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The Shutdown Gm Needs?


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THE SHUTDOWN GM NEEDS?

It's a chance to clean house and downsize

How dramatically will General Motors Corp. change as a result of its latest showdown with the United Auto Workers? By late June--four weeks after workers struck two Flint (Mich.) plants and slowly brought GM's North American production to a halt--the auto maker was dropping tantalizing clues. Might the company use the shutdown to make fundamental changes--reducing plant capacity to match its reduced market share, killing off poor-selling models and, perhaps, getting rid of entire marketing divisions?

For investors eager to see such reforms, there are encouraging signs. A June 30 GM filing with the Securities & Exchange Commission stated that the company is "carefully reviewing future spending for products and facilities." That followed a series of internal memos leaked by GM that hinted at similar plans. And on July 1, Ronald L. Zarrella, GM's vice-president for sales and marketing, told reporters: "We may well take this situation as an opportunity to move up some future plans in terms of eliminating overlap in our portfolio."WORRIED WALL STREET. Even if the auto maker isn't definitively signaling a major overhaul, many analysts and academics think it should. On Wall Street, where analysts are increasingly worried by the strike that has already cost GM $1.2 billion in net income, there's hope that this time the carmaker will go further than the long-expected cutbacks of a few more parts plants and a couple of car models. They would applaud a broad restructuring that would finally get GM in fighting trim. That would mean cuts in management and hourly ranks, and revamping products, marketing, and manufacturing. Furman Selz analyst Maryann N. Keller is eager for such a clean-sweep approach. "I would love it if they were making those decisions," she says.

Clearly, GM's decade-long "death by a thousand cuts" strategy of gradual downsizing isn't working. The company has not come close to its overall productivity goals. Its manufacturing inefficiency puts it at a $411-per-vehicle disadvantage to Ford Motor Corp., estimates Stephen J. Girsky, a Morgan Stanley Dean Witter analyst. And GM's declining market share in recent years has only made the need for lower costs more acute. At the same time, the never-ending cuts exact a high toll on labor relations. "Does GM honestly think there's going to be less pain in doing these things one at a time?" Keller asks. "It just makes the UAW madder."

True, getting all the bad news out at once might cause more labor friction in the near term. Analysts say GM needs to shrink hourly rolls by 40,000 to 50,000 workers out of 220,000 to match competitors' efficiency--hardly welcome news to the union and its members. But such moves are inevitable, and GM hopes to make many cuts through attrition over the next few years.

In some cases, workers whose plants are sold could be better off in the long run working for new owners, as former GM workers at Detroit Diesel and American Axle have discovered. Meanwhile, greater investment in new equipment for the remaining factories could improve productivity and preserve jobs.

A one-fell-swoop strategy could actually result in better labor relations in the long haul. Says Trevor Bain, a University of Alabama management professor: "Whatever it is, they need to enunciate it clearly and let the union in on the secret, too." Workers would stop waiting for the other shoe to drop--and looking for real or imagined actions against them by management--if they believed the cuts were over and the rebuilding was beginning. It worked at Ford and Chrysler Corp., both of which downsized radically in the early 1980s and went on to rebuild solid labor relations once the bloodletting was over. Says Merrill Lynch & Co. analyst Nicholas Lobaccaro: "Once you get right-sized and you don't need to lay people off any more, labor relations can improve dramatically."

And nobody should be surprised by more GM plant closings. The company is widely believed to be planning to close or sell both Flint plants that struck in June, as well as the Dayton brake plant that struck in 1996, and voted on June 30 to authorize another strike. "This strike may highlight a bunch of parts operations that have been living on borrowed time for quite a while and are finally going to be shuttered," says Lehman Brothers analyst Joseph S. Phillippi. Adds David E. Cole, director of the University of Michigan's Office for the Study of Automotive Transportation: "They'll probably clean the plate here. This is a crisis."

The auto maker is also expected to spin off all of its Delphi Automotive Systems parts maker, which had $26 billion in revenues in 1997. GM has said only that it is planning a partial spin-off. The sooner that happens, the better, analysts say. Likewise, GM is expected eventually to announce it will close at least one assembly plant--the Ste. Therese (Que.) factory that builds Chevrolet Camaros and Pontiac Firebirds that analysts say will be dropped.

Wall Street would like to see the same discipline applied to salaried ranks. Analyst Girsky notes that GM's senior management ranks have ballooned 47% since its 1992 reorganization; rival Ford has reduced its top ranks by 37% in that time. GM would have to shrink its top management by 20% to 25% to match Ford's levels, he says. Labor experts say GM would gain credibility with its union workers if top management's bonuses were linked to the same efficiency standards being used to decide workers' fates."GRADE-B MOVIE." The most painful reductions could come by streamlining GM's marketing system. It has more than twice as many brands and 70% more U.S. dealerships than Ford, Girsky points out--even though GM's unit sales are only 19% greater. Analysts and investors say GM should stop trying to resuscitate dying divisions, and instead spend more on promising newcomers like Saturn Corp. "This is like watching a grade-B movie--you know exactly how it ends," says Keller. "Either Buick or Oldsmobile is going to have to disappear." Analysts also would like GM to add more high-profit trucks and new car-truck hybrids like Honda's CR-V and Lexus' RX300. Zarrella acknowledges that "we have more cars than we need, and not enough trucks." The strike may result "in getting out of those cars faster," he says.

GM's biggest problem is that it is chasing moving targets. When it comes to factory efficiency, "the competition is getting better faster than they are--and GM was already behind," says Phillippi. The company's U.S. market share has tumbled faster than it can close plants, and in June stood near 31%, down from 36% a decade ago. Even a rash of plant closings in the early '90s barely kept up with the declining demand. GM still has about 50% more assembly plants than Ford, which owns 24% of the market.

So how can GM level with the union about its capacity needs when management doesn't know how far market share will fall? Its executives will have to take a hard look at where sales are heading. For decades, they have declared that market share is about to rebound, only to be proven wrong. Early this year, market share tumbled below 29% for the second time in a year. A spring auto buying boom, fueled by a GM-led rebate push, helped the auto giant's share rebound temporarily. But Zarrella predicts that market share will be "well under 25%" in July and drop further if the strike continues. And some analysts believe the decline will continue longer term. Says Lobaccaro: "If you're doing long-term planning for GM, I think you have to look at 29% market share."

That's tough medicine for GM, its union, and its investors. But delaying the inevitable won't make it any less bitter--and will likely prolong the pain.By Kathleen Kerwin in DetroitReturn to top


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