Chartered Financial Analyst (India), March 2006

ICFAI University Press (India)

Chartered Financial Analyst
March 2006
http://www.icfaipress.org/306/an.asp

ROUND TABLE
General Motors
In recent times, the debate over the fate of General Motors (GM) has only heated up as time appears to be running out for the world's no.1 carmaker while it struggles to save its future. Accumulating pension and healthcare obligations coupled with falling market share continue to haunt the auto giant from Detroit. The problem is that being a gigantic company, no solution seems to be perfect. Does that mean that the company has reached the end of the road? The Analyst invited eminent experts like David E Cole, Chairman, Center for Automotive Research, Michigan, USA; Peter M DeLorenzo, Automotive Consultant and Editor, Autoextremist.com; Arthur C Wheaton, Workplace & Industry Education Specialist, Institute for Industry Studies, Cornell University, USA; Steven Szakaly, Economist, Center for Automotive Research, Michigan, USA; and Charles Fleetham, President, Project Innovations Inc., USA, to share their perception on what the future holds for GM.
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Below are excerpts of interviews with Arthur C. Wheaton from the article (too long to include) --

How do you see GM in the global scheme of things (business), and especially in the auto industry?

Arthur C Wheaton (ACW): General Motors will continue to be one of the three largest auto companies of the world in the foreseeable future. There is, however, a good chance that Toyota will surpass GM in sales in the next three years. GM will continue to gain more sales in Eastern Europe, Asia (especially China) and South America. It will also continue to struggle in the US; especially, if there is a strike at Delphi.

What kind of solutions would you suggest for the problems being faced by GM?

ACW: GM needs to revitalize its lineup of cars and reduce its dependence on large SUV’s and trucks. It needs to learn to work more cooperatively with its suppliers and to build long-lasting relationships to stabilize quality, reliability and profitability of both GM and its suppliers.


Do you think GM is suffering due to industry-related problems, or are the problems specific to GM?

ACW: The problems facing GM at the moment are also being faced by Ford and to a lesser extent DaimlerChrysler. The problems are also directly linked to and causing major problems in tier I and tier II suppliers. When GM and Ford face profitability issues they have an immediate and direct impact on Visteon, Delphi and American Axle as well as other suppliers. The reduction in scheduled vehicles for production has a devastating impact on the viability of the suppliers to stay in business, as witnessed by the excessive number of bankruptcies and reorganizations in the suppliers today.


What are the strengths still left with GM that it could use to wade through its troubles?

ACW: GM has the strengths of depth and human resources around the globe. They have significant partnerships with other automakers and countries to help them engineer new products and tap new markets. The relationship with Suzuki is quite important for the Indian market. It has also been largely underutilized in the other Asian markets with GM preferring to rename the Suzuki vehicles and call them Chevrolets.

For GM to wade through this major economic mess, it will have to increase its investments in new vehicle development and reach for more creative styling. They have greatly improved the quality of their vehicles while being unable to change the poor impressions of past mistakes. The
cooperation between GM and Daewoo has been vital in producing a good small car for an affordable price. The Fiat partnership may have been a huge mistake, but it did yield a decent small diesel engine ready for mass distribution throughout the developing countries.


With the present scheme of things do you think GM will file for chapter 11; and if it does, what kind of impact would it have on the industry, economy, employees and, more importantly, on its future?

ACW: I think it is premature to speculate about filing for chapter 11. If GM does file for bankruptcy, it would be only if things get dramatically worse; most likely the result of a catastrophic strike at Delphi, and GM not being able to find replacement parts. GM has sufficient liquidity in cash to weather the storm for a few years. They are finally starting to
realize that the SUV’s won’t save them and have canceled major redevelopment work on the TrailBlazer. The impact of a GM bankruptcy would devastate the US economy in manufacturing. There is an old American expression that says, “What’s good for GM is good for the US; what’s good for the US is good for GM.” They are tied together and are almost inseparable. When GM faces turmoil it has an immediate impact on its suppliers, as well as its domestic competition. When GM faces a problem it is assumed Ford and Chrysler must have the same problems, since they have the same union and similar contracts. The impact on the US labor unions would also be severe not only on the United Auto Workers (UAW) but also on many other companies and unions that base their wages and benefits on what they receive. In many cases, companies will pay equivalent compensation to avoid unions. So if the UAW has been a deterrent to underpay the employees, the GM bankruptcy could cause massive pay cuts and benefits for many companies including unionized and non-union employees.


Why didn’t GM sort out its present problems in their initial stages itself?


ACW: GM is a very large bureaucracy, and being the largest manufacturer makes it difficult to change course. Turning the titanic around takes some time and space. There is a largesse that sets in making large-scale change more difficult. The American expression is “if it ain’t broke, don’t fix it”. Well, it is now painfully obvious that the old model and paradigm is broken and needs to be fixed. Many of the executives that are in the GM bureaucracy are more afraid of failure than to take chances on success. The boring design in many of the GM products reflects the unwillingness to take chances. GM has always thought that trucks and SUV’s will pay for all the lack of progress on cars. They gave up designing good and exciting small cars to chase the higher profit margins on trucks. They also failed to recognize the impact of high gas prices on their sales and the negative image of large SUV’s now that gasoline prices have gone up. There is still time to change for GM, but not much time for doing things the same way as before. Time is running out for Rick Wagoner before the shareholders give up on him. Kirk Kerkorian may be able to apply enough pressure on the board to make the right decisions and to get things moving a little more quickly. Bob Lutz was not able to crack all of the bureaucracy, but may have his moment now that the problems have come into the spotlight. Management will have to give up on the past conservative styling and start designing ‘must have’ vehicles.