Motown misery: the world's biggest car maker, General Motors, is sick--very sick; some have even mentioned the bankruptcy word.
How could the giant have been brought so low? It's a story that's been developing for decades. Put simply, the company makes vehicles people don't want in an industry that produces more units than it can sell.
Billy Durant might understand this rise and fall in fortunes. Having become rich making buggies, Mr. Durant bought the ailing Buick Motor Car Company in 1904. In 1908, he folded Buick into another company and called the result General Motors. But, within two years, the company was in financial trouble. The banks took over and booted Mr. Durant out. Quickly, he and Louis Chevrolet started up the Chevrolet Company. Billy Durant organized a merger with his old company and, in 1915, he was back in charge of General Motors. He bought up many small car manufacturers, among them the McLaughlin Motor Car Company. Colonel Sam McLaughlin had started making cars in Oshawa, Ontario in 1907. In 1918, Col. McLaughlin sold out to GM and became President of General Motors Canada. But, it all turned sour again for the colourful Billy Durant; in 1920, GM said goodbye to him for the final time. The self-made, and then unmade, multi-millionaire died in poverty in 1947.
Under the leadership of Alfred Sloan, General Motors started to expand worldwide. Mr. Sloan came up with the idea of offering an annual model and different lines of cars at different prices. Consumers liked the idea that they could trade up to a bigger and more expensive car. GM quickly overtook Ford as the biggest car manufacturer.
World War II was good to GM. The company made a lot of the weaponry for the allies; it also made warplanes and trucks for Nazi Germany.
Writing in The Washington Post in 1998, Michael Dobbs pointed out the irony: "When American [soldiers] invaded Europe in June 1944, they did so in jeeps, trucks, and tanks manufactured by the Big Three motor companies (GM, Ford, and Chrysler) ... It came as an unpleasant surprise to discover that the enemy was also driving trucks manufactured by Ford and Opel--a 100 percent GM-owned subsidiary--and flying Opel-built warplanes."
By the mid-1950s, General Motors was the biggest company in the U.S. and the world's single largest employer. The high-point was 1962: the company's 75-millionth car rolled off its Detroit production line and its one-millionth shareholder bought stock. GM was now making one million vehicles a year in North America.
Then came the oil shock of 1973. Arab countries quadrupled the price of the crude oil they exported and, for a while, halted shipments to the U.S. (The Arabs were angry over American support for Israel).
Very suddenly, drivers wanted fuel-efficient cars and GM was trying to sell them gas guzzlers such as Cadillac Eldorados, Chevrolet Monte Carlos, and Buick LeSabres. These cars had eight-cylinder engines and weighed 1,500 kilograms and up. Fuel consumption was atrocious at about four kilometres a litre of gasoline.
Meanwhile, in Japan and Europe car companies were already making small cars. It wasn't because they were incredibly far-sighted and spotted the rapid rise in gasoline prices coming. Their small, crowded countries with narrow roads meant that North American-sized cars simply wouldn't fit. Canadians and Americans looking to save money, started snapping up small cars, particularly Japanese ones. The Big Three were slow to react. Not only did they miss the demand for smaller cars, they also failed to see that consumers wanted cars that were more environmentally friendly.
General Motors and its fellow North American manufacturers tried to stop the flood of imports that were taking bigger and bigger chunks of the market. Japanese manufacturers reacted by opening assembly plants in Canada and the U.S.
General Motor's share of the U.S. automobile market dropped steadily throughout the 1980s, from about 45 percent in 1981 to about 35 percent in 1989. The company laid off tens of thousands of workers. Between 1980 and 1992, GM racked up losses of almost $30 billion. And still, the highly paid executives didn't catch on.
Japanese car makers such as Toyota were devouring GM. Average buyers became loyal to Toyota, Honda, and Datsun (later Nissan). They found the Japanese vehicles more reliable and cheaper to run than the cars Detroit's Big Three were turning out. Customers with deeper pockets preferred the better-quality European brands of BMW, Mercedes, and Volvo.
By the start of the new century, GM and its fellow North American manufacturers only dominated one sector of the market--the big sport-utility vehicles. The profit-margin on these huge cars is high, so GM focussed most of its attention on the SUV. U.S. automakers can earn $10,000 or more in profit from the sale of a big SUV, compared with a few hundred dollars when they sell a compact car. So, GM followed the money.
Once again, the company was blind-sided by gasoline prices. In 2005 and 2006, sales of SUVs have dropped by up to a third. Fewer people are willing to pay the more than $100 it now costs to fill up a Chevrolet Tahoe. Customers want fuel-efficiency and hybrids that pollute less. (GM actually built 1,100 electric cars between 1996 and 1999. In 2003, the program was cancelled, and almost all the cars were crushed and recycled).
Today, Korean, and soon Chinese, makers are winning on price, the Japanese on quality, and the Europeans on performance. There are other reasons for the GM decline as reported in 2005 by the British Broadcasting Corporation: "Where the big Detroit auto-makers have dung to the idea that [showy] power and size, ideally at a low price, are what sells cars to Americans, the competition's realized that style is ultra important in a world where cars are fashion items ...
"A quarter of a century ago, 80 percent of new cars were bought because the old one had died. Fifteen years ago, that figure had fallen to 60 percent.
"Marketing companies reckon that today less than one in five cars are bought out of necessity.
"Most people make their choice by what they want the car to say. Distinctiveness is everything."
The bleeding at GM still hasn't stopped. Financial institutions now rate GM's debt as "junk" status. This is a slang term applied when there is a high risk that lenders might not be repaid.
Rick Wagoner has the difficult task of turning the company around. He's the Chairman and Chief Executive Officer of General Motors. He has a plan.
Twelve GM plants are going to be closed in North America and 30,000 workers let go by 2008. In addition, when union contracts are renegotiated in 2007, the company is going to strike a hard bargain. Mr. Wagoner says GM cannot continue to pay for its generous healthcare plan; workers are going to be told they'll have to pick up some of the cost.
The plan hasn't gone over too well. The value of GM shares has declined further. BusinessWeek magazine's analysis is that "within five years GM must become a much smaller company, with fewer brands, fewer models, and reduced legacy costs. It's undeniable that getting to that point will require a drastically different course from the one Wagoner has laid out so far. He is going to have to force a radical restructuring on his workers and the rest of the entrenched GM system, or have it forced on him by outsiders or a bankruptcy court."
The problem is the same one that's clobbered GM before--customers are buying its competitors' products. BusinessWeek explains why: "Toyota, Nissan, and Honda ... concentrate research dollars on fewer vehicles, pack them with the latest features and technologies, manufacture them in low-cost, non-union U.S. factories, and update them relentlessly ... Toyota models average sales of 80,000 units a year in the U.S., whereas GM squeezes out just 52,000 sales per model on average. And, Toyota models stay on the market for an average of three years before their next redesign, compared with nearly four for GM's cars."
And, The Economist reports that: "Throughout the 1990s the company (GM) paid too much attention to money management and marketing rather than developing good cars ...
"Too many GM products are still mediocre, dragged down by cheap plastic interiors." Industry observers say GM has to stop the sales slide. Merrill Lynch analyst John A. Casesa says it's vital that GM doesn't lose any more customers. "We believe that 25 percent market share is the threshold," Mr. Casesa told BusinessWeek. "If GM falls below that, things get ugly fast."
1. General Motors is not alone. Ford is in terrible shape for many of the same reasons as GM, particularly poor product development. Open a clipping file on Ford and periodically review news of it and GM. Compare and contrast the state of the two companies and their recova.y plans.
2. Alfred P. Sloan Jr. was the legendary chief of General Motors from 1923 to 1946, and Chairman of the company unli11956. His memoir, My Years with General Motors (ISBN: 0385042353) was published in 1965. Management expert Peter Drucker describes the book as "A must read" for all business students.
3. View the 2006 movie Who Killed the Electric Car?A teachers' guide is available at http://www. sonydassics.com/whokilledtheelectric car/
General Motors Canada--http://www.gmcanada.com/ english/home/index.html
General Watch--http://www. generalwatch.com/
Almost 4,000 jobs were saved in Canada when GM announced it will build its re-designed Camaro in Oshawa, Ontario. The V-8, six-litre vehicle belongs to the "muscle car" category but it doesn't impress Jeffrey Simpson. The Globe and Mail columnist writes that: "At the very moment when governments and industry should be acting to reduce emissions of carbon dioxide, along comes GM to launch a gas-guzzling, high-emitting vehicle. Similarly, with all signs pointing to a future with permanently higher gasoline prices ... GM (with taxpayers' help) will be putting on the market in 2008 a vehicle quite wrong for the limes."
On paper, General Motors is now worth less than the motorcycle maker Harley-Davidson.
Between 1886 and 1898, about 300 cars were built and sold. A century later, worldwide car production was more than 53 million.
RELATED ARTICLE: Sit down in flint.
The city of Flint, Michigan, is where General Motors started. (The company later moved its headquarters to Detroit about 100 km away). By the 1930s, GM's Flint operations were a vast complex of factories employing 45,000 workers.
The work was boring and dangerous; the company paid very little attention to safety. The workers were also poorly paid. Before the Depression the weekly wage was $40; by 1935, it was $20.
On 30 December 1936, the workers in a Fisher Body plant (owned by GM) in Flint went on strike. Within a couple of weeks, GM faced strikes at plants in 35 cities involving 135,000 workers. The work stoppage was organized by the fledgling United Automobile Workers Union (UAW).
Wyndham Mortimer was the UAW officer put in charge of the campaign in Flint. He found out quickly he was in a rough game. Within minutes of checking into a hotel in the city he got an anonymous phone call. He said he was told to get back where he came from if he didn't "want to be carried out in a wooden box."
The striking workers stayed in the plant, sitting down and halting production. GM cut off the heat and water supply. After a couple of weeks, police tried to stop food being sent into the strikers inside the plant. A riot followed. Strikers were hit with buckshot and police were pelted with car parts. The police withdrew.
After an appeal from U.S. President Franklin Roosevelt, GM management decided to talk with the union. The UAW won recognition and the workers got a five percent raise. By July of 1937, the UAW had signed up 400,000 members and all the major car makers except Ford were unionized. Some experts say the Flint Sit-Down Strike was the most important work stoppage in U.S. labour history.
Half a century later, GM closed several plants in Flint, putting 40,000 people out of work. The 1989 closures were the subject of the Michael Moore film Roger and Me.
RELATED ARTICLE: Legacy costs.
One of the many problems GM faces is the high cost of benefits for current and former workers. Through union contracts, the company pays almost the entire health-care costs of its hourly paid workforce. Covering the medical needs of the company's 1.1 million employees, retirees, and dependents costs well over $5 billion U.S. a year. That adds $1,525 U.S. to the sticker price of each vehicle the company makes. The cost of the company's pension plan adds another $675 U.S. per car. These are called "legacy costs" and they add up to $60 billion U.S. in retiree health benefits and $87 billion U.S. in pension obligations. In 1960, the company had 11 active workers for one retiree; today, the ratio is 11 active workers for 33 retirees. The Japanese manufacturers currently escape a lot of these costs in North American. That's because they have not been "n operation long enough to have a lot of retirees drawing pensions.
RELATED ARTICLE: Soon to be number one.
While General Motors, Ford, and Daimler Chrysler close plants and cut production, Toyota is doing the opposite. Since The year 2000, the world's output of vehicles has risen by three million units to roughly 60 million a year. Of that increase, half is accounted for by Toyota. The company is now worth more than the Big Three put together. In an industry filled with money-losing basket cases, Toyota is highly profitable and growing fast. By the end of the decade it will be the world's largest car maker.
Toyota became so successful by revolutionizing the business of building cars. it invented the just-in-time manufacturing system; parts used on the assembly line are delivered just before they are needed. This cuts down on waste and the cost of holding large stocks of parts. Toyota also developed an idea it calls kaizen--a process of continuous product improvement. The company is absolutely focussed on its customers, and has a relentless pursuit of excellence. As soon as one target is met another, more challenging one, is set.
Trade unions have not been able to organize Toyota's workers. This is because the company looks after its employees well; they are paid about the same as union members, have a generous benefits package, and are never laid off.
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|Publication:||Canada and the World Backgrounder|
|Date:||Oct 1, 2006|
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