Why GM Failed
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From: Melbourne, Australia
The company took on excessive debt to fund their legal obligations with the union and retirees, however, through the sale of assets such as Allison Transmission, GMAC, Hughes etc., it was able to maintain a stable cash position up until the very end. In order for GM to have survived the sudden drop off in sales without bankruptcy, GM would have had to have over $40 billion in cash on hand.
GM bet the ranch when it launched the GMT-900 as it had no other viable options after the unsuccessful launch of a series of passenger cars earlier in the decade. From the data presented it appears it was a reasonable business decision. Figure 3 suggests the decision to move up the launch of these vehicles starting in late 2006 was valid and did help to significantly improve revenue. However, they were not as successful as intended because of escalating fuel prices. With fuel cost increasing, revenue from trucks slowed. Unlike other auto companies GM could not gain traction in the market with its passenger cars to account for the lost revenue on trucks.
And make no mistake about it, after GM emerges from Chapter 11, the current fullsize pickups and SUVs will continue to generate the cash flow to fund the restructuring of the company until a more balanced profitable portfolio of products can be released. Today, these vehicle make up approximately 31% of GM’s sales (Jan-to-June 2009) and up 1% from last year. According to Automotive New production data (ending May 30th), GMT-900 production was down 40% compared to GMNA's total production being down 50% in that same period. Last year this time fullsize truck production accounted for 50% of GM total production in North American and today it is 64%. If historic trend hold true, fullsize pickup truck production will lead the recovery in the auto sector as the economy rebounds. As I discussed in an earlier article (See 2009 US Auto Sales May Have Reached Bottom - Slow Recovery Expected), there are indications pickup truck sales as a segment are improving.
It also needs to be remembered, the 2005 Delphi bankruptcy cost GM $12.5 billion dollars since its filing. Only now, three and a half years later, does that situation appear to be resolved. It will cost New GM over $2 billion (subsidized by the US Treasury) to finance Delphi’s emergence from bankruptcy in addition to GM taking over some of Delphi’s plants.
GM bet the ranch when it launched the GMT-900 as it had no other viable options after the unsuccessful launch of a series of passenger cars earlier in the decade. From the data presented it appears it was a reasonable business decision. Figure 3 suggests the decision to move up the launch of these vehicles starting in late 2006 was valid and did help to significantly improve revenue. However, they were not as successful as intended because of escalating fuel prices. With fuel cost increasing, revenue from trucks slowed. Unlike other auto companies GM could not gain traction in the market with its passenger cars to account for the lost revenue on trucks.
And make no mistake about it, after GM emerges from Chapter 11, the current fullsize pickups and SUVs will continue to generate the cash flow to fund the restructuring of the company until a more balanced profitable portfolio of products can be released. Today, these vehicle make up approximately 31% of GM’s sales (Jan-to-June 2009) and up 1% from last year. According to Automotive New production data (ending May 30th), GMT-900 production was down 40% compared to GMNA's total production being down 50% in that same period. Last year this time fullsize truck production accounted for 50% of GM total production in North American and today it is 64%. If historic trend hold true, fullsize pickup truck production will lead the recovery in the auto sector as the economy rebounds. As I discussed in an earlier article (See 2009 US Auto Sales May Have Reached Bottom - Slow Recovery Expected), there are indications pickup truck sales as a segment are improving.
It also needs to be remembered, the 2005 Delphi bankruptcy cost GM $12.5 billion dollars since its filing. Only now, three and a half years later, does that situation appear to be resolved. It will cost New GM over $2 billion (subsidized by the US Treasury) to finance Delphi’s emergence from bankruptcy in addition to GM taking over some of Delphi’s plants.
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From: Melbourne, Australia
One other thing the author neglected to add was that Wagoner was responsible for negotiating the last rounds of contracts with the UAW. GM's toughest stand should have resulted at that time.
Still, no good blaming Wagoner alone as he inherited the huge mess. The author did mention Roger Smith, John Smale and Ron Zarella as being the culprits for GM's terminal cancer.
It's also interesting to read how the auto industry was once self-regulating until the Fed decided to introduce laws that saw Detroit crumble, while having to stave off strong Japanese competition... that period almost bankrupted both Ford and Chrysler.
Still, no good blaming Wagoner alone as he inherited the huge mess. The author did mention Roger Smith, John Smale and Ron Zarella as being the culprits for GM's terminal cancer.
It's also interesting to read how the auto industry was once self-regulating until the Fed decided to introduce laws that saw Detroit crumble, while having to stave off strong Japanese competition... that period almost bankrupted both Ford and Chrysler.
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From: The Golden State
One of the best analysis of what happened that I've read. Also some things I didn't consider that actually make sense in hindsight.
Among them, some items that I feel are bullseyes:
"The auto industry quickly but not successfully as a whole shifted to unibody, front wheel drive vehicle with new engines incorporating new technology. All of these changes at once caused horrific quality problems. In the case of GM many of their products ended up looking alike by the mid-1980s because money was spent on the significant retooling of the company to meet the new government requirements. Less effort was dedicated to brand differentiation."
"Most of auto production in the US was by union labor and the supply chain was a captured unit within the companies. The efficiencies at the companies were also set up accordingly, for GM, Ford and Chrysler to compete with each other and not imports from Japan. The company’s passed on their inefficiencies to the consumer because the fixed costs for the entire industry were the same."
" Under Chairman and CEO Roger B. Smith, the company undertook it largest ever restructuring which arguably destroying the company in the process. With Smith at the helm, the company’s market share declined from about 44% in 1981 to 34% by the time he stepped down in 1990 on relatively flat sales volume (Figure 4). Suffice it to say, restructuring GM in the 1980s to improve efficiencies was an imperative but it was so poorly mis-managed it almost took the company down shortly after Smith retired (See Maryann Keller’s Rude Awakening and Albert Lee’s, Call Me Roger for additional insight into the Smith era). Post Smith management has been trying to put the company back together ever since with varying degrees of success."
"Under Zarella the Brand Management marketing philosophy at the company was institutionalized. Under his direction, each vehicle model would have a brand manager who was likely to have been hired from the disposable good industry with no automotive experience. In practice GM de-emphasized its once strong divisional brands and focused instead on individual model nameplates. The direct consequence was product that was designed for everyone eventually appealed to no one. Paralysis by over analysis overrode instinctive design decisions eroding divisional brand character."
"Chairman and CEO John Smith and as of 1998 COO Rick Wagoner were more focused on structural issues at the company such as creating one North American operation and removing the fragmented divisional legacy structure. "
And this very pogniant point, that I think strikes home:
"Rick Wagoner formally became CEO of GM in 2000. In late 2001 Bob Lutz was personally recruited by Rick Wagoner and soon replaced Zarella as head of GM’s North American operations. Shortly thereafter Wagoner and Lutz dismantled the Brand Management structure and brought product design over marketing back to the forefront. However, the damage had already been done as many car products designed under the direction of Zarella’s Brand Management approach were too far along for Lutz to cancel or redesign. It could be argued, Wagoner and Lutz's biggest mistake were not doing just that. But in reality and without hindsight, it was not practical.
The last products designed under Zarella were to be high volume mass appeal cars such as the midsized Pontiac Grand Prix, Buick Lacrosse, Saturn Ion, Chevrolet Malibu and Pontiac G6. When released to the market, all failed miserable and contributing greatly to GM’s eventual collapse. "
Then there is one hidden item that seems to directly answer anyone who feels that the G8 was a failure (It wasn't) and to why the North American Zeta plan was scrapped (in addition to the investment it would have taken):
" On the surface, the GM initiative made a lot of business sense. The major engineering work was already underway at GM’s Australian business unit, Holden and Chrysler had shown there was a substantial market in the US for these vehicles. However, digging into the quality of the sales numbers reveals, 39% of the 125,000 Chrysler 300s and 49% of the 115,000 Dodge Charges were sold to fleets in 2007.
GM in time would rethink their plans for rear drive and cancel all but two at this point. As of now only the new for 2010 Camaro would be released and built in GMNA. The replacement for the Pontiac Grand Prix, the G8 was not built in the US but imported from Holden starting in 2008. The volume of the new Pontiac G8 was consistent with the retail volume of the Grand Prix, at about 20,000 to 30,000 per year prior to the market collapse. For the 2007 model year, approximately 80% of the 100,000 Pontiac Grand Prix went to fleet sales. If not for the rethinking of the retail sales volume, GM could have tooled up for 100,000 Pontiac G8 in NA, and been fleeting 70% just like the Grand Prix, continuing the death spiral. GM wised up to the realities of the market and prevented a serious mistake.
Again, a fantastic read, and it cuts through alot of the fog, and offers a clear view of events.
A must read!
Among them, some items that I feel are bullseyes:
"The auto industry quickly but not successfully as a whole shifted to unibody, front wheel drive vehicle with new engines incorporating new technology. All of these changes at once caused horrific quality problems. In the case of GM many of their products ended up looking alike by the mid-1980s because money was spent on the significant retooling of the company to meet the new government requirements. Less effort was dedicated to brand differentiation."
"Most of auto production in the US was by union labor and the supply chain was a captured unit within the companies. The efficiencies at the companies were also set up accordingly, for GM, Ford and Chrysler to compete with each other and not imports from Japan. The company’s passed on their inefficiencies to the consumer because the fixed costs for the entire industry were the same."
" Under Chairman and CEO Roger B. Smith, the company undertook it largest ever restructuring which arguably destroying the company in the process. With Smith at the helm, the company’s market share declined from about 44% in 1981 to 34% by the time he stepped down in 1990 on relatively flat sales volume (Figure 4). Suffice it to say, restructuring GM in the 1980s to improve efficiencies was an imperative but it was so poorly mis-managed it almost took the company down shortly after Smith retired (See Maryann Keller’s Rude Awakening and Albert Lee’s, Call Me Roger for additional insight into the Smith era). Post Smith management has been trying to put the company back together ever since with varying degrees of success."
"Under Zarella the Brand Management marketing philosophy at the company was institutionalized. Under his direction, each vehicle model would have a brand manager who was likely to have been hired from the disposable good industry with no automotive experience. In practice GM de-emphasized its once strong divisional brands and focused instead on individual model nameplates. The direct consequence was product that was designed for everyone eventually appealed to no one. Paralysis by over analysis overrode instinctive design decisions eroding divisional brand character."
"Chairman and CEO John Smith and as of 1998 COO Rick Wagoner were more focused on structural issues at the company such as creating one North American operation and removing the fragmented divisional legacy structure. "
And this very pogniant point, that I think strikes home:
"Rick Wagoner formally became CEO of GM in 2000. In late 2001 Bob Lutz was personally recruited by Rick Wagoner and soon replaced Zarella as head of GM’s North American operations. Shortly thereafter Wagoner and Lutz dismantled the Brand Management structure and brought product design over marketing back to the forefront. However, the damage had already been done as many car products designed under the direction of Zarella’s Brand Management approach were too far along for Lutz to cancel or redesign. It could be argued, Wagoner and Lutz's biggest mistake were not doing just that. But in reality and without hindsight, it was not practical.
The last products designed under Zarella were to be high volume mass appeal cars such as the midsized Pontiac Grand Prix, Buick Lacrosse, Saturn Ion, Chevrolet Malibu and Pontiac G6. When released to the market, all failed miserable and contributing greatly to GM’s eventual collapse. "
Then there is one hidden item that seems to directly answer anyone who feels that the G8 was a failure (It wasn't) and to why the North American Zeta plan was scrapped (in addition to the investment it would have taken):
" On the surface, the GM initiative made a lot of business sense. The major engineering work was already underway at GM’s Australian business unit, Holden and Chrysler had shown there was a substantial market in the US for these vehicles. However, digging into the quality of the sales numbers reveals, 39% of the 125,000 Chrysler 300s and 49% of the 115,000 Dodge Charges were sold to fleets in 2007.
GM in time would rethink their plans for rear drive and cancel all but two at this point. As of now only the new for 2010 Camaro would be released and built in GMNA. The replacement for the Pontiac Grand Prix, the G8 was not built in the US but imported from Holden starting in 2008. The volume of the new Pontiac G8 was consistent with the retail volume of the Grand Prix, at about 20,000 to 30,000 per year prior to the market collapse. For the 2007 model year, approximately 80% of the 100,000 Pontiac Grand Prix went to fleet sales. If not for the rethinking of the retail sales volume, GM could have tooled up for 100,000 Pontiac G8 in NA, and been fleeting 70% just like the Grand Prix, continuing the death spiral. GM wised up to the realities of the market and prevented a serious mistake.
Again, a fantastic read, and it cuts through alot of the fog, and offers a clear view of events.
A must read!
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