With Little Room, GM Turns Itself Around
One of the world’s largest companies, an organization once regarded as the model for business everywhere, gave an indication last week that it’s getting its act together again.
General Motors Corp. reported good profits and a confident outlook. And while tax changes were highlighted as a reason for the earnings, other evidence spoke of recovery in GM’s North American automotive operations and in its finances.
The results--$6.9 billion in income on $169 billion in revenue--declared a comeback from the depths of 1991-92, when GM lost $28 billion and business people feared the giant company would go under--with baleful consequences for thousands of suppliers worldwide.
And even more than that comeback, if reports around Detroit are correct, the company could be returning to something like its old strength after years of repeated mistakes.
“It’s a massive turnaround; GM made more than $430 profit per car in North America last year, where in 1991 they lost $3,200 per car pretax,” says James Harbour of Harbour Associates, a Troy, Mich., automotive consulting firm. “GM is going to make trouble for a lot of competitors.”
Other observers are more restrained. Analyst Maryann Keller of the Furman Selz investment firm, who has written two books on GM, acknowledges improvements in operations and finances. But she says the jury is still out on whether the company can adapt to a motor vehicle business in which “the real returns on investment are in trucks and recreational vehicles, not in cars.”
Yet that’s the point about a landmark like GM: From its challenges as well as its failures, we learn the foot-slogging realities of industries that are complex but no longer young, where there are few forward passes and yardage is made on the ground.
In 1992, GM had hit bottom. Even its pension funds were worrisomely underfunded. That was when the board of directors ousted management and gave John F. “Jack” Smith, who had successfully led GM in Europe, a promotion to president and the job of turning the company around.
There was nothing in the cupboard. The maker of 8 million vehicles a year had no new models coming out and no money to develop products. It would be five years before GM could introduce new vehicles--as it will this fall.
Yet in extremis, the old ways that had hobbled GM could be overturned. Smith brought over Jose Ignacio Lopez from GM Europe to make sense of the company’s sprawling parts operations. Lopez hammered suppliers for cost reductions, wrought $7 billion of annual savings.
Then he unified GM’s parts-making operations to create the Delphi Automotive Systems division, which now sells steering columns to Chrysler and Toyota and even ships parts to Japan.
Strapped for cash, GM focused on a few popular models, such as the Buick Regal, on which it offered bargains to boost sales. “It was a hold-the-line strategy,” explains Doug Kevorkian, a Detroit-based auto consultant.
The strategy worked. New models will start appearing in the U.S. market this year, and GM’s international operations--39% of vehicle sales--have been doing well all along.
The emerging image is of a savvier, leaner GM that nonetheless recovered without savage downsizing. Automotive employment at the company--which also owns Hughes Electronics and EDS, the computer service firm--was reduced 16% over three years and rose again last year.
Nor did GM go in for whiz-bang new technology, as it tried to do in the 1980s when it first responded to inroads by Toyota and other Japanese car makers. At that time, GM had $10 billion in spare cash, which it proclaimed would buy the world’s most technologically advanced production system.
Competitors were not impressed. “I don’t care how much money they have,” the head of Honda said at the time. “Unless GM changes its management system, it will not succeed.”
He was right. GM became a laughingstock in the 1980s as robots painted one another instead of the cars, and the company’s finances and its reputation steadily declined.
But now it is back. Along with earnings, GM announced last week that it has replenished its pension funds.
The question, however, is back to where? The global automobile business is a tough battlefield of too many producers and finicky customers these days. Suburban light trucks--a category that includes minivans, Jeeps, Chevy Blazers, etc.--now account for 42% of all vehicles sold in the U.S. market and a rising percentage of the Japanese market. Chrysler has 60% of its production in such vehicles and makes $1,270 per car, which ranks it as highly profitable.
But that’s in an industry that accepts 11% on capital, or even lower, as a good return.
“The profits in the automobile business are too low for the huge investments car-making demands,” says analyst Keller. Newer industries such as computer electronics are highly competitive too, but companies typically earn 18% to 20% or more on capital.
Thus, the stock market gives high valuations to technology but is stingy with automobile stocks. GM’s current price of about $53 a share, seven times last year’s earnings, reflects slowing auto sales this year and tough competition globally.
Yet automobiles are a basic world industry with an enormous future as developing countries enter the vehicle age. GM last year began a joint venture with Shanghai Motor to produce cars in China.
The global winners will be those companies disciplined enough to keep costs down yet nimble enough to offer vehicles that excite buyers.
GM, with its costs in line and new models on the way, looks like a winner for the first time in years--no, make that decades.
