due to the restorative effects of Chapter 11, which allowed GM to write off billions in debt and negotiate far more favorable contracts with its unionized workforce. And it took government overlords to dismiss two home-grown CEOs largely viewed as captive to the bureaucratic groupthink that turned GM into a slow-motion monolith. But GM itself can claim credit for some of the accomplishments that led to a successful IPO. GM's profitable operations in China, Brazil, and other key overseas markets have been a strong point in its portfolio for more than a decade. Quality and design improvements were starting to raise the reputation of its cars well before the bankruptcy filing. And the plug-in Chevrolet Volt, the automaker's latest "halo" car, got its start back in 2007, when practically nobody thought bankruptcy was in GM's future.

The biggest cultural problem at the old GM, however, was that mediocrity became good enough, and success was taken for granted—even when the company lost billions of dollars. GM has clearly been humbled, but a successful IPO could rekindle the hubris at a company that was, after all, considered too big to fail. "Confidence morphs into arrogance," says Jeremy Anwyl, CEO of car-research site "There is a fine line, and GM has crossed it in the past." Here are five ways GM could once again succumb to the kind of arrogance that brought it down before:

Relax on quality. GM is the first to point out that the quality of its cars has improved sharply. In the U.S. News car rankings, for example, the Buick Regal sedan, Buick Enclave crossover, Chevy Equinox SUV and GMC Terrain SUV all rank No. 1 in their categories. In the latest J.D. Power and Associates initial-quality survey, 10 GM models ranked in the top three in their segments. That's a nice showing. But the fanfare stems largely from the fact that GM is a prodigal son returning to the fold, after many years when the automaker turned out a remarkable series of duds. Some older models are still weak, and overall, GM's quality and reliability still have a lot of room to improve. Despite a better showing in the J.D. Power survey, all four GM nameplates are clustered around the middle on quality—below Ford. In Consumer Reports' latest reliability survey, GM logged notable improvements—but all four brands still fell slightly below average.

GM will indoctrinate mediocrity and stop earning points from buyers if quality plateaus and the majority of its vehicles remain clustered near the middle. It's a tough challenge, because it's easier to raise quality from a low point than to institute the kind of refinements that produce world-class quality. If GM takes its eye off the ball and lets quality slip, customers and critics who supported GM after bankruptcy will feel burned—which could make it a short-lived comeback.

Milk popular models. GM has some genuine hits these days, like the Chevy Traverse and GMC Acadia crossover twins, the Cadillac CTS sports sedan, and the Chevy Camaro muscle car. The new Chevy Cruze is probably the best small car GM has made in decades, and the Buick Regal has impressed critics, if not buyers. But GM has a history of playing favorites in its lineup, plowing resources into trucks and SUVs, for instance, while neglecting its mainstream car lineup for much of the 1990s and early 2000s. And GM still is still relying on some aging models that are falling behind the competition. The Chevy Impala, for instance, is a generation out of date, making it a decent rental-fleet staple but an afterthought in the showroom. The Chevy Malibu was comfortable and competitive when it debuted in 2008, but it hasn't quite kept up with top-shelf rivals like the Ford Fusion and Honda Accord. To build a consistently strong lineup, GM needs to keep all of its models fresh, which can be expensive but is necessary to please buyers in every segment of the market. If GM caters to some customers more than others, it will once again be viewed as a big company that can only do a few things well at any given time.

Let others lead on technology. The Chevrolet Volt is an exciting newcomer to America's roads, a battery-powered plug-in fueled by regular household electricity until the battery runs down and a gas engine kicks in. GM has invested real money in the Volt, which could turn out to be a pioneering vehicle that helps shift drivers away from fossil fuels. But everybody at GM knows that Volt sales will be minuscule for the next several years, since it's an expensive technology showpiece with limited appeal to most ordinary drivers.

GM will gain some technology cred from all the attention showered on the Volt. Critics may even forget that GM still doesn't have a mainstream hyrbrid, more than a decade after the Toyota (NYSE:TM) Prius debuted. But the buzz will fade if the Volt starts to look more like a showy science project than a genuine automotive breakthrough. To capitalize on the Volt, GM needs to overcome the A.D.D. that doomed other technology efforts in the past, and continually refine its electric drive technology until it's viable for a much bigger market. That could take a decade or two. At the same time, GM needs to stay at the fore of traditional powertrains, explore other options like hydrogen and natural gas, and come up with a meaningful fleet of hybrids. "This is a strategic inflection point for GM," says Vijay Govindarajan, a professor at Dartmouth's Tuck School of Business and former chief innovation consultant for General Electric (NYSE:GE). "GM better use its second life to re-focus on what made it a great company earlier in the 20th century—innovation."

Underestimate the competition. Another GM foible has been a tendency to forget that the competition gets better all the time. GM is notorious for benchmarking its development projects against existing Hondas (NYSE:HMC) and Toyotas—then producing cars that match up nicely with last-generation competitors but are a step behind the newest models. The Malibu fits that profile—it went head-to-head with most competitors when it debuted, but didn't remain a must-have car for long. Ford (NYSE:F) did a better job with its Fusion sedan, partly because it freshened the lineup along the way with a new hybrid model that has consistently earned praise. GM needs futuristic designs and look-ahead technology across its lineup, not just in select areas.

Emphasize size over profitability. The biggest reason GM has lured investors is profitability: The automaker has earned an impressive $4.2 billion so far in 2010, and that's in a depressed market that's far below the peak sales levels of 2006. Performance has improved because GM has overcome some of the woes that dragged down profits in the past: Overproduction, deep discounts and heavy incentives to move cars that were appealing on price alone. With popular models that win on design and performance, GM has been able to keep pricing up, reduce its low-margin fleet sales, and keep inventories lean. It has also helped that GM axed four of its eight brands—Saab, Pontiac, Saturn, and Hummer—which has improved the brand image of the remaining nameplates and allowed GM to allocate marketing resources to fewer, more deserving, products.

To keep profitability up, GM must continue building great cars—and perhaps get smaller still. GM was the biggest automaker in the world for nearly 80 years, until Toyota surpassed it in 2009. The company has been obsessed with market share, often at the expense of profitability. That's why it took bankruptcy and a government car czar to downsize the auto industry's most unwieldy product line. Yet GM's four divisions still seem like an outsized portfolio. Toyota only has three divisions, with clearer distinctions between them than GM has. Ford is downsizing from three to two, and Honda and Nissan only have two. Volkswagen, Kia, and Hyundai offer everything from economizers to luxury rides under just one division. It has taken a long time for GM to realize that more can be less. The test now is whether GM sticks to its diet, or binges all over again once its government minder backs away.

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