Monday, June 19, 2006
Wall Street Journal
"Rightsizing" is the corporate euphemism for shrinking your resources to match your prospects. General Motors is now in the midst of the largest and trickiest rightsizing it has ever undertaken. It has finally abandoned its annual expectation that new products in its pipeline will create an apotheosis, an expectation that has traditionally led it to reduce capacity reluctantly and inadequately. With first quarter U.S. market share at 23.8%, half the peak of the 1970s and 1.6 percentage points below the same period in 2005, the General finally seems to have embarked seriously on demoting itself to Major.
It will be a costly undertaking. The write-off of its optimistic investments in Fiat and Fuji Heavy Industries were modest down-payments. The big drains will be the payoffs to the unionized production employees who accept its early retirement offer and the ransom -- which it estimates at $5.5 billion to $12 billion -- that it disgorges to prevent the workforce at its bankrupt, one-time parts-making empire, now Delphi Corporation, from going on strike. The walkout, already voted, would be precipitated if Delphi management requests a court to void its collective bargaining agreements. If they are, Delphi CEO Steve Miller intends to slice compensation by as much as half, unless GM chips in enough to placate Delphi workers. Delphi complains that it loses substantial money on no less than 5,000 supply contracts with GM -- while GM asserts that doing business with Delphi typically involves a cost premium of 15%. Both are right. And beyond the delicate tiptoe through the Delphi minefield, GM faces the expenses of shutting assembly plants and their supporting facilities.
GM's current supply of cash -- $22 billion at the end of its first quarter -- will be replenished by selling off more of the family silver. DirecTV is gone; so are its commercial mortgage business and shares in Suzuki. Now the most prominent disposal will be a 51% stake in its profitable financing arm, General Motors Acceptance Corporation, scheduled to generate $10 billion in the fourth quarter and an additional $4 billion over the following three years. Divesting control of GMAC is bitter medicine, because it is a healthy moneymaker that has become increasingly infected by its association with GM's unhealthy vehicle businesses. This increases its cost of borrowing the cash it uses to support loans and leases for GM retail customers and the inventory financing of GM dealers.
Rightsizing is also galling for GM's management because of some hard-won accomplishments. The European vehicle business, after a long string of losses, has returned to profitability. U.S. plant productivity has made considerable strides. Initial product quality has risen into the industry mainstream. Unfortunately, consumer perception of quality always lags reality; so respect for GM's improved products has not materialized in the marketplace and is only likely to do so gradually, if at all. Also, GM cannot point to a wave of genuine hit products in the six years of the current management. Vehicles that prompt widespread buyer enthusiasm can overcome any manufacturer shortcomings in quality, productivity and even cost competitiveness -- as Chrysler demonstrated frequently throughout the '80s and '90s.
The Yankee's Hall of Fame pitcher Lefty Gomez once said, "I'd rather be lucky than good." While GM has been getting slowly good in some respects, it has also been getting unluckier. It has been mauled by buyer panic over $3 gasoline: Most of its new 2006 models are SUVs and trucks, segments that are swooning. And GM's longer-term vision has been a burden, too. Instead of charging side-by-side with Toyota and Honda into hybrid gas-electric technology, GM has placed its R&D chips on hydrogen fuel cells, a power system that will not materialize commercially for at least 20 years, if ever.
Between now and 2008, GM will have to move production from 12 abandoned plants to the ones it will retain, while minimizing the expense and avoiding output hiccups. And as the company begins reaching for enhanced labor productivity and higher plant utilization, it faces the delicate task of orchestrating its transitions in ways that avoid infuriating its unions and poisoning the collective bargaining negotiations due next fall.
Meanwhile GM doggedly defends its multiplicity of brands -- primarily to preserve peace with another influential group, its dealers, and to avoid the sort of expense it encountered in pulling the plug on Oldsmobile in 2003-04. Brand proliferation, though, is a costly albatross, entailing the substantial investment of providing each with seemingly unique vehicles and enough ad spending to counteract flagging buyer interest.
GM's newest director, Jerry York, pointed to this straight out of the box. He represents GM's largest shareholder, Kirk Kerkorian, who has so far lost $250 million on his $1.69 billion GM bet. The York apostasy has been papered over by the assertion of a corporate spokesperson that he was not yet sufficiently knowledgeable at the time of his remarks, although they echoed earlier "misquoted" comments along similar lines by GM's own vice chairman, Robert Lutz.
Indeed, novel brand ideas do seem to be percolating within GM. There has been talk of fielding only zoom-zoom rear-wheel-drive cars at Pontiac, and American clones from GM's European lineup at Saturn. The time required, though, to implement this strategy would be at least five years -- by which time Pontiac and Saturn, along with even more sickly Buick, will have continued draining GM market share and cash.
At the annual shareholder meeting, chairman Rick Wagoner celebrated GM's recent accomplishments while commenting that it "might not be able" to achieve its 2006 target of saving $1 billion on purchases because of rising raw material prices. Missing targets like this one has been a recurring pattern at GM. His comment seems to have contributed to a flattening of the small bubble in GM's share price, which still languishes at two-thirds of its 52-week high.
Mr. Wagoner's own tenure seems at least temporarily secure. A board meeting to discuss it was short-circuited by his own efforts and those of his most persistent supporter, lead director George Fisher, who reportedly confronted his colleagues with the unsettling question, "If not Rick, who?" Mr. Fisher's inability to pull off a similar transformation while CEO of Eastman Kodak must feed his sympathy for Mr. Wagoner's efforts. The question that will persist, though, as GM navigates its tricky rightsizing, is whether the constituencies who say grace over GM's share price believe there may be a "who" out there better able to pull it off.
Mr. Schnapp led the auto industry practice at Mercer Management Consulting.