“What was good for the country was good for General Motors and vice versa,” said Secretary of Defense Charles Wilson in the 1950's. Well, he was half right. It would be good for the country if every employee received excellent medical coverage, lucrative labor deals, and was able to retire early; however, these are not so good for General Motors. Ford has many of the same problems and has come under the spotlight recently for closing several large plants. Chrysler was in a dire situation 15 years ago which they solved by merging with German auto maker Daimler/Mercedes. Both Ford and Chrysler still have the same large legacy costs that GM does, but GM takes the brunt of the criticism.
In the early 1950's, the United Auto Workers union managed to agree with GM that all medical costs would be covered by the company. At the time, the decision was not a huge issue, but as health care costs have soared, so has the drain on the company. Over $2000 per car goes to pay employee health benefits. Other agreements with the UAW in the early 70's have come back to haunt GM. The ‘30 and Out’ program that offered a full retirement plan to any employee who stayed with the company for 30 years is now becoming a ‘30 and Out of Business’ program for GM. Most decisions made when GM held a larger market share seemed appropriate at the time and may have been planned out for the next five years, but certainly not for the next 25.
In the 1980's, a wave of imports from Asia with lower prices and better build quality caught GM sleeping at the wheel. The exchange rates at the time made it possible for Asian companies to be profitable even with the import tariffs. The public was also tired of boring and expensive domestic cars which made the compact and efficient imports an attractive option. Some argue that the American made cars of the time were poorly built; however, the issue was that the imports were very well made and over-engineered, which caused the domestic cars to appear slapped together. Early use of computers and electronics in cars around the same time did not help either, as many U.S. built cars had problems while the imports did not. The merging of electronics, which has long been Japan’s forte, and well-built compact cars caused a lasting impression on the public that imports were better, a reputation that the Big Three are still working to rectify.
When GM was at its’ peak after World War II, every brand had a specific target market and the line was built on a ‘Step-up’ program. Each automotive divisions was targeted to specific market segments and, despite some shared components, each vehicle distinguished itself from comparable GM stablemates with unique styling and to some extent, distinct technology. The shared components and common corporate management created substantial economies of scale while the distinctions between the divisions created an orderly upgrade path, with an entry-level buyer starting out with a practical and economical Chevrolet and, assuming progressive prosperity of the buyer, moving through offerings of the several divisions until the purchase of a Cadillac. The divisions were not competing with each other so much but rather they were passing along the same customer, who would thus always be buying a GM product, with the profits flowing to this single corporation. This plan seemed fine until roughly the early 1960's when designers and engineers began to lose sight of the brand distinction of their marque. Chevrolet moved into GMC’s territory with what has now become an identical model lineup of trucks. Pontiac, which began selling solid but reserved cars, moved towards performance, an area that the recently defunct Oldsmobile brand was supposed to incorporate. Over the last half-century, the system that worked so well for GM’s first 50 years has been cast aside; a move that experts believe also had something to do with the current problems. A customer can now go to a dealer and buy a 6 cylinder Cadillac, (an engine fit only for Chevrolet’s in the 1950's) for half the price of a top of the line Chevrolet SUV.
More recently, GM has been reluctant to move away from designing and building full-sized SUVs, which have become increasingly difficult to sell with rising gas prices. Chevrolet has recently recalled 900,000 trucks for a safety measure. Several vehicles, such as the Pontiac Aztek, were complete flops and financial disasters. Overall, the years have been hard on what was once the largest private employer and the first U.S. company to make more than $1 billion in a year.
Now faced with vast numbers of retirees to care for, rising production costs, vehicles that are behind the times and hard to sell, and competition that has been a step ahead for the last 20 years, the outlook is grim.
In April 2005, General Motors posted a $1.1-billion loss, for the first quarter of that year. Its debt was also downgraded to junk bond status. GM announced plans to cut 25,000 jobs in the United States, and included plans to shut down one of the Oshawa, Ontario, plants by 2008.
By November 2005, within the first nine months of the year, GM had posted a near $4 billion loss. On November 21, 2005, GM had announced a revised plan of increased cuts. These cuts went from 25,000 to 30,000 employees, or 9% of its labor force. GM also increased the number of plant closings. Originally, the company planned eight plant closings; the new plan calls for the closing of twelve facilities.
In December, 2005, Standard and Poor's further downgraded GM bonds to "B", with the observation that it is ‘now dubious’ whether the new line of SUVs and trucks would return GM's North American auto business to profitability On December 21, 2005 Toyota Motor Corp announced that it would produce 9.06 million vehicles for 2006. Analysts estimate that GM will only produce around 8.825 million cars for 2006, giving up the title of the world's largest auto producer. GM has held the title for 74 consecutive years without a doubt. However, GM's Wagoner is confident that GM will remain number one. No active employee was even alive in 1930, the last time a rival sold more cars in the U.S. than GM. The idea of being number one is etched into the company's DNA - which makes it all but impossible for executives to embrace a strategy of getting smaller. Also, union leaders have never seen a problem that couldn't be ironed out at the bargaining table. "I think GM and the American auto industry are facing a lot of competition," says United Auto Workers President Ronald Gettelfinger. "But we've always had difficult times."
In February 2006, GM decided to slash its annual dividend to $1.00 per share. GM had resisted the move for some time. However, the reduction will save GM about $565 million in cash each year. GM invested in Suzuki in the early 1980s, with their share of the company rising to 20.4%, but in March 2006 the company sold 92.36 million shares (reducing their stake to 3%) in order to raise $2.3 billion.
Will GM go bankrupt? Probably not. It certainly cannot within the next five years even if nothing gets better. GM would have to be eligible to declare bankruptcy; it can’t just decide it would be strategically beneficial to do so. General Motors, with $19 billion in cash and a book value of $40 billion, hardly meets that test now or for a number of years. Also, GM doesn’t need a bankruptcy threat to win concessions from its unions. It has Delphi to do that for them. When the Delphi bankruptcy is concluded, the unions will know what they can expect to win from GM if they force it to use the bankruptcy route. Chances are, they will settle for something close to the Delphi concessions because they have even more to lose with GM, or at least that is what is hoped. The UAW has a reputation for being stubborn even if it means losing everything. Another reason is that GM as a business is a very valuable franchise. Before it goes into bankruptcy, it would likely reach a merger agreement with a foreign car manufacturer much as Chrysler did seven years ago when it merged with Daimler/Mercedes to form DaimlerChrysler. Also, unlike the airlines, GM and its unions have it within their power to fix the problems. There are a variety of ways this can be done short of bankruptcy. The main battle may well be within the United Auto Workers, pitting young workers against those who are either retired or about to retire.
Lastly, a bankruptcy filing would be most devastating to GM shareholders. It is the duty of the board of directors and management to do everything to prevent that from happening. While this principal seems to have been ignored in several recent bankruptcies, it seems less likely to happen here.
With that in mind, things will still have to change. Various analysts have modeled different strategies. One of the more dramatic plans was though up by experts at CNN Money.
Their plan entailed having five fewer assembly plants and building around 4 million vehicles a year in North America instead of 5.1 million. That would slash U.S. market share to around 20%, but factories would hum with real demand, stoked less by rebate giveaways and cheap rental-car sales. Workers would have a cost-competitive health-care plan but would fall back on government unemployment benefits when hard times demanded layoffs. Profitable auto sales and finance operations would fuel a richer research budget, tightly focused on four or five divisions instead of eight.
This new GM might make two-thirds as many models: Chevrolet, perhaps its most recognized global brand, handling trucks and mass-market cars; Saturn, behind its cool new Euro styling, selling more expensive cars with design flair. A resurgent Cadillac would parade advanced technology and luxury. Hummer would only last as long as brawny SUVs are hip. GMC, which is very profitable these days, would stick around if Chevy couldn't satisfy America's yearning for trucks. Pontiac, Buick, and Saab would follow Oldsmobile to the scrap heap.
Maybe CEO Rick Wagoner will decide to bite the bullet and spend the billions needed to launch such a dramatic overhaul now, rather than waiting. And maybe the UAW leadership will get religion and offer more than token help. Where they decide to take GM will matter a great deal to the army of auto workers toiling away in its factories, the vast web of businesses that feed off of them, and legions of investors.
There is, however, another possibility that could reverse the fortunes of GM; its new Flexfuel vehicles that are able to run on 85% ethanol. The change to this fuel source was outlined by President Bush in his State of the Union Address. Although the price of ethanol is currently higher than normal gasoline, that is very likely to change. Government tax breaks and subsidies could also make these vehicles a must have for the car buying public. GM has already started a huge advertising campaign for the vehicles, and many companies across the country are currently building plants to produce this alternative fuel.