If You Can't Beat 'Em, Buy 'Em


The last time General Motors sold a locally built car in Japan, Franklin D. Roosevelt was in the White House and the big news was Nazi Germany's invasion of Poland. The year was 1939. Now, 62 years later, GM (GM) is reentering the Japanese market with a locally made, 1.5-liter hatchback called the Chevrolet Cruze. But this time around, the world's largest auto maker is outsourcing production -- to Suzuki Motor. (GM Japan opened an assembly plant in Osaka in 1927. The company ceased operation in 1941.)

The Cruze is symbolic of GM's new approach to Japan, the second-largest car market after the U.S. Following a string of embarrassing product flops -- most recently with its Saturn compact -- GM has bought into a number of Japanese carmakers. In the past three years, it has taken 20% stakes in Suzuki and Subaru's parent Fuji Heavy Industries, and boosted its share of truckmaker Isuzu Motor to 49%. GM's strategy seems to be: If you can't beat 'em, buy 'em.

On Oct. 25, GM Chairman Jack Smith spoke about the company's new tack, as well as the outlook for the U.S. auto market post-September 11, with BusinessWeek Correspondent Chester Dawson at the Tokyo Motor Show. Edited excerpts of their conversation follow:

Q: What's your forecast for car demand in the U.S. in the aftermath of the September 11 attacks?

A: We believe we're in recession now. But we believe there's a significant amount of fiscal and monetary stimulus that will bring the market back. So we see weak growth in the first half of next year and -- because of the stimulus -- we see it coming right back in the second half.

Roughly, we're looking at a 15.5-million-unit market next year, but, at this time of year, that's a pretty hazy forecast. For 2001, we were forecasting a market of 16.8 million. But I'd say it could be slightly higher due to incentive-led sales.

Q: The "Keep America Rolling" zero-percent financing campaign pioneered by GM has goosed sales, but how long will that continue -- through year's end?

A: I can't say. We'll look at market trends and do what seems to make sense. We didn't think it would be anywhere near as successful as it has been. We were really surprised by the power of what we unleashed. At the moment, it's premature to describe what we're going to do in December. But I can tell you one thing: Our dealers are absolutely pumped. Morale is high. They're selling the stuff, emptying out the lots.

Q: But are GM's short-term market-share gains worth the long-term earnings pain?

A: Who says we're not making money? That's an opinion that everybody jumps to, but there were a lot of incentives in the marketplace before zero-percent financing. And so we're taking those other incentives off, we cut out the other advertising, and focused it on "Keep America Rolling." And so while there's incrementally more expenditure by doing it, I don't think it's such a great leap that it throws us into a tizzy and keeps us from being profitable.

Q: GM's repeated attempts to crack open Japan's market -- most recently with the Saturn -- have failed to gain much traction. Now, the company is buying up chunks of Japanese auto makers. Is the new strategy: If you can't beat 'em, buy 'em?

A: Basically, we came to the conclusion that trying to export vehicles from the U.S. market, which is so different from other markets around the world, is probably not a long-term winning strategy. Our thinking was that we really needed to produce vehicles in the region and for the region. And if we look at the Asia-Pacific region, most of the design trends really come out of the Japanese companies.

This didn't happen overnight, but we came to the conclusion that we should rely on our alliance partners to develop the products for the region, including Japan. Our focus is working with our partners to have a full array of product that is defined clearly as meeting Asia-Pacific needs.

Q: But do GM's minority stakes in its Japanese partners give it enough control?

A: The 20% is working for us. We can drive synergies with it and yet not have to tie up a lot of investment capital. Also, 20% gets us in a position that we can work together to lower costs by buying materials together and so forth, so we're comfortable.

Q: What is GM doing to ensure its partners work together instead of at cross-purposes?

A: It's up to them to come to whatever agreements tend to make sense for them. In the case of Suzuki and Fuji Heavy, they both are in the mini-car segment. I don't know whether they'll decide to do something together. But obviously they're independent, so they'll make the call. What the alliance does do is facilitate talking together, working together, and getting to know one another. And those things are very helpful. We've already seen some actions taken. But I don't think GM can force anything.

Q: Other than giving GM entree to South Korea's market, how does the recent investment in Korean carmaker Daewoo fit into your global strategy?

A: The other half of that story is that Daewoo has some very low-cost platforms. It is a low-cost producer, so we see a great opportunity to help fill out our product lines with exports from Korea, particularly in the Asian-Pacific region, but also in developing countries throughout the world, like Latin American, the Middle East, and Central and Eastern Europe.

Q: Can GM re-establish Cadillac as a brand to be reckoned with in luxury cars?

A: It's important for us to get that right. We're going back to rear-wheel drive on Cadillac because most of the competing luxurious cars are rear-wheel drive. And we're putting a tremendous focus on it. Cadillac cars are to be the match for any European luxury car that's sold on the American market.

By the same token, we believe the car can sell globally because it will be the same size as the competition. It's important for us to get that market back, and we're going to work very hard on it. The first car -- the CTS -- is coming out right now.


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