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GM’s Recovery Still Revs Despite Fears of Stalling

James Flanigan can be reached at jim.flanigan @latimes.com.

We are at a moment in history when some of the most venerable names in American business -- AT&T; Corp. and UAL Corp.'s United Airlines, among them -- may well be on the verge of disappearing.

But at least one corporation that some have placed on the could-soon-be-extinct list -- General Motors Corp. -- should be scratched right off it.

Yes, credit rating firms have spoken openly in recent weeks of downgrading GM’s bonds to less-than-investment-grade, or junk, status. And Fiat has threatened, under terms of a 5-year-old agreement, to force GM to buy the Italian company’s heavily indebted auto business, a move that could further imperil GM’s financial standing.

It’s also true that the world’s largest automotive company last year made less than 2 cents of profit for every dollar of its $193 billion in revenue. And those scant earnings came principally from the company’s finance division, GMAC. Overall, GM’s automotive operations posted a slim profit last year.

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What’s more, as it tries to move forward, GM faces formidable headwinds.

GM once set the pace for all of American industry, pioneering pension and healthcare coverage for its employees. But now, what was a model program has come back to haunt GM. The company faces an estimated $50 billion in future healthcare liabilities for its 425,000 retired workers and their spouses.

GM’s annual medical bill for active and retired employees tops $5 billion. That amounts to $1,500 more per vehicle than its rivals in the U.S. market have to pay, a considerable disadvantage against Japanese rivals Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co.

So is the onetime flagship of U.S. industry headed for the corporate graveyard, like some of the major airlines and old “Ma Bell” may be?

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The surprising answer is no. Far from it.

“The largely unrecognized fact is that GM has been in a remarkable turnaround since 1992, when the board of directors took charge,” says Vincent Barabba, who was general manager of strategic planning for GM until his retirement two years ago.

Barabba is referring to a dramatic episode when directors, watching GM lose money year after year and seeing it crushed by debt, made bold changes at the top.

They brought in Jack Smith, then head of GM’s European operations, to run the whole shebang. And the bleeding quickly stopped.

The next dozen years saw GM raise productivity steadily, according to Harbour Consulting Inc., a Troy, Mich., firm that keeps track of efficiency statistics for the industry.

In fact, GM is now the most efficient of the U.S. automakers (although it has yet to match the productivity levels of the Japanese manufacturers’ nonunion American plants).

The big automaker also has improved the quality of its cars and trucks. J.D. Power & Associates, the Westlake Village firm that keeps track of customer satisfaction, says GM is winning high marks these days.

“They’ve done an impressive job of revamping whole product lines,” says security analyst Ivan Feinseth of Matrix USA, a New York-based brokerage.

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And the company is not done yet. GM sees itself as having achieved only 70% of the quality it needs.

To foster its recovery, GM has gone back to basics. It adopted the formula of Alfred P. Sloan, the company’s longtime chairman, of producing cars for five economic strata -- from Chevrolet through Cadillac -- and then updated it.

On the factory floor, GM “now uses a single production platform to produce a variety of models and values,” Barabba says. New Pontiacs and Chevrolets are thus all born of one chassis. The base of the Cadillac Escalade is the same as that of Chevrolet sport utility vehicles.

Cost savings are wrung out of such processes, which is why GM’s auto business is in better shape than it appears. Were it not for the healthcare cost burden, GM’s automotive operations would have cranked out enough profit to have more than doubled the $3.7 billion in net income the company reported for 2004.

Which may well explain why GM’s Rick Wagoner, who became chief executive in 2000, seems so calm amid all the current fears about the company’s future.

When asked whether he is seeking U.S. government relief from GM’s healthcare burden, Wagoner, a onetime star basketball player at Duke University, shrugs like a guy who has been through a few pressure situations.

“The reality is we have the legacy costs,” he says. The company will get some break, he adds, when Medicare assumes prescription drug coverage for seniors next year.

Wagoner knows that GM’s greatest challenge remains producing models that excite customers. That hasn’t changed for 100 years.

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The aim now is to get folks to buy cars and trucks without offering the big discounts to which the company has resorted of late.

“For us, the incentives have sort of leveled out,” Wagoner said recently. Still, he cautioned, “we have to be realistic about competitive conditions for 2005 -- or to be honest, for the rest of our lives.”

Tough conditions aren’t stopping GM from investing $8 billion this year in plant improvements and research and development. At the end of the decade, the company foresees bringing to market a hydrogen fuel-cell vehicle that will give it, once again, the technological lead in the industry.

Meanwhile, Wagoner stresses the firm’s successes in China and the rest of Asia, where its automotive operations are profitable. And he talks of new SUVs and other models coming out next year that could spark a vigorous period of growth for GM.

It is more than just spin. Despite some negative headlines, GM is hardly stuck in reverse.


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