GM still just spinning its wheels

Trends

December 25, 2005|By PETER MORICI | PETER MORICI,SPECIAL TO THE SUN

Last month, General Motors Corp. announced yet another downsizing and reorganization of its ailing North American vehicle business and named a new chief financial officer. None of this will fix GM's systemic problems and arrest its long-term decline. In fact, by spreading "legacy" pension and health care costs for many thousands of retired workers over a smaller number of vehicles, downsizing North American operations brings GM closer to bankruptcy.

Indeed, the company's stock price fell last week to a 23-year low as Toyota announced plans to boost production - a move that could set the stage for that company to replace GM as the world's largest automaker.

GM knows how to build good cars. Consider, for example, its success in China, where it is not burdened by legacy costs, unrealistic union contracts and overpaid executives, and it does not face an effective incumbent competitor with home-field political advantages. Toyota, Volkswagen, GM and others all face the same opportunities and challenges in China, and GM does well there.

Examining the ways GM offerings in North America come up short - comfort and aesthetics, drivability and reliability - indicates that GM is able to hit the mark on one or two these metrics but usually not all three at the same time. The basic problem is that GM's costs are higher than those of its Japanese and Korean competitors, and GM tries to make up the difference by putting less into its vehicles than those competitors. GM tries to mask differences in vehicle content and quality with slick ads, such as those comparing the price and size of Chevy SUVs to Lexus' offerings rather than Toyota's, and statements touting that Cadillac's reliability beats Toyota's although Lexus is the relevant yardstick for GM's luxury brands.

The reasons for GM's disadvantages are clear. Legacy costs, bureaucratic management, inefficient product design and excessive pay for blue-collar workers and senior executives raise GM's unit costs above those of Japanese and Korean competitors, even when the latter make cars in North America. Consequently, GM puts less content and lower-quality parts into vehicles, spends too little to develop up-to-date engines and transmissions and updates its vehicles less frequently than do its Asian competitors.

GM has been unable or is unwilling to address systemic cost and management problems within its corporate structure, and has increasingly leaned on parts suppliers to cut prices, not just to be competitive with overseas suppliers but also to compensate for GM's internal cost disadvantages.

Initially, this resulted in inferior parts - parts that don't perform as well and require replacement sooner than those of transplant and imported vehicles - and poor consumer acceptance of GM products. Longer term, GM's rough treatment of suppliers is helping force Delphi and others through bankruptcy.

In addition, GM has attempted to compensate for outsized engineering and management costs by building cars for multiple markets on the same platform. For example, GM sells rebadged Chevys and Subarus as Saabs.

This year, GM announced plans to further extend this approach. But this is a difficult strategy to execute, and GM has not proved it workable. After all, why should car buyers pay a premium price for a Saab built on a Malibu platform or a rebadged Subaru?

Consumers have voted out this strategy. They judge that GM vehicles don't deliver the value that Toyota and other Asian brands offer. This is evidenced by the fact that consumers are not willing to pay as much for GM vehicles as for comparable Asian vehicles, and consumers are unwilling to pay GM what it costs to make its vehicles.

The terrible losses GM has suffered in a rapidly growing U.S. economy and the recently announced plant closings are direct evidence that GM's costs are too high, and its strategies to compensate for its high costs have failed.

The GM value gap - the difference between the prices GM vehicles fetch and those that comparable Asian vehicles command - is so large that even if GM's legacy and health care costs were subtracted, the company's cars would still be overpriced.

A smaller GM will have to spread legacy costs over fewer vehicles. Plant closings don't address outsized compensation for blue-collar workers and senior executives, bloated engineer costs and bureaucratic management; rather, plant closings are the direct result of these systemic ills.

Plant closings like the shutdown of Baltimore's Broening Highway plant this spring, along with layoffs, may permit GM to temporarily regain profitability.

But continued underinvestment in new products and technology will eventually force GM to again sell vehicles for less than cost, shut more plants, lay off more workers, and further cede market share.

What GM needs to accomplish is easy to articulate but difficult to execute.

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