For a company run by conservative finance guys, General Motors Corp. (GM
) is making some big wagers these days. Case in point: GM agreed in late February to spend $99 million on a joint venture with beleaguered Russian auto maker Avtovaz. The Detroit giant will put its reputation on the line by selling an Avtovaz-designed sport utility vehicle as the Chevrolet Niva, for $7,500 or so, in emerging markets worldwide.
Betting on such overseas ventures with other auto makers has become standard procedure for GM. The grand design is to exploit emerging markets and develop small vehicles for Europe and North America. So, since buying the remaining 50% of Saab for $125 million early last year, GM spent $2.4 billion for a 20% stake in Fiat, $1.3 billion for a fifth of Subaru parent Fuji Heavy Industries, and $653 million to double its 10% position in Suzuki Motor. To put this spending in perspective, the $4.6 billion acquisition spree is twice GM's earnings target for this year.
Pricey as it is, this global hunt is key to CEO G.Richard Wagoner Jr.'s vow to build market share and find new technology fast. GM in the U.S., for example, has proven inept at making successful small cars for entry-level buyers, an area where Suzuki and Fiat excel. Tapping such expertise and building a global presence is worth the effort to Wagoner. "Sure, there's risk," he concedes. But "I would challenge [anyone] to find a better overseas footprint than we have."
A skeptic would point out that last year, GM's international operations lost almost $900 million, mostly from the travails of Isuzu and Adam Opel, the German operation. Revenue from outside North America is essentially flat at around $35 billion. And overseas cooperation with Detroit has resulted in some notable duds like the Cadillac Catera and the Saturn L-series--both jointly developed with Opel.
Wagoner's response has been a major review of GM's overseas management. Before, foreign alliances tended to be loosely monitored. To rectify this sloppiness, over the past year GM has installed a much tighter network of senior managers who work in the headquarters and product development centers of its partners and report directly to the top-ranking GM executive in each region of the world. Those executives send ideas to Lawrence D. Burns, GM's vice-president of research & development in Detroit. Wagoner now meets regularly with top executives at partner companies. In a sign he is getting serious, he has finally forced a tough recovery plan on Isuzu.
The new approach is paying off in some areas. GM has had success with the Opel-designed Celta in Brazil and the Suzuki-designed, Polish-built Opel Agila compact wagon in Europe. In the U.S., GM is jointly designing an entry-level Chevrolet with Suzuki.
TOO DISTANT. But the approach may not solve a kind of psychological complex GM has: It often declines to buy outright control of a partner, as Renault has essentially done with Nissan Motor. And when GM does acquire control, the process can be so ponderous that benefits are lost. Says Prudential Securities Inc. auto analyst Michael Bruynestyne: "When you can't control a company, that means making compromises."
Many of these issues are apparent in GM's forays in Europe. Witness Saab. GM bought half of the struggling Swedish carmaker in 1990. A decade later, Saab still has a measly two-car lineup, and it has lost $1 billion since GM bought it. In all, say sources close to the deal, GM spent nearly $1 billion to get all of Saab. Yet GM often let the operation sputter along without giving Saab the new products it needed to transcend its status as a niche player. Undaunted, GM plans to double Saab sales, to 250,000 a year, by 2005.
Saab is just the start of GM's troubles in Europe. Opel President Robert W. Hendry plans to quit in March. Last year, Opel lost $472 million, having badly misread the shift to diesel-powered cars. A lack of sharp styling hurt, too. To fix Opel, GM has cut 15% of its capacity and is sacking salaried workers. Concedes Michael Burns, head of GM Europe: "Our goal is to be profitable by [yearend], but a lot has to go our way to make that happen."
Opel's crying need for more diesel engines offers GM a chance to test its new strategy of close coordination. GM ally Isuzu Motors Ltd. has a Polish plant that can crank out 200,000 small diesel engines a year, and it will share the output with Opel. By late 2002, GM will start putting Fiat diesels in its cars, including the Opel lineup. There could be a Fiat payoff for GM North America, too, if it follows through on plans to sell Fiat's Alfa Romeo cars in the U.S. The Italian marque could be the third leg of a premium-car strategy in America that would include Cadillac and Saab, says Ronald L. Zarrella, president of GM's North American operations.
This is just what Wagoner envisioned. But there are signs that the old GM way of doing things may slow the execution of the alliance. Opel insiders bemoan all the levels of decision-making, with GM Europe executives and now Fiat managers all in the mix. GM executives say the synergies emerging from the Fiat deal will put these concerns to rest.
GM has similar troubles in Asia, where weak oversight has built up the problems. GM owns 49% of Isuzu, which accounted for nearly all of GM's $107 million fourth-quarter loss in Asia. Rudolph A. Schlais Jr., president of Asia-Pacific operations, told Wall Street analysts in February that Isuzu lacked good cost controls. Hence GM's decision to install a new president at Isuzu.
A FEW HITS. Apart from the Isuzu hassle, GM has found East Asia and Japan nearly impossible to crack. In early February, GM decided to yank Saturn from its Japanese dealerships after a three-year attempt to build the brand there. GM has less than 4% of the 11 million-vehicle market in Asia. So GM is again turning to its partners. With Suzuki, it developed the YGM1 subcompact, a car built expressly for Asia that seats five. In China, GM is looking at some of Suzuki's subcompacts and minicars to sell besides its Opel-based Buick Sail compact, says Philip Murtaugh, head of GM China. GM has invested $2 billion in China, selling the Buick Century sedan, minivans, and Chevrolet Blazer SUVs, but has just 3% of the market.
If General Motors gets the green light to build other cars in China, its partners would be the source for some of the vehicles. It might be a while, though, before any agreement is struck. "We would like them to move faster," says Koichi Arasawa, Fuji's senior vice-president of product planning. "GM's structure can be very bureaucratic." The Fuji partnership has yet to announce a jointly designed vehicle that they can market.
Sometimes cooperation produces clear hits. The Brazil-built, Opel-derived Celta minicar should push GM's profits in South America, up from last year's slim results, says Frederick A. "Fritz" Henderson, group vice-president of operations in Latin America, Africa, and the Middle East. In the U.S., pickup trucks jointly designed with Isuzu could liven up GM's line. But no matter how clear the vision at the top, there's always the problem of the GM bureaucracy. Wagoner has the right idea. He needs the right organization.
By David Welch in Detroit, with bureau reports
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