Losing Profit Race : GM Taking Back Seat to Rival Ford

General Motors got rid of the messenger bearing bad tidings last Monday, when it ousted its chief in-house critic, Texas billionaire H. Ross Perot.

But shooting the messenger, so to speak, won’t change the fact that the news at the world’s largest industrial corporation these days is almost all bad: factories closing, layoffs, weak sales volume, plunging earnings and more.

What is most embarrassing about GM’s plight, however, is that it comes not in the midst of an industry-wide slump, but at a time of enormous prosperity for its major domestic rival, Ford Motor Co.

Today, the contrast between Ford’s health and GM’s malaise couldn’t be more stark. Sales of GM luxury cars are depressed, while Ford’s are going strong. With its new Taurus line of cars, Ford has become the style leader, while GM is still being bashed for its “cookie cutter” look-alikes. GM is plagued with overcapacity while Ford is selling all the cars that its streamlined manufacturing system can produce.

The proud GM still has about $100 billion in annual sales, and is certainly not in financial trouble, but it is about to be humbled where it hurts most--at the bottom line.

Ford Profits Higher

For the first year since 1924--the Model T era--Ford will post higher annual profits than GM in 1986, industry analysts predict, although Ford, with only a little more than half the revenues of GM, sells far fewer cars and has far less financial muscle.

In Detroit, that’s the equivalent of Avis beating Hertz.

“What’s Ford doing right that GM isn’t?” asks John Hammond, an analyst with Data Resources, an economic forecasting firm.

“Everything.”

Indeed, just two years after GM Chairman Roger B. Smith was being hailed as a corporate guru for moving aggressively on all fronts to harness high technology at GM to close the gap with the Japanese car makers, his golden touch seems to have turned to dross.

Many of the same industry observers who in 1984 saw Smith as a modern-day Alfred P. Sloan, a savior of heavy industry, now argue that he has tried to do too many things too fast.

As a result, they insist, GM is in an organizational jumble today, burdened by runaway costs and a bloated management at a time when its sales are slipping.

Such criticism rankles GM executives, who remember being lampooned in the late 1970s for being too stodgy. “It was just a few years ago that GM, and all of U.S. industry, were being bad-mouthed for only looking at short-term profits,” says Lloyd Reuss, GM’s executive vice president in charge of North American automotive operations. “We’ve never had more of a long-term focus than we do now on a strategy that is going to pay off in the long haul,” he adds. “Our approach has been that, in the long run, technology is going to be important in determining success or failure.”

Still, GM’s problems do seem to stem from massive overspending on new plants, automated equipment, high-tech acquisitions, joint ventures and other ambitious projects such as Saturn Corp., GM’s $5-billion small-car unit.

Such spending has begun to deplete GM’s cash reserves at a time when Ford’s pockets are bursting. GM had $3.92 billion in cash and marketable securities on hand at the end of the third quarter, while Ford had $8.1 billion.

Investment in Technology

In fact, GM has tried to spend its way into a good competitive position. It has viewed expensive technology as a magic cure for all of its ills, analysts charge. In the process, GM perhaps forgot that attention to detail in manufacturing, not high technology, is what makes the Japanese so good at building cars.

“GM had unrealistic expectations for a lot of its high-tech projects,” said Maryanne Keller, auto industry analyst with the investment firm Furman, Selz, Mager, Dietz & Birney Inc. “GM had this blind belief that if you had enough of this technical stuff that you can’t understand installed in your plants and on your cars, then, by God, you were going to be the winner.”

Meanwhile, the auto maker’s biggest immediate worry is certainly the devastating impact Perot’s ouster is expected to have on morale at Electronic Data Systems subsidiary, the Dallas-based computer services company Perot founded and sold to GM two years ago.

The merger of the bureaucratic GM with the energetic, free-wheeling EDS--which was supposed to help GM streamline all of its new technology systems--has been rocky at best. With thousands of employees from both GM and EDS transferring back and forth, GM’s computer services unit has been unable to settle down and do its job--coordinate the auto maker’s vast computer and communications systems to improve productivity.

Morale Is Concern

Now, with Perot removed from GM’s board and fired as chief executive of EDS, defections by key EDS executives, many of whom remain loyal to Perot, are expected to mount. This could devastate morale and reduce the unit’s effectiveness.

And, in the midst of everything else, Smith called for an overhauling of GM’s North American auto operations in 1984, by reorganizing the five car divisions and Canadian operations into two new car groups. The changes required thousands of managerial transfers that have aggravated the internal confusion at GM.

With so many ambitious projects under way simultaneously inside GM, the auto giant appears to have become bogged down by the weight of its good intentions.

“GM has been trying to ride off in too many different directions at the same time,” said David Healy, automotive analyst with Drexel Burnham Lambert.

The results have become painfully obvious this year: GM’s earnings have plummeted. In the third quarter, the company posted a $338.5-million operating loss, its largest operating deficit in five years.

With its costs soaring, it is just much more difficult for GM to make money. Its break-even level--the number of cars or trucks it must sell before it can make a profit--has risen from 5 million worldwide in 1983 to 6.4 million this year, analysts estimate.

Gap Is Widening

Already, GM’s profit margins are lower than those of either Ford or Chrysler, and the gap is steadily widening. For the first nine months of 1986, GM’s operating profits were $271 per vehicle, down 37% from last year; by contrast, Ford had a profit margin of $677 a vehicle during the same period, up 28% from 1985.

Although GM still will earn $3 billion this year, analysts predict (down 24.8% from $3.99 billion in 1985), getting beaten by Ford, which is expected to post record earnings of about $3.1 billion (up 23.3% from last year’s $2.51 billion) will smart.

“If we do beat them, it would be kind of exciting,” said a gleeful David McCammon, Ford’s controller. “Any way you look at this, it’s just an incredible story of change in our relative positions.”

The crunch on earnings at GM has come not just from escalating costs, but also from sluggish car sales. Through November, GM’s domestic sales were down 1.7% from 1985, while its share of the domestic market (excluding imports) is at its lowest ebb in 10 years--at least partly because of tougher competition from Ford. While GM’s domestic share has plunged from 62.6% in 1980 to 56.1% today, Ford’s share has risen from 22.4% in 1980 to 24.6% so far this year.

GM’s technological drive simply hasn’t translated into more distinctive cars or improved sales--at least not yet.

Fresh Design Lacking

Although all of the fancy new computers are supposed to make it easier for GM to design and build stylish, high-quality products, many of its latest models show no indication of this.

In particular, GM’s new front-wheel-drive, wedge-shaped luxury cars are bombing. That has given Ford an opportunity to increase its share of the highly profitable luxury-car market dramatically. For example, sales of the new Cadillac Eldorado now account for just .04% of the domestic car market, down from 0.1% during the same period last year, while Ford’s Lincoln Town Car’s market share has risen from 1.4% to 1.5%.

GM acknowledged the problem last Wednesday, when it announced that it would lay off 4,500 workers from three Midwestern assembly plants that produce full-size and luxury models.

“GM’s new luxury cars have been, to say the least, absolute disasters,” says Chris Cedergren, sales analyst with J. D. Power & Associates, an automotive market research firm. “They have lost their distinctiveness. Their expensive luxury cars look just like their cheap, intermediate-sized cars--a $25,000 Cadillac looks like a $10,000 Buick Century.”

High Prices, Low Demand

Heinbach of Merrill Lynch added: “The real problem at GM is very simple--not enough people are interested in buying their cars at current prices, and that is a problem that they can’t turn around very quickly.”

GM is now working hard to reverse the slide, but it is a slow process. The Chevrolet Corsica and Beretta compacts, due out early next year, will be the first to break away from the old GM look and copy the aerodynamic styling of Ford’s successful Taurus and Mercury Sable models. Some analysts say that the so-called “GM10” line of intermediate models--to be sold by Buick, Oldsmobile, Pontiac and Chevrolet beginning in the fall of 1987--will also have distinctive styling. But it will take years for GM to overcome the problems with its new luxury cars.

GM’s sales slump has left its plants running at about 75% to 80% of capacity, according to industry estimates, while Ford continues to operate its plants at full speed.

In response, GM has finally put the brakes on spending over the last year. In November, the company announced it would shut 11 plants and lay off 29,000 workers over the next three years, to reduce fixed costs by about $500 million a year. GM has also said it will pare its white-collar ranks by 25% by 1990.

Meanwhile, GM has scaled back its Saturn small-car project, canceled a billion-dollar program to develop a plastic sports car to replace the Chevrolet Camaro and Pontiac Firebird, dropped plans to purchase thousands of new industrial robots, and reduced the number of assembly lines it will devote to the “GM-10.”

Analysts estimate that GM’s announced cost-cutting moves will trim its annual costs about $2.5 billion by 1990, but that still might not be enough. “They should be looking at that as taking them about halfway home on costs,” says Charles Brady, auto analyst with Sanford C. Bernstein & Co.

Brady said Ford has become so profitable, even with a dip in car sales this year, because it has slashed its fixed costs by $5 billion since 1979, while GM in the same years allowed its costs to balloon.

“I think you can trace the roots of GM’s current problems back to the recession,” said Brady. “Both Ford and Chrysler got scared that they were going to go out of business, and so they got serious about costs. GM never got that scared, never had that traumatic experience, so they never rebounded with a reborn attitude about costs.”

Ford’s Dark Days

Indeed, the early part of this decade remains a raw memory at Ford headquarters in Dearborn, Mich. During those dark days, Ford was posting billion-dollar losses, its sales were plunging, and its products, both in terms of quality and design, were woefully out of step with the demands of the American public. Ford was still best known then as the auto maker responsible for Pintos with dangerous fuel tanks and LTDs that shifted from park into reverse without warning.

Today, signs of a complete turnaround at the world’s second-largest auto maker are everywhere, and Wall Street has found a new darling among Detroit’s Big Three.

“It’s really a different world,” says Ford’s McCammon.

Not only is Ford about to beat GM in net income, it has emerged as the undisputed design leader in domestic cars and trucks and has made dramatic strides in quality. Its Taurus and Sable models have been enormous sales successes and have helped improve Ford’s image among the upscale, import-oriented car buyers. “The Taurus-Sable has made Ford the styling leader for the entire industry,” says Keller. “Ford has the magic touch right now.”

And Ford, to a greater extent than General Motors, seems to have reversed the long slide in its labor relations since the recession.

Ford’s financial success this year comes at a time when its total sales have actually begun to lag. Even with a 26.7% upswing in November, Ford’s U.S. car sales are off 3.1% for the year.

So the real key to the reversal of Ford’s fortunes has been its willingness to slash costs.

“Ford is doing so well financially because it has done a marvelous jobof cost reduction, even better than Chrysler,” adds Keller.

Ford has closed 15 manufacturing plants worldwide since 1979, including seven in the United States, and has not opened any new facilities to replace them. The company has reduced its white-collar work force in North America by 30% since 1979, and plans to pare it back another 25% by 1990. Ford executives now take grim satisfaction from the fact that salaried staffing levels have declined steadily for 29 straight quarters.

“What we believe we have done right is keep an eye on the basics, which is keep an eye on cost control,” says Philip Benton, a Ford executive vice president. “You get in trouble in this business when you take your mind off the ball, and you spend your money somewhat promiscuously. GM has not kept its eye on the cost ball.”

By maintaining stern limits on costs, Ford has been able to keep its break-even sales figure constant, at 3.3 million units worldwide, since the recession, so that more money could flow to the bottom line, analyst Healy noted.

“A good illustration of how the cost savings have come through is that, in 1986, we will sell roughly 6 million vehicles worldwide, about the same as 1979,” McCammon said, “but our profits in 1986 will be triple what they were seven years ago.”

Ford has also been very cautious about devoting its resources to new product programs. In fact, the Taurus-Sable models are likely to be the last all-new domestic cars that Ford introduces for several years, company officials concede.

They say that Ford will keep product-development costs down by relying on cars either built or designed in Asia or Europe to fill out its domestic lineup.

Roger Maugh, Ford’s director of international product development, acknowledged recently that product development costs are too high for Ford to justify producing an all-new line of subcompacts in the United States without at least sharing the costs with another company.

Still, Ford remains vulnerable. With no plans to follow the Taurus-Sable success with similar new products, Ford may be unable to match GM’s output of new domestic models over the next few years. If it can’t build on the Taurus-Sable momentum, it could once again lose market share.

Design Copying Seen

More and more competitors will be copying its successful aerodynamic designs, diminishing the distinction of the Ford look and cutting into their sales. In addition, if, as is widely anticipated, Ford makes a major acquisition in the coming months, its cash cushion will be reduced. The result could be that Ford’s resources become fragmented.

Few observers--least of all executives at Ford--expect GM to lose a rematch on profits in 1987. GM is too strong for Ford to keep pace with it for very long, they say.

“It may take GM another two years to correct their cost problems, but they have recognized the problem now, and I’m sure they will turn it around,” said Ford executive vice president Benton.

“I have never made the mistake of underestimating General Motors,” he adds, “and I don’t intend to start at this late date.”