General Motors (GM) is unwinding its decades-old international alliance strategy. On Mar. 6, the struggling auto giant disclosed that it will sharply reduce its stake in Japanese auto maker Suzuki Motor.
GM will sell the majority of its stake back to Suzuki for $2 billion, dropping its ownership from 20% to 3%. Both companies will continue to collaborate and will jointly run a plant in Canada that builds the Chevrolet Equinox and Pontiac Torrent crossover SUVs. A GM spokesman says the time was right to sell the Suzuki shares, since GM expects to reap a $550 million to $750 million pre-tax gain on the deal.
The Suzuki move is the latest global alliance GM has scaled back. Last year, the company dumped its shares in Fuji Heavy Industries, parent of carmaker Subaru, and early in the year dropped its 20% ownership of Fiat Auto Spa. GM raised $800 million in cash on the Fuji deal, but lost more that $700 million on the investment. But with Fiat, GM had to pay $2 billion to escape a put option that could have stuck the U.S. carmaker with the struggling Italian company.
BURNING THROUGH CASH. Sources familiar with the Isuzu relationship say GM may even sell its remaining 8% stake in the Japanese truck and engine maker. GM used to own 40% of the company, but reduced its stake to 12% in 2002 when the company was restructured -- and it has since cut it to 8%.
GM's primary motive in unloading its global alliances is generating cash. The company may soon be paying a few billion dollars to buy out some of the 25,000 workers it plans to cut in the next two years. In addition, GM execs and United Auto Workers union negotiators talked for many hours over this past weekend, hammering out a deal in which the automaker could buy out some workers at bankrupt Delphi, GM's former parts unit that was spun out in 1999 (see BW Online, 2/6/06, "GM Slashes Dividend, Benefits, Exec Salaries").
GM has $20.5 billion in cash. But its North American auto business burned $6 billion last year while the company reported a loss of $8.6 billion. The cash burn has led many to speculate that GM could end up in bankruptcy, and bond-rating agencies have pegged its debt deep in junk territory. (see BW Online, 2/8/06, "Deutsche Bank Cuts GM To Sell from Hold").
MIXED BAG. In the near term, GM needs money to fund a quick restructuring. GM is contractually on the hook for some Delphi retirees. And if angry UAW workers in Delphi plants strike over the parts firm's attempt to rewrite their labor contract, GM could be shut down as well. A long strike could force GM into bankruptcy (see BW, 12/12/05, "What If GM Did Go Bankrupt...").
To avoid a strike, GM could buy out some of Delphi's 30,000 workers. It could also buy out enough of its own workers and then hire Delphi's union employees to work in GM plants. That would cost an estimated $3 billion, according to a recent research report by J.P. Morgan analyst Himanshu Patel.
The need for cash may be GM's main reason for backing out of its international deals. But some analysts and GM insiders say that the alliance strategy -- which included at one time or another, equity tieups with Suzuki, Fuji Heavy, Fiat, and Isuzu Motor -- have at best been a mixed bag when it comes to generating concrete results. Critics say it was often a distraction for the company. Says longtime industry watcher Maryann N. Keller: "GM never really knew how to run the joint ventures."
LITTLE RETURN. Ditching the alliances repudiates a strategy that Chairman G. Richard Wagoner Jr. inherited when he took over in 2000. Wagoner didn't kick off the strategy, but he had a part in buying a stake in Fiat and in the Fuji deal.
To be sure, some of the alliances provided GM with access to badly needed technology. GM gets diesel engines for its pickup trucks and European cars from Isuzu, and it uses Fiat diesel engines, too. Isuzu also has built some small commercial trucks that GM sells in emerging markets.
But in many cases, GM paid a lot of money and didn't get much of a return on its investment. Take the Subaru deal. Subaru built the Saab 9-2X sedan and wagon for a few years, but GM could never really mate the Japanese company's all-wheel drive system with its own cars (see BW Online, 3/3/06, "GM-Europe's Saab Story"). GM also lost $719 million when it sold its stake in Fuji Heavy last fall.
WORKING WITHOUT SUZUKI. GM claims that the $4.4 billion it spent to get in and then out of Fiat yielded a return. It says the diesel car engines and a purchasing joint venture with the Italian carmaker made the venture profitable. But the company has never provided any details.
And Suzuki? GM has owned part of Suzuki since 1981, when the company bought its first 5.3% stake. Since then, GM has sold small SUVs like the Chevrolet Tracker, but none of the vehicles did much for GM in North America. GM did, however, sell some Suzuki vehicles in emerging markets in Asia and still gets engines and subcompact cars.
Still, GM struggled even with Suzuki's help to establish a strong foothold in Asia. Only now that GM bought assets cheaply from bankrupt Korean auto maker Daewoo has it penetrated Asia significantly.
It's tough for GM to claim that its alliance strategy has been a clear success. But at least by selling off the assets, GM can generate some cash to fix the business back home.
With Kenji Hall in Tokyo Welch is BusinessWeek's Detroit bureau chief
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