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General Woes
Posted on: 2005-09-16 12:52:07 Just selling more cars may not be enough for the troubled automaker By Richard J. Newman Mediocrity often sneaks into products undetected. But executives at General Motors think they are learning to spot the unwelcome intruder and show it the door. Last year, for example, a disagreement broke out among the team developing a new Buick crossover vehicle, due out in the next couple of years. GM designers, responsible for looks and style, felt the vehicle's corners were too square with a hood that hung out too far over the tires. But the engineers, who have to build what the designers draw, said proposed changes would take too much retrofitting. Team managers told the two factions to resolve their differences in a series of "enabler meetings" --troubleshooting sessions at 6:15 in the morning--which GM has begun using to break the notorious bureaucratic logjams at the world's biggest carmaker. This time, both sides held their ground. Finally, Jim Queen, GM's engineering chief, and Ed Welburn, head of design, stepped in. They finessed a solution that gives the crossover the shapely, Lexus-like curves the designers were after, while appeasing the engineers. "There have been periods at GM when design had total power, and periods when the engineers set all the rules," says marketing chief Mark LaNeve. "Now they work together. The whole attitude has changed." Clearly, some things have changed at GM as the carmaker battles for its survival under CEO Rick Wagoner. The company has long been derided for bland, compromise designs, like the Chevy Malibu and Pontiac GTO, that look a generation behind the hottest cars in their class. But a series of new vehicles to be launched over the next several years is drawing praise from analysts, auto journalists, and industry insiders. The company is also breaking old habits like building nearly identical cars for different nameplates--think Chevy Cavalier and Pontiac Sunfire--and focusing instead on giving each of its eight brands a distinct identity. And GM's summerlong "employee discount" promotion, initially jeered by skeptics, turned out to be one of the most successful marketing campaigns ever, helping GM thin bloated inventory and gain market share. "The General" needs to conquer a lot more turf, however, before it can beat back hot competitors like Toyota and Nissan and reverse a precipitous money-losing slide. And even the huge employee-discount program--which offers all consumers the same favored pricing that GM employees get, and is due to expire at the end of September--may end up doing little to aid the automaker's fortunes. Despite boosting sales, the summer's fierce discounting apparently did little to improve GM's profit margins, the worst in the business. Employee and retiree healthcare costs, which will add up to nearly $6 billion this year, sap an increasing portion of company revenues. And GM's image still sags, a huge roadblock to reducing giveaways and boosting profits. "They need to change the perception the consumer has about GM," says Jeff Schuster of J. D. Power & Associates. "Are they the Kmart of cars or a more upscale store?" The employee-discount program, launched right after GM announced a $1.4 billion loss for the first half of 2005, started with a more strategic purpose than just clearing out aging merchandise. Aggressive rebates and other deals have locked GM, along with Ford and to a lesser extent Chrysler, into a debilitating pattern: Consumers have gotten hooked on incentives on domestic cars and won't buy without them. The only exception is for red-hot new models like the Chrysler 300C, which have been scarce at GM. All that discounting has thrashed profitability. In 2002, according to Harbour Consulting, GM made $701 per vehicle in pretax profit in North America, worse than the Japanese importers but better than Ford and DaimlerChrysler. By the first half of this year that profit had become a $1,227 loss. Toyota, by contrast, has been earning about $1,488 per vehicle, a 23 percent improvement from 2002. Sticker shift. GM desperately needs to wean consumers off incentives--without losing customers. The employee discount program was Step 1. By introducing set prices, and making them sound like a great deal, the company hoped car buyers would start getting used to lower list prices--and smaller rebates. Step 2 is a new scheme to lower sticker prices on about 30 of the 2006 models, to close the gap between the price on the sticker and the price buyers actually pay. An entry-level 2005 Malibu, for example, lists for about $20,000 but sells for just $17,700 on average, according to car-research firm Kelley Blue Book. That's a gap GM needs to close. So for '06, GM is dropping the list price by $1,835. "We're taking some of the guesswork out of the pricing equation," explains LaNeve. On other models, GM will add features without raising prices, hoping consumers will sense the bargain and buy without demanding deep discounts. More realistic prices and hipper cars should, theoretically, improve GM's overall image--as it has for the company's Cadillac division, which has become a legitimate rival to BMW and Mercedes. GM hopes that stronger appeal among its higher-volume brands will eventually allow it to charge more for better-respected vehicles. But so far the opposite seems to be happening. Mark Oline of Fitch Ratings says his firm's analysis of the carmaker's cash flow suggests actual prices paid for the company's cars, after all discounts, are declining, not holding steady or rising. That could bring back the big incentives--and lead to further cuts in GM's credit rating, forcing it to pay more to borrow. "GM's credit profile will continue to deteriorate," Oline predicts. "It's hard to see how they're going to restore profitability just through revenue and new products." And while the employee-discount deals have helped GM bump up its market share, they've also drawn shoppers into competitors' showrooms--boosting sales at Nissan, Toyota, Honda, and even Hyundai. If industry sales peter out this fall, as many analysts expect after the summer binge, GM will probably fall back more than others, since it has had to offer more come-ons to attract buyers. Winter Solstice? Other reforms seem shrewd, yet far short of what's needed. The new Pontiac Solstice two-seat roadster has the hallmarks of a desperately needed buzz vehicle--quasi-Porsche styling and a zippy engine for about $20,000. But delays have GM introducing the convertible just in time for . . . winter. GM has also begun trying to carve out distinct personalities for struggling brands like Pontiac, Buick, and Saturn. Instead of issuing Pontiac and Saturn carbon copies of the Cobalt, Chevrolet's economy sedan--the old "rebadging" strategy--GM has used the Cobalt's chassis to build the Chevy HHR, a neo-retro wagon-ute that resembles Chrysler's PT Cruiser. Critics have lauded the strategy--but GM needs to sell hundreds of thousands of appealing new vehicles across all of its brands, not just a few thousand funky Chevys. Worse, higher gas prices, exacerbated by Hurricane Katrina's damage to the energy industry, may already be neutralizing GM's secret weapon--full-size trucks and SUV s. Next year GM will introduce a new lineup of light trucks, which have been the automaker's most profitable segment. But higher gas prices and a shift in consumer preference toward smaller crossover vehicles have punctured hopes for a killer new SUV. "They're bringing new product into a shrinking segment," laments Oline. Even GM knows that. The company plans to build about 250,000 fewer light trucks than it did during the late '90s, the glory days of the big SUV. For all those woes, GM's biggest problem is the one it is saying the least about. For several months the automaker has been negotiating with the United Auto Workers over a long list of sensitive issues--reducing healthcare benefits, closing plants, and slimming its workforce. In addition to building cool new cars and regaining some verve in the marketplace, GM still needs to aggressively cut costs and downsize its vast manufacturing footprint. And that falls heavily on the company's blue-collar workers. GM's contract with the union expires in 2007, but CEO Wagoner has insisted GM needs concessions sooner, to cut capacity, improve productivity, raise margins, and become competitive once again with importers firing on all cylinders. The union, skeptical of Wagoner's claims of financial distress, has hired several New York investment bankers to examine the company's condition. At a conference for investors last month, Wagoner said virtually nothing about the negotiations, except that GM will continue to face a "tough, challenging market" in 2006. If there's any good news for the company, say cynics in Detroit, it may be that you no longer have to work for the company to get the employee discount. GM AT A GLANCE Though likely to post a huge loss this year, GM is still the world's biggest carmaker. Founded: 1908 CEO: G. Richard Wagoner Jr. 2004 annual revenue: $193 billion 2005 net income: loss of $1.4 billion (through June 30) Total employees: 317,000 Countries where GM cars are sold: 200 U.S. assembly-line workers: 109,000 U.S. brands: Buick, Cadillac, Chevrolet, GMC, Hummer, Pontiac, Saab, Saturn Number of U.S. dealerships: approximately 7,500 Homepage Please support are sponsors. 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