dispatches from the new world of work

What's a GM to Do?

Mike Neiss offers this commentary on the state of GM.

May 6th started with the normal routine ... coffee, turn on the music, fire up the web, and head to my favorite newspapers online. As REM sang in the background, "It's the end of the world as we know it ...", the headline from the Detroit Free Press seemed to confirm REM's sentiment. "GM, Ford credit rated junk". The Lansing, Michigan, assembly plant rolled their last car off the line after 85 years. Legacy costs are at an astronomical high with 2.5 retirees for every active worker. And GM's response? We have to lower costs again. If ever there was a case for re-imagining, it is at GM.

Now I've mulled it over for a week, and here's my take: Cutting costs further will not work. Already, quality and the "wow" factor have been hurt by cheaper and cheaper materials. And layoffs won't work. GM has to sell every car they have capacity to make to cover their legacy costs. They can't close a factory. The issue is clear. They have to stop the deep dive on market share loss. That means better, more exciting design. That means taking the risks they currently avoid to be the leader in hydrogen cell vehicles (oops ... too late, Honda and Toyota are battling it out to have hydrogen powered vehicles in the showroom by model year 2010). That means the UAW has to start reading the writing on the wall and give back their fair share. That means the end of promotion by entitlement, and the beginning of promotion based on real results. That means understanding that their cash cow is GMAC, but you have to have something to feed the finance pipeline.

It's hard to criticize GM. They are my former employer, and many of my friends are in senior management positions. Once they tried to turn around the late Oldsmobile brand by insisting "this is not your Father's Oldsmobile!" Don't they have to realize that they are still operating as their Father's General Motors? What do you think? What can be done?

Mike Neiss posted this on 05/16/05.

Comments

Perhaps another question is when will an automotive equivalent to JetBlue, Song, and SouthWest appear? These organizations donâ€™t have the overhead of unions and retirement accounts. Did I mention that they are actually profitable?

Posted by RTodd at May 16, 2005 12:01 PM

Here's an interesting article on the same general topic in Strategy+Business.

What's the solution? Kleiner suggests competition and innovation. I believe competition leads to either price cuts or innovation. Therefore innovation is the final solution. Like you said - Re-imagine.

Posted by Dustin at May 16, 2005 12:56 PM

Itâ€™s a bleak outlook and GM management have seen it coming for some time. Not since 2002 have GMâ€™s automotive revenues been higher than GMACâ€™s. Iâ€™ve seen it in other industries - a tendency to become increasingly dependent on the revenue earned from financing the product you make to help replace the gap in the revenue the product itself consistently fails to deliver. Itâ€™s not viable for long.

It has to come back to product innovation, cars people want to drive not because the marketing is great (though it helps), but primarily because the cars themselves are great. In fact, Iâ€™ve read that costly marketing incentives to lure customers into US showrooms combined with poor results in Europe, are some of the factors responsible for GMâ€™s troubles.

Maybe they should focus on making smaller cars and, as RTodd says, go after the mid-market more like Mercedes Benz, BMW, Opel and the Japanese manufacturers do. Then perhaps market them as luxury items at an affordable price.

Posted by Noel Guinane at May 16, 2005 12:57 PM

The missing link:
http://www.strategy-business.com/press/enewsarticle/enews042805?pg=all

Posted by Dustin at May 16, 2005 1:00 PM

GM and Ford are simply poster children for the massive shift of manufacturing to emerging markets. Their pension funds are next!

Posted by Tom Asacker at May 16, 2005 2:17 PM

there was a nice article in the ft a couple of days ago http://news.ft.com/cms/s/928dd6d2-b361-11d9-ad2b-00000e2511c8.html

"rotten cars, not high costs, are driving GM to ruin."

for those who are not subscribers the - philosophical - punchline more or less is the following:

"... This is the company, remember, that gave us the template for the modern, multi-divisional corporation. A pioneer of financial control and fact-based management, it spawned two of the best management books ever written - Peter Drucker's Concept of the Corporation (1946) and Alfred Sloan's My Years at General Motors (1964).
As the hard-headed Sloan would surely have recognised, however, this is no time for sentiment.
..."

will the ship crack, burst and sink when they try to change the course now?
will they change course?
are there some small boats that will be able to escape the disaster?

to be continued...

Posted by jens at May 16, 2005 2:48 PM

Thanks for the comment folks. I think innovation and re-imagining the business are keys. However, I do think it may take more organizational courage than they can muster at the moment. The designs are rendered blah by an overzealous concern for cost that destroys the beauty of the concept cars. Designers who don't "fit" the GM culture don't last. They just leave and form Nissan Design Institute and develop the Infiniti line. Read about it in Jerry Hirschberg's great book Creative Priorities.

Posted by Mike at May 16, 2005 3:12 PM

Management is outsourcing innovation... its the beginning of the end:

http://www.edn.com/article/CA601510.html?title=Article&spacedesc=news&nid=2551

Posted by Steven J. Ackerman at May 16, 2005 3:20 PM

Frankly, my dear, I echo Jens and the FT. I did not own an American car until last year, only because I needed wheels quick, and it's just not as good as the Japaneses cars I owned, nor the BMW I owned for two glorious years. I expected that. It says a lot that you see 20-year-old Japanese and German cars on the road, and the 10-year-old American cars look like they're being driven to the junkyard. American cars have earned their bad reputation.

If GM can earn peoples' trust by building a GREAT group of cars for once (the only good GM car I know of is the Corvette), then after 10 years, they'd be doing okay.

Problem is, I have grave doubts about whether or not the old boy's club in the GM boardrooms would allow such a thing.

GM=Studebaker?

Posted by Ron at May 16, 2005 4:24 PM

Winners attract winners. The real problems GM and other legacy companies are facing is not the retirees. It's the score of "almost retirees" who want to keep the ship afloat just long enough to finish their voyage. They build hidden administrative machines to perpetuate their own longevity that stifle creativity and discipline free thinkers. This kills the revenue just when it is needed most. Anyone with a choice runs as fast as they can away from the progresive metropolis of Detroit straight to whatever else they can find. Most probably, these companies will eventually use bankruptcy to ditch the retirement obligations and teach the unions a lesson. If they're going to come out and survive, though, they're going to need to create a new company using free thinking, non-conforming design freaks (pulling from a wide diversity of backgrounds, ages, genders and agendas). The combination of a generation of overcompensation (through deferred retirement benefits) coming home to roost and death of a cash cow is clearly a train wreck.

Posted by Tom at May 16, 2005 10:04 PM

Tom,I think you have some legitimate points here. I do not believe their primary problem is their legacy costs. A little better foresight could have helped them plan for these costs. I am a child of the rust belt, born in Toledo, my Dad, a factory worker and local UAW official who in his late years grew more appalled at what the workforce was and wasn't doing. This is more than just a big three problem. The midwest, and maybe the nation, needs a robust US auto industry. I always had the feeling working at GM that the execs were more worried about maintaining the present instead of building a future. The whole economy of building several brands on the same platform was a disaster. Short term gains at the cost of long term market share. By the way, I am driving a vehicle with a US nameplate for the first time in about 20 years. It's a fine vehicle, but has the usual US touches...back window washer doesn't work, 12 volt power receptacle quit after 2 weeks, etc. Nothing major, just another symptom of failing to pay attention to detail or perhaps forcing suppliers to cut costs to the point ofd quality failure. I hope the team at GM can figure this out...or more importantly, have the courage to rethink their obviously failed strategies.

Posted by Mike at May 17, 2005 9:02 AM