GM's Next Challenge

By JAMES F. PELTZ

July 29, 1998 12 AM PT

TIMES STAFF WRITER

The strikes against General Motors Corp., though very costly by themselves, together were only the latest skirmish in a long-term battle GM is fighting to arrest its drooping share of the U.S. auto market and otherwise regain ground lost to its rivals.

The strikes, which effectively halted GM’s North American production for several weeks, will cost the company as much as $2.8 billion and some additional short-term market share, because dealers’ lots won’t have normal stockpiles of all GM models, analysts said.

GM’s willingness to pay that price shows its resolve to keep searching for ways to wring efficiencies out of its enormous operations--steps that frequently involve domestic job cuts, shuttering antiquated plants and work rule changes. It’s that prospect that spawned the latest standoff with the United Auto Workers union.

“GM is willing to take two or three steps forward and one step back,” said Marvin Behm, an analyst at Duff & Phelps Credit Rating Co. in Chicago. “They’re willing to take some pain so that, in the long run, they can continue to improve.”

But others wonder if GM paid too steep a price. Though details of the labor agreement have yet to be announced, “I find it hard to believe they got anything that was worth $2 billion” in lost earnings, said David Healy, an analyst with Burnham Securities in New York.

Even if the UAW’s members approve a tentative pact reached Tuesday, end the walkouts and give GM some measure of labor peace, the No. 1 auto maker still faces a rash of other problems in trying to reverse its slide.

GM trails behind its domestic and international competition in production efficiency. Some analysts regard its product lineup as bloated with too many models. And the company’s labor relations are the worst in the industry. Even though GM has improved in these areas, its rivals have stayed ahead by moving more quickly.

That’s frustrating some observers who thought GM would more quickly shed its bureaucratic, lumbering ways in the six years since GM’s board staged a coup and replaced the company’s former chief executive with current CEO John F. Smith Jr.

“They’ve made a lot of progress to become more productive, but they haven’t closed the gap with the competition,” Healy said. “It’s a management problem.”

Though it remains the nation’s largest industrial corporation--with 1997 sales of $178 billion--GM trails its major competitors in several areas, including how much it spends to build a car, how much profit it earns per vehicle, its overall profit margin and how long it takes to develop and launch new models, analysts said.

In addition, GM’s share of the North American market for cars and light trucks has steadily declined in this decade, to a current 31% from nearly 36% in 1990, according to industry research firm Ward’s Communications in Southfield, Mich.

Ford Motor Co. is close behind at 27%, with Chrysler Corp. at 19% and the remainder held by nameplates of auto makers based in Japan, Europe and elsewhere. And Chrysler is seen as an even more potent threat, owing to its recent agreement to merge with the big German auto maker Daimler Benz AG.

Furthermore, GM’s share of the market would likely be worse if the company wasn’t offering substantial buyer-incentive plans. Those discounts averaged a whopping $1,703 per vehicle in the second quarter, up from $1,060 a year earlier.

The incentives are helping support GM’s market share, but are a drag on its profits. Indeed, GM’s profit for the second quarter ended June 30--excluding the impact from the strikes and some other adjustments--tumbled 24% from a year earlier. The first strike began June 5.

“At the end of the day, the real problem that GM faces is that its production costs are still way too high relative to its competition, even against Ford and Chrysler,” Lehman Bros. analyst Joseph Phillippi told his clients recently.

Critics maintain that GM also must overhaul its car-model development and marketing more quickly. They contend that GM has too many nameplates--including Chevrolet, Buick, Oldsmobile, Pontiac, Cadillac and Saturn--that aren’t distinctive enough from each other. The line leaves consumers confused and effectively wastes much of GM’s enormous spending on advertising.

But GM’s “massive size makes it difficult” to ponder such “big-bang” steps as eliminating whole lines of cars, even if it would help pump up GM’s profitability, Behm said.

Analysts said there’s one other reason GM is under intense pressure to keep improving its operations: Right now, conditions could hardly be better for selling cars. The economy is strong, employment is high and auto-financing rates are low. But the market will be much less forgiving when the next recession hits, they said.

* MAIN STORY: A1

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Striking Out

With the United Auto Workers strikes tentatively settled, General Motors--which lost $2.8 billion during the lengthy labor action, must make improvements in several areas.

GM needs to improve producity...

Avg. workers per vehicle made in the United States

Nissan: 2.23

Honda: 2.51

Toyota: 2.67

Ford: 3.09

Chrysler: 3.29

General Motors: 3.47

GM’s market share

‘98*: 31.0%

*June figure

But its stock price held up during the strike