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Commentary: Sacrificing Size For Success At GM


A note to the executive suite at General Motors Corp.: Maintaining the crown as the world's largest automaker doesn't matter. If you can't keep it while boosting profits, let Toyota have it. Let Toyota face the scrutiny of being No. 1. Then you can focus on increasing profits. Given the hypercompetition in the global auto market and the rate at which technology is changing, GM will need many billions in cash to stay in the game.

GM Chairman and CEO G. Richard Wagoner Jr. says his focus is profitability. But if he is seriously looking at buying troubled Malaysian carmaker Proton Holdings--which GM acknowledged on Jan.16--he may be falling back into GM's long-held obsession with size and market share. Remember, this is the company that, after five years of sacrificing profits for market share, spent the past year trying to wean its dealers and buyers from a discounting strategy. GM also forged alliances with smaller carmakers as a way to boost output. But GM sold those stakes over the past two years both to raise cash and to extricate itself from an alliance strategy that generated more trouble than value.

'IT'S GOING TO BE A DOGFIGHT'

IN OTHER WORDS, buying Proton for anything above a fire-sale price would be a sign that Wagoner feels the temptation to safeguard GM's crown. While GM insiders swear their interest in Proton isn't just a defensive maneuver--it would give them small cars and a presence in emerging markets--there is plenty of evidence saying otherwise. In the global sales race, Toyota trails GM's 2006 sales of 9.1 million by about 250,000 vehicles. Considering Toyota's growth and the fact that it is adding 320,000 vehicles worth of production this year in North America, the two companies will be in a tug of war for the sales crown. Wagoner said at the Detroit auto show on Jan. 9 that he isn't ready to concede the top spot to Toyota. "It's going to be a dogfight," he said.

If GM grabs a big enough stake in Proton, Wagoner could add 180,000 vehicles to its annual tally. A lesser stake would still enable GM to build more cars in Proton's underused plants. Considering that GM sold 5 million vehicles outside the U.S. last year, up 7% from 2005, even small partnerships could keep GM ahead. Plus, Proton's chief competitor is allied with Toyota-controlled carmaker Daihatsu. GM might be worried that Toyota will use that connection to dominate the Malaysian market and others in the region.

GM says Proton talks are at an early stage. As they progress, Wagoner may realize GM doesn't need Proton or its headaches. Proton, after all, is losing money. It's valued at $1 billion despite a forecasted 2006 loss of $127 million on sales of $1.9 billion. And GM already has its GM-Daewoo operations in Korea to make subcompacts for emerging markets.

Suppose GM passes on Proton and a few other sales-boosting initiatives that could stave off Toyota. There could well be fringe benefits. Toyota's rampant growth has come at a price. Developing so many new models has taxed its engineers, and recalls in the U.S. and Japan have more than tripled in the past three years. Toyota says it has delayed a few models to double-check for glitches. The recalls haven't dented Toyota's teflon image for quality, but if problems persist, they will.

Environmentalists who have loyally buffed Toyota's green image are already criticizing its push into big markets like SUVs and pickup trucks. The Union of Concerned Scientists (UCS) still thinks Toyota has a fine green track record, but says its new pickups are gas hogs, and that's a concern. "It's like they're trying to out-GM on going backwards on fuel economy," says David Friedman, a research director at UCS.

That's just the kind of publicity GM would love to share with Toyota. Or, as Vice-Chairman Robert A. "Bob" Lutz puts it, "It could be a relief in some ways. Let someone else be the guy at the county fair with his face in the hole in the rubber sheet." And for GM's sake, let Wagoner be the guy who passes up global bragging rights in exchange for bottom-line results.

By David Welch


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