As we have already mentioned in our previous report regarding General Motors (GM), one of the important catalysts for the company was a change in its management style. On August 17, the reorganization was formally announced by CEO Dan Akerson. Since the announcement, GM's share price has gone up by almost 6%.
The most critical aspect of the reorganization is that decision-making power will be shifted from regional heads to global leaders in the marketing, purchasing and product development departments.
With troubled European units of the Opel and the Vauxhall, the company's biggest product launch phase in history, due shortly, and its massive pension liabilities, such a decision from the iron-fisted Akerson was inevitable. If the change is successfully implemented, the market will positively revise GM's valuation multiples as the market witnesses GM's possible return to its glory days.
Not an Overnight Idea
A large portion of the market thinks that GM is heading towards another bankruptcy, as they think that the circumstances through which the company is going are quite similar to those of 2009, when GM was saved by a $50 billion bailout. However, critics have argued, and rightly so, that currently, having $33 billion in cash reserves, only $14 billion of outstanding debt, and net income (TTM) of $ 2.5 billion, it is not the balance sheet weakness, but rather the company's culture and poor planning that has brought GM to the brink of yet another bankruptcy.
Dan Akerson's appointment as CEO in 2010 was the first step, as there were so many seniors working for decades that could have been handed over the prestigious office, but it was the former navy officer that was handed over the charge to bring a turnaround at GM. The notion of reorganization did not come overnight.
In June, Akerson disclosed that he wanted the company to be run as a global giant rather than small regional companies with fragmented manufacturing operations. He has finally decided to shift the power from regional heads to a single global head. However, he also wants two executives to oversee the Cadillac and Chevrolet brands, and run them globally, by having one executive for each country that will overlook the product, sales and pricing.
To address culture-related problems, he ensured that ethics would be properly followed and every action by any official on GM's behalf would be properly disclosed. The recent forced resignation of Chief Marketing Officer Joel Ewanick for not properly disclosing a sponsorship deal with Manchester United was one of the indicators of Dan's determination to change the system. In another episode, Karl Friedrich, head of the Opel unit, was fired when he reported that Opel was almost $100 million short of the 2016 savings plan.
Until lately, Akerson had not been able to control GM his own way, as an author stated, Dan Akerson runs GM with a tight fist, but appears to be losing his grip. However, now Akerson has the determined Dan Ammann (CFO) and Mary Barra (Product Development head) on his side, which is probably why he has decided to go with such a big change of centralizing operations.
Dan Ammann and Change
The appointment of Dan Ammann as the CFO was the next step taken to change the company's corporate culture. The Finance department was held as one of the main culprits for the company's downfall in 2009. The department was characterized by arrogant managers who still lingered on the fantasies of the era when GM was performing at its peak. Ammann is focusing on keeping matters simple and clear. Recently, he used only three slides, rather than a couple of dozen that were used as a norm, to present the importance of GM's stock price for the company, which shows his focus on being precise. Ammann has already changed half of the 15-member team that reports directly to him. He is working hard to train the 4,200 member global finance team to avoid complications, and impart their knowledge to people in such a way that the audience understands what is being communicated to them, even if they have not specialized in finance. Under the reorganization plan, Ammann has been asked to design and implement an accounting system in 12 months or so, which would allow for greater transparency in country-wise results, and help GM to track where it spends its money across different divisions. This accounting system will better complement centralized operations, unlike the older obsolete system that reinforced divisions across GM. The accounting system will be ready by the year end, according to Ammann, and this will be an important catalyst as to whether the company is heading for a successful reorganization or not.
Mary Barra, Product Development and Change
Mary Barra was appointed as Senior Vice President of the Vehicle Development Department. She claims that at least $1 billion can be saved from GM's engineering operations. The Senior VP holds a key post, as her decisions decide how much time it will take for a new vehicle to reach the market. She is extremely opposed to the stubborn bureaucracy that rules her department. Last month, she removed a whole layer of management in her department, including 20 executive positions.
The $1-billion savings will be achieved by addressing late design changes, a slow decision making process at the initiation stages, and reducing the transfer of engineering work from one part of the world to another.
Even before the reorganization, she had been partially successful in bringing change to her department. Some of her successes included faster than normal development of a new hybrid edition of the Chevrolet Malibu, the Chevrolet Spark (GM's smallest car), and the Cadillac ATS concept (a product expected to give the BMW 3 series a tough time). One of the most remarkable changes was her decision to introduce a new engine type, "The Ecotec," in GM's small cars, which would save the company $1 billion and three years of time that would have been spent in developing another version of the engine. She is expected to bring more savings to GM in the future, as the company heads towards the biggest product launch since its inception, replacing 80% of its new line up in the next couple of years.
Rest of the Plan
Akerson also hired Randy Mott to renovate GM's IT systems so that the car manufacturer has greater flexibility for innovation. Akerson also promoted Tim Lee, the head of GM International Operations, as the global head of GM Manufacturing Operations. Therefore, the decision-making power has been shifted to global leaders.
Akerson is looking into methods to increase GM's operating flexibility and make it a fast-paced automotive company. The Automotive Industry requires new products to move. For new products to be developed, the whole decision-making process should be smooth, quick and free of bureaucracy.
The stock is trading 40% below its IPO price of $33, after its reemergence from a potential bankruptcy. As GM has already once been through Chapter 11, the market will keep on perceiving that such a thing will happen again, until the company provides solid proof to justify otherwise. This is why the stock has not managed to trade at the same pre-crisis levels. The reorganization plan may take a long while to show results, but it has definitely changed the outlook that the market had for GM. The plan surely marks a turnaround for GM, and if successfully implemented, it will align the company with its rivals like Volkswagen (VLKAF.PK), Ford (F) and Toyota Motors (TM), and is expected to take GM to the same heights that the company once enjoyed in the 1980s. Important catalysts to watch out for are:
- Successfully implemented accounting system tailor-fitted for the reorganized GM.
- Hiring a permanent head for Opel division.
- Separate global heads for Cadillac and Chevrolet.
- Reduction in government stakes and debt, which will allow GM to operate more freely, as senior executives complained that GM had been unable to get the best blood from the market due to federally imposed limits on executive compensations.
- More favorable insider trading after CEO increased his stakes by 10%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.