GM Retools With Global Strategy

General Motors Corp. Chairman John Smith dined with Fiat Chairman Paolo Fresco over calamari risotto and monkfish here last month, discussing wines, world travel and the global truck market. It was a relaxing chance for the two to get to know each other better three months after a dramatic share swap between the two industrial titans that left GM with 20% of the Italian conglomerate’s car business.

But there was much to talk about after dinner: The next Monday, GM and Fiat submitted a joint bid to acquire troubled South Korean auto maker Daewoo Motor Co.--an attempt to extend the reach of the Western car manufacturers not only in Asia but also in Eastern Europe, where Daewoo has a number of factories.

Although Ford Motor Co. was eventually selected as Daewoo’s sole negotiating partner, GM’s joint bid with Fiat highlights how the world’s largest auto maker is moving from its traditional go-it-alone approach and cooperating with its automotive partners.

Such unions should mean huge cost savings for manufacturers--and lower prices and more choices for consumers.

GM is reinventing itself through its alliance strategy. In the process, it is shifting from the model of legendary Chairman Alfred P. Sloan--clearly organized brands within a tightly integrated structure--back to that of Billy Durant, the controversial founder (and twice-sacked president) who cobbled together a collection of semiautonomous companies that became General Motors.

GM’s alliance strategy veers markedly from that of Big Three rivals Ford and DaimlerChrysler.

Ford usually makes outright acquisitions of marques highly dependent on the U.S. market. It now owns 100% of Aston Martin, Jaguar and Land Rover of England and Volvo Cars of Sweden, as well as a controlling 33.4% stake in Mazda Motor Corp. of Japan. Ford is highly regarded for how it has managed its acquisitions, frequently putting its own executives at the top but allowing Jaguar, Aston Martin and Volvo, in particular, to retain the essence of their European identities.

DaimlerChrysler, on the other hand, has proved to be a study of a “merger” gone awry--more a takeover with Daimler clearly calling the corporate shots, installing German executives to dominate the board and chasing away much of Chrysler’s top American talent.

GM’s approach is more piecemeal. It has crafted a web of share holdings with Japan’s Suzuki, Isuzu and Fuji Heavy Industries (the maker of Subaru), Saab of Sweden and Fiat Auto of Italy, all of which have huge stakes in their home markets. It has forsaken outright acquisitions for partial stakes ranging from 9.9% to 49% (with the exception of Saab, which it owns 100%).

Each partner adds expertise in areas where GM is weak: diesel technology from Isuzu and Fiat, small-car expertise from Fiat and Suzuki, all-wheel-drive and continuously variable transmissions from Subaru, turbo-power technology from Saab and commercial vehicle know-how from Isuzu.

There is skepticism in the industry about the alliances. Critics see the deals as a way to compensate for GM’s inability to build small cars on its own at a profit or to develop a world-class diesel engine or compact all-wheel-drive system.

Synergetic maneuvers such as supplying Isuzu engines and Suzuki bodies to Opel (GM’s German-based unit)--or putting Suzuki engines in Chevys and Honda engines in Saturns--also risk diluting the brands’ images and possibly alienating customers who seek what they perceive as German engineering, Japanese quality or robust American power plants.

Small stakes such as the 9.9% of Suzuki that GM owns bring in little revenue, and critics wonder whether GM already has too many brands with eight of its own in the U.S. Not known in the past for astute management or nimbly following fast-changing consumer tastes, can GM keep up with a fistful of partial ownerships around the world while it faces market share, quality, design and other crises at home?

Managing GM’s far-flung alliances will be one of the top tasks for G. Richard Wagoner, who became chief executive June 1.

But call them associations rather than annexations: “The individual players make their calls,” Wagoner said. “We don’t control them.”

For GM, which also has technology tie-ups with Japanese giants Toyota and Honda, the alliances are a means to shore up eroding market share and sell more cars in Asia, Europe, Latin America and, ultimately, the U.S.

“Alliances give us a chance to grow, in developing markets in particular, where we’re not as big as we need to be,” Wagoner said at a recent press seminar here on GM’s future. “It strikes us as a very efficient way to use a capital base. Instead of pouring billions into acquisitions, we can spend that money on things like win-win product development programs.”

And win-win, he says, doesn’t necessarily mean all-or-nothing or even 50-50. Most auto makers don’t want to sell out completely.

“It’s a cost-benefit analysis,” said Gilly Filsner, an analyst at the automotive consultancy Ludvigsen Associates in London, meant to answer the question: “Can we get what we want without buying the whole thing?”

Saving Money

For their part, GM’s partners are looking for a “big brother” that can protect them from hostile bids and allow them to run their own brand, Wagoner said.

“I can assure you that today, the leaders at Fuji Heavy are more engaged than they’ve ever been in the success of their Subaru brand,” he said. “They are not moaning about being taken over by Americans and having to do things Americans’ way. Fiat feels exactly the same way. There’s not a lot of sighing over who’s taking over who. It’s much better than a sudden merger.”

Fiat is the most recent partner, with the two firms agreeing in March on an equity swap. In addition to GM’s stake, Fiat is taking a 6% stake in GM, which has the option to buy the rest of Fiat Auto after 2004. They will set up two joint ventures to pool purchasing and powertrain development, and are discussing sharing car platforms and other development and manufacturing costs--not unlike rival newspapers that have a joint-operating agreement.

Although GM’s Asian partnerships are aimed at expanding revenue and access to technology, the Fiat alliance is driven by the need to cut costs.

“We found with GM the same intention to cut industrial cost and be independent in the marketplace,” said Roberto Testore, chief executive of Fiat Auto. “We will be more competitive, and to do that we will put together operations with GM in Europe and Brazil.”

Both auto makers nonetheless pledge to be fierce rivals wherever they face off.

“We will fight one another in the marketplace as always,” said Fiat Group President Paolo Cantarella.

But the cooperation amid the competition is all about saving money.

“Down at the purchasing and powertrain levels, there’s a lot of incentive to get the cheapest--the best--offer through to the two customers,” said John Lawson, auto analyst at Salomon Smith Barney in London. “At the end of the day, I really think that if the powertrain operation is serving its two customers to its best ability, it will push a lot of costs out.”

A perhaps unintended effect of the association is additional pressure put on rivals around the world. Aligning GM with Fiat Auto makes the two larger than German powerhouse Volkswagen in Latin America.

“The only player left down there of any size is Ford, and they now look very small against them,” said Garel Rhys, professor of motor industry economics at Cardiff Business School in Britain. “Put the two together, and the battleground is Europe and South America to start with. But it will break out everywhere else.”

GM’s alliance strategy began in 1971 when the auto maker bought a 34% stake in Isuzu, later increased to 49%. Along the way it has acquired its stakes in Suzuki, Saab, Fuji Heavy and Fiat Auto. In the last year GM has announced a tie-up with Toyota to work jointly on fuel cells and hybrid gas-electric propulsion systems, and a deal with Honda to buy its gasoline engines and in turn sell Honda diesel engines developed by Isuzu.

“We’ve concluded that in the right circumstances, an alliance can get you most of the gain of an acquisition with a lot less of the pain that usually goes along with it,” Wagoner said.

Not that GM’s endeavors have been painless. It ran a 50-50 joint venture with Daewoo in the 1980s that imported the Korean-made Pontiac LeMans--an unreliable and unlamented car plagued by quality problems. In linking up with Japanese manufacturers, GM hopes some of their renowned quality will rub off, and that they will also help the company reach its goal of selling one of every 10 cars in a recovering Asian market. Together, the “GM Network,” as executives have only recently begun calling the global grouping, could even help boost the auto maker’s sagging U.S. market share, which fell below the 30% mark in 1998 for the first time in at least six decades.

The scope of GM’s Japanese alliances hit Wagoner “like a load of bricks” at the Tokyo Motor Show in October, when he was asked how it felt to be Japan’s No. 2 auto maker.

“Somebody had done the math and figured out that the GM Network sells more cars in Japan than anybody except Toyota,” he said, still incredulous.

That Japanese connection is now poised to flourish. GM has already announced that the next-generation Chevrolet S-10 and GMC Sonoma compact pickups will be designed by Isuzu; that its Northern California manufacturing joint venture with Toyota will develop and produce a “lifestyle activity vehicle” for Pontiac; and that a joint Chevy-Subaru car-truck crossover is in the works.

Other jointly developed cars are set to launch this year in Asia, Europe and Latin America. Already in production: the Opel Agila, a Suzuki-designed mini-minivan with an Isuzu diesel engine option, assembled in an Opel plant in Poland and a Suzuki factory in Hungary; and the Opel and Vauxhall Frontera sport-utility vehicle with an Isuzu engine.

GM planners have high hopes for the compact YGM-1, which will begin production in Asia next year with a Suzuki platform and engine and will be sold as a Chevrolet. The four-wheel-drive car has the potential to be an affordable, huge-selling compact for Asia’s reemerging markets and a “world car” that GM could export more widely.

The Chevy Triax, being developed with Suzuki, has the options of a traditional internal combustion engine, a battery-powered electric powertrain or a hybrid combination of both. The Isuzu 160, seen as an “Asian utility vehicle,” uses Isuzu diesel engines made in Poland and could also be sold worldwide.

Asia Plan Uncharted

“We want to further our development in close collaboration with GM, not just in Asia but in Latin and South America, Africa and worldwide,” Isuzu Chief Executive Kazuhira Seki said at the Tokyo show. “With our two companies’ global strategy, GM has become a partner we cannot do without.”

With GM out of the running for Daewoo, its next move into Asia is cloudy. It could expand its partnerships with the unaligned Toyota and Honda, but both are fiercely independent and are unlikely to enter an equity relationship. GM is more likely to expand its presence in China or India, perhaps to build affordable family cars for the emerging middle class.

GM, as the 800-pound gorilla of the automotive world, certainly has the weight to throw around and forcibly take over competitors. But Wagoner says that’s not his style.

“We dance only when both partners want to dance,” he said. “You can destroy a lot of value arguing with people.”

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The Global Carpool

The auto industry has undergone a rapid period of consolidation, underscored most dramatically by Daimler-Benz’s merger with Chrysler Corp. in 1998. Here is a list of current ownership ties among the top 10 manufacturers, assuming pending deals are completed, along with each manufacturer’s worldwide output:

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Sources: Automotive News, Merrill Lynch, Associated Press