Is GM Going Nowhere Fast?


By David Shook With Chrysler in the throes of a financial mess and Ford still reeling from quality and tire-safety problems, you might think General Motors would take advantage of its competitors' weakened positions. Think again.

Sure, GM (GM) tapped former Chrysler (DCX) design guru Bob Lutz on Aug. 2 to rev up design strategy at the largest U.S. auto maker. And GM was the only auto maker among the Big Three to report a profit in the second quarter -- $610 million before a one-time charge of $133 million to restructure Isuzu Motors. True, that's down from record profits of $1.8 billion a year earlier, but it is a profit all the same.

Take a closer look at the second-quarter results, however, and you'll see a few trends that are likely to hurt GM's chances of being able to power past its rivals. While GM investors may applaud the decision to hire Lutz, they can probably expect little action in the stock this year -- even as GM moves to sell Hughes Electronics, its satellite unit and the operator of DirecTV, which continues to add customers but remains deep in the red. Hughes lost $156 million in the second quarter, attributed mostly to DirecTV.

TRUCKS PICK UP. GM investors are no doubt frustrated. The stock has eroded steadily over the past year, falling from $75 to around $62 on Aug. 9. Despite the troubles at Ford (F) and Chrysler, analysts say GM is not in a position to regain any of the market share that the Big Three have lost to Japanese auto makers.

Since 1981, GM's share of the U.S. market has tumbled from a remarkable 50% of auto sales to under 30% today. Even the most upbeat analysts believe GM has little hope of making up lost ground. "We think they will do well to stabilize [market] share," says Scott Hill of Sanford Bernstein & Co., who nevertheless remains bullish on GM's stock. "They're ceding share in most car categories but posting impressive gains in the most profitable segments of the U.S. light-vehicle market, full-size pickups, and sport utility vehicles." Indeed, while light trucks accounted for less than 40% of sales in the early '90s, they now represent about 54%.

Focusing on light trucks is indeed the plan, says GM spokesman Mark Tanner. "I'm not so sure you can say we've moved away from cars as much as we've changed our mix of products. We've acknowledged that we were behind the industry trend. We've realigned our production to catch up with the shift in demand," Tanner says. "You have to remember, though, GM is a big place."

"LONG-TERM TURNAROUND." In other words, the company's size makes it hard to execute fast turns. So it won't be easy to implement CEO Rick Wagoner's sweeping proposals for changes in GM's mix of designs and products. The innovations may well establish a solid future for the company, but long-term investors may still want to shore up their patience. "GM has for years neglected to address the issue of poor design," says Banc of America analyst Ronald Tadross. "Lutz is a good addition, and it's nice that Wagoner seems willing to address the issue, but, unfortunately, we're looking at a long-term turnaround. It will take two or three years for GM to see changes in product development."

Consider the negative trends in this summer's financial picture: While GM truck sales climbed 2% in July, car sales fell 19% vs. the same month a year ago. "In short, a poor month," notes Merrill Lynch's John Casesa. GM is also suffering in Europe, where all auto makers face intense price competition. In the second quarter, GM Europe lost $156 million, vs. a $166 million gain a year ago

Then there's the issue of GM's post-retirement employee costs -- one of the burdens that comes with having been the largest manufacturer in North America for several decades. This all adds up to an employee retirement liability of about $35 billion. GM downplays the issue: "That number has basically been flat for several years now," says company spokesman Tanner. Still, it represents the largest post-retirement outlay of any major corporation. Says Tadross: "That continues to be a drag on earnings."

NEW DIRECTIONS. The good news? GM is in much better shape than its rivals -- not just financially but also in terms of quality and productivity. GM North America earned $521 million in the second quarter of 2001, even as production fell 13% due to the weakened economy. GM also has been successful in reducing inventories to meet the declining demand. U.S. dealer stocks fell to 1.1 million vehicles in the second quarter, more than 200,000 units below 2000's yearend levels.

In addition, GM outpaced the industry with an 11% improvement in quality in the 2001 J.D. Power & Associates quality study. GM was the highest-ranked domestic auto maker, with nine vehicles among the top three in their categories, and three vehicles ranking highest. Moreover, the recent annual report by Harbour & Associates, a Troy (Mich.)-based manufacturing and management consulting business, cited an 8.5% improvement in GM North America's productivity -- a gain which saw it outperform all other multi-plant manufacturers. "GM is the most advanced of the domestic manufacturers in incorporating the lean manufacturing concepts Toyota first principled," says Scott Hill of Bernstein Research. Even so, its cost structure remains much higher than its competitors' because GM pays higher wages to senior union members in non-assembly jobs. And that's on top of those high retirement costs.

It's clear GM is on the right track in hiring Lutz, the former Chrysler design chief credited with fostering the radical Dodge Ram pickup and cab-forward Chrysler sedan designs of the early '90s. GM appears bent on applying that same kind of fresh thinking to its 17 car and truck brands. But a radical change in design is a huge undertaking for a company with more than $180 billion in sales across all those brands. Certainly, GM has done well to avoid the quality and safety problems that now plague its rivals. But there's still a lot of road to travel before Wagoner and Lutz can realize their ambitious goals. Shook covers the markets for BusinessWeek Online in New York


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