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Facing reality at GM

3721 Views 6 Replies 6 Participants Last post by  G35X
Belatedly, the automaker is coming to terms with the weak economy and the soggy car market.

By Alex Taylor III, senior editor

(Fortune) -- Truly determined optimists purported to divine good news amidst the wreckage of General Motors' $3.25 billion first-quarter loss. To be sure, the financial results were better than some had expected, GM made money everywhere except in North America, and the automaker is doing better controlling its costs.

But what was notable about the earnings announcement, as well as the subsequent conference call with analysts and journalists, was how difficult the quarter really was in North America -- and how hard GM (GM, Fortune 500) is finding it to face up to that reality.

The big news came when newly named president Fritz Henderson more or less admitted that GM markets and distributes cars under too many brands - but can't cut the underperformers because doing so would cost too much.

GM has argued for years that with eight brands of cars and trucks in North America, it can slice and dice the customer base better than anyone, and provide buyers with more choice. Ever since it killed Oldsmobile at the end of 2000, it has resolutely rejected the need to shutter any more divisions, even as it moved to shunt Buick, Pontiac, and GMC into the same dealerships, and created a premium division by joining together Cadillac, Hummer, and Saab in a shotgun marriage.

On Wednesday, Henderson let the cat out of the bag, in effect saying that it wasn't the strength of the brands that kept them in business, but the cost of getting rid of them. As a business proposition, the cost of doing away with a brand is too rich for GM, he said, adding: "Oldsmobile was pretty painful." GM's approach since then, he explained, was that "instead of ending the brand," it decided to slam them together into single distribution points and shrink their model lineups.

He admitted that doing away with a laggard brand (you can insert Buick, Pontiac, Hummer, or Saturn here) would cause a big splash and might feel good. But it wouldn't be cost-effective, in his view. GM spent nearly $1 billion on Oldsmobile in 2001 alone buying out dealers and shutting down operations.

More confessions were forthcoming from Henderson and chief financial officer Ray Young:

* They admitted that their U.S. sales projections for 2008 have been too rosy. GM had been expecting more than 16 million vehicles, including trucks and buses, to be sold this year. In fact, the adjusted selling rate for the first quarter of the year points to 15.6 million. That's a significant shortfall when you are trying to manage production and inventory.
* They expected parts-maker Delphi to emerge from bankruptcy in April. Since its financing fell through, however, it didn't, and GM has agreed to cough up another $650 million. At a time when GM is scraping together pocket change, Delphi (DPHIQ, Fortune 500) has been an expensive obligation. GM has taken $8.3 billion in Delphi-related charges over the past few years.
* They didn't forecast $120-a-barrel oil. Of course, nobody else did either, but higher gasoline prices are accelerating the shift out of highly profitable SUVs and pickup trucks into less-profitable crossovers and passenger cars -- all to GM's disadvantage. Said Henderson: "The change in market mix has accelerated faster than we thought."

Several other first-quarter events made a mess out of any immediate plans to return GM North America to profitability. The big one was GMAC, its once-dependably profitable finance arm, which lobbed losses of $276 million onto GM's operating statement, and added to the injury with a $1.5 billion non-cash impairment charge.

Henderson complained a bit about the overall economy, saying, "If we'd been dealt a better hand with the market, we'd be doing better." But being more of a realist than an optimist, he added, "We have to adjust. We have to learn how to make more money in cars and crossovers and tighten our belts with regard to cost expenditures."

As Henderson would be the first to admit, GM doesn't have all day to get this done. But he should at least be happy that he doesn't have a retired CEO like Jack Welch looking over his shoulder. If he did, his faulty first-quarter forecasts might have gotten him thrown under the bus.
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The problem with GM has been that for the last 35 years, is that they have been reactionary to public opinion and fashion. Prior to that, they led public opinion and even created opinion before people even knew they had one. The other American car companies did too. The oil embargo of '73 combined with new smog regulations and the coming of age of the Baby Boomers changed all that. They never have seemed to be able to regain the talents they had before.

Circumstances morphed cars from being exciting and new into everyday appliances. As the appliances became tougher to sell, GM searched for new guidance for the first time in their history and started really focusing on what it was that people wanted and how to maximize dwindling profits. They quit thinking in terms of cars and started thinking in terms of product.

In the past they told people what they wanted. They just instinctively knew without asking. Sort of symbiotic, the people inspired GM and GM inspired the people. Now they just say, "What do you want and we'll try to build it." It's kind of like a bunch of rich old white guys trying to put together a Hip Hop group just so they can sell records.

If GM wants to regain relevance, they need to stop looking at Toyota and Honda for business models and look more at Harley Davidson and Apple Computer to see how to pull it together and regain market respect in America. They will always be the greatest car company on Earth from the 1930's to the 1960's but after that, it falls apart. People don't really want to see a retro revival, what they really want is innovation, design leadership and a reflection of American ingenuity and spirit.

If I were upper management, I would round up all the significant department heads and go off to a retreat somewhere. There, for a good amount of time, I would drill into everyone's heads history, what it means to be GM, what it means to be American and what makes the great cars of the past so great. I think there they would discover that once they got in touch with their inner car guy, that the answers lie in just making cars that make them personally proud and worrying about market share, shareholders and profit margins latter.
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