GM Plans to Spend on New Models
CEO Frederick A. "Fritz" Henderson and Vice-Chairman Robert A. Lutz have been putting pressure on the company to develop more new models and get them to market faster. At the same time, GM's new board has also questioned whether the company can satisfy revenue and market-share targets without additional new products. It's not hard to see why: While GM is launching several new models in 2009, the pace will slow down over the next couple of years unless further models are developed.
By pushing hard now, says James N. Hall, principal of 2953 Analytics, a Detroit-area consulting firm, GM "could end up bringing some of these cars out just as the market turns around." The question is whether GM has the people and the resources to pull this off.
Profit Point: An 18.5% Market Share Late last summer, the board asked Henderson and Lutz if GM's product plan was adequate. Some directors had read a report from Bank of America Merrill Lynch (BAC) that said GM would replace only 45% of its sales volume with new models from 2010 to 2013. Among GM's major competitors, only Chrysler (FIA.MI) was replacing models at a lower rate.
The Merrill report went on to predict that unless GM ramped up its product pipeline, the company's U.S. market share would tumble from 19.5% today to as low as 15%. GM has told representatives of the U.S. government, which now owns 60% of the company, that it would start making money with an 18.5% share in a market that sells 10 million cars. Henderson said in a September interview that GM is replacing its models at a higher rate than the report says because newer models are already selling at higher levels than some of the comparable cars they are replacing. He also told BusinessWeek he needed to educate the new directors, none of whom have worked in the car business, on how long it takes to engineer models.
Whether pressured by the board or his own targets, Henderson wants the company to get cracking on a range of new models. Some of the cars were canceled or delayed over the past year and others will be additions to the plan. Among the possibilities: small, stylish youth cars for Chevrolet; a production version of the Cadillac Converj concept car, which runs on the same electric drive system as the Chevrolet Volt; more GMC crossover SUVs, including a boxy model that would compete with Toyota's (TM) Scion xB and Nissan's (NSANY) Cube; and new Buicks that could do double duty in the Chinese and American markets.
Still Shedding White-Collar Jobs None of this will be easy. GM has drastically cut its new-product budget. One insider says the company has dropped its budget this year down to $3 billion to develop new vehicles. That's a far cry from the $8.5 billion GM spent on average during the previous decade. Indeed, it's about what Chrysler spent during the tight-fisted reign of former owner Cerberus Capital Management.
But GM is decidedly ramping up spending on new cars. Adding as many as 10 new models over the next five years could cost more than $5 billion. GM has been burning cash this year but its balance sheet is now beefed up. The company has access to as much as $33.3 billion in government money, on top of the initial $19.4 billion borrowed before bankruptcy. GM staffers worry that the design and engineering staff will be hard-pressed to gear up development of a half-dozen new models. After all, GM has shed 5,400 white-collar staffers this year and another 1,300 jobs are targeted by yearend.
Assuming GM has the resources to pull this off, the investment makes sense. While convincing consumers to look at the company's brands remains a challenge, Lutz told reporters on Oct. 14 that GM's new cars are selling for $31,800 on average, about $6,000 more than they did last year. Says Hall: "They understand that they have to spend to get sales."