NEWS ANALYSIS : Mixed Reviews for GM Cuts : Autos: Less capacity is welcome, but lower capital spending may hurt the firm.
General Motors’ historic announcement that it will close 21 plants and slash its North American production capacity was applauded by analysts Wednesday as a sign that the world’s largest auto maker has finally accepted its diminished role in today’s fiercely competitive U.S. auto market.
By massively reducing the excess production capacity and surplus of vehicles flooding the auto market, GM’s move should boost the recession-ravaged fortunes of the industry as a whole, these analysts said.
But they cautioned that GM’s move to cut back on new-product spending is not the way to succeed in such a market, and they chafed at the uncertainty left by GM’s refusal to say which plants it plans to close and when it plans to close them.
“GM’s decline has been largely due to product-related problems, and now it’s going to knock out product programs and cut spending,” said John Schnapp, an analyst with Temple Barker & Sloan, a management consulting firm in Boston. “It’s a little like shooting yourself in the foot.”
Said David Garrity, an analyst with Nomura Research Institute, a securities firm in New York, “It’s about time GM executives recognized that it’s not their manifest destiny to get back 45% of the market. But for investors, as well as for employees, there is still a high level of anxiety and perceived risk.”
The issue isn’t GM’s survival so much as its competitiveness in its critical home car and truck market. The company’s huge European operations are earning record profits, its multibillion-dollar finance, computer and aerospace subsidiaries are performing solidly, and analysts expect a return to overall profitability as the U.S. economy improves.
But GM’s share of the U.S. market has plummeted to 35% from 47% in the 1980s, and it remains by far the highest-cost U.S. producer. Moreover, its unused capacity served to weaken the entire U.S. auto market.
Thus the move to close plants was viewed as positive both for the long-term health of the company and for the industry as a whole. GM has been operating at 67% of its production capacity this year and is expected to lose up to $7 billion on its North American automotive operations in 1991.
Auto makers building cars and trucks in the United States have the capacity to produce 4 million more vehicles than Americans will buy at today’s depressed market levels. About 2.25 million of the excess vehicles were accounted for by GM’s assembly plants this year, according to Clifford Swenson, an analyst at Jacobs Automotive, a consulting firm in Little Falls, N.J.
The pressure on manufacturers to build more cars so as to utilize more of their production facilities has yielded a market flooded with vehicles--and fed an expensive habit of paying an average of $1,100 per vehicle in rebates and other incentives to consumers in order to sell the cars and trucks they churn out.
By eliminating some of its excess capacity, GM not only saves money by not paying to maintain unused facilities, but it also alleviates the pressure on other manufacturers to produce more and price lower.
“To the extent that we get excess capacity out of the system, it will eventually have an impact on marketing expenses,” Ford Motor Co. President Philip Benton told reporters last week in response to speculation on GM’s plans.
Ford, the No. 2 auto maker, stands to gain not only from the overall reduction in production capacity but from GM’s decision to pare its new-product budget.
With Japanese auto makers providing tough competition in the lucrative mid-size and luxury car markets and domestic competition taking the lead in the expanding minivan segment, analysts say GM needs to come out with hit products in order to avoid losing even more market share.
Analyst Schnapp says that GM’s plan, while likely to help it make money sooner, focuses too much on the bottom line and not enough on regaining the dozen points of market share it lost over the 1980s.
The strategy of maintaining profitability at the expense of market share contrasts with the Japanese approach to the U.S. auto market, which has typically been to sacrifice profits initially in order to gain share.
But others maintain that GM, the last of the U.S.-based auto makers to bring its capacity into line with the realities of today’s crowded market, is ensuring its successful future as it reconciles itself with the changes wrought by Japanese inroads into the U.S. market over the last decade.
Its chairman, Robert C. Stempel, said Wednesday that no “major” product programs are being cut. He said GM will attack its oft-criticized lineup of overlapping models without retreating from any segments of the auto market.
But as it improves its efficiency and seeks to capitalize on recent improvements in quality, GM is aiming at moving targets such as Toyota. The Japanese competitor, which is raising the stakes in North America higher each year, offered words of support to its larger rival.
“Ours is a small industry, and a decision such as the one announced today is a personal thing to many of us,” Toyota Motor Sales U.S.A. head Robert McCurry said in a statement. “We empathize with them and hope they will be successful.”
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