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November 4, 2012 9:18 pm
General Motors’ plant at Lake Orion, 40 miles north of Detroit, is a model of efficiency at a company whose name until recently was a synonym for corporate bloat and profligacy.
Car workers installing wiring, air conditioning and other components pick up kits of parts prepared for them by contractors working just a few yards away. The workers then step on to a conveyor belt carrying the cars and install the parts under the bonnets or inside the footwells. They then walk back, ready to start on the next vehicle. Every process in the area, known as the trim shop, minimises time and waste.
According to Steve Brock, the plant’s manager, the Lake Orion plant only recently began running such a tight ship. Before GM reorganised in bankruptcy in 2009, the plant had a less efficient assembly line. The old equipment, millions of extra dollars-worth of it, snaked twice the distance around the trim shop. Contractors worked at a site several miles away.
“[Now] they’re just next door, instead of 10 miles away,” Mr Brock says. “It helps from a quality perspective and from a cost of inventory standpoint.”
The Lake Orion plant is a microcosm of many of the positive changes at GM, America’s biggest carmaker by revenues – and one of the world’s top three by unit sales. Following the US Treasury’s $49.5bn bailout of the company in 2008-09, it is on a new course.
Just over three years after it exited bankruptcy, the company has lower costs, a balance sheet unburdened by crushing debt and flexible labour agreements that have made it more competitive. GM last week reported third-quarter net income of $1.5bn, its 11th straight quarter of profitability. Dan Akerson, chief executive, brandished a slide showing upward-pointing green arrows on eight out of 11 financial metrics the company measured for the quarter, which included global sales, earnings and net cash.
The company – like Ford Motor before it – is working to make better use of its international network of engineers and manufacturing plants to take on its main rivals in the business, led by Toyota and Volkswagen. This, coupled with having lower costs and a better financial footing, means GM for the first time in decades is producing cars that can compete effectively in the US against overseas manufacturers.
The Lake Orion plant makes the Chevrolet Sonic, a surprise hit for GM. Since its launch last year, the car has grabbed more than 10 per cent of the subcompact car market in the US, a segment where GM could not compete a decade ago because its costs were too high. The Sonic is selling better than competing small cars such as the Honda Fit, Hyundai Accent, Toyota Yaris, and even Ford’s small Fiesta, which it makes in Mexico. “The Chevy Sonic is probably one of the best small cars on the market, if not the best,” says Michelle Krebs, senior analyst with Edmunds.com, the US carbuying website.
However, an objective report on the health of GM would have to raise questions on whether the company is fully healed.
While it is one of the industry’s top-selling producers, it still makes less profit per vehicle than VW, Hyundai-Kia or Ford. This could matter over time – and potentially push GM into losses – in a brutal global business where all of its competitors are raising their game significantly too.
General Motors’ smaller competitor Chrysler, which Fiat acquired in 2009 and plucked out of bankruptcy, has landed squarely in the political fray this election season, writes John Reed .
“I saw a story today that one of the great manufacturers in this state, Jeep now owned by the Italians, is thinking of moving all production to China,” Mr Romney said recently in Ohio, a swing state with a large auto industry, drawing boos from the crowd. He later repeated the claim in a campaign advertisement.
In Europe, GM lost time during the bankruptcy when it fumbled badly on an attempt to restructure Opel/Vauxhall, which will lose $1.5bn to $1.8bn this year. GM’s losses in Europe – one of the few red arrows on Mr Akerson’s chart last week – have been weighing on its profitability to the point that its shares are trading well below its initial public offering price of 2010. This means US taxpayers are unlikely to see the 32 per cent remaining government stake floated any time soon. If not, GM’s derisive nickname “Government Motors” – usually invoked when doubts are raised about its viability – could still stick for some time.
Questions also persist over whether Mr Akerson, who came to GM via the telecommunications industry and private equity, is the right man for the job. Unlike his two big rival chief executives in Detroit, he has not articulated a simple and punchy message to investors on where he wants to take GM. Ford’s Alan Mulally has a mantra of “One Ford”, predicated on marshalling the carmaker’s global assets to produce a globally similar, regionally customised stable of vehicles built on shared platforms. Sergio Marchionne’s message at Chrysler is that he is coupling that carmaker’s management and car platforms with Fiat’s.
Some of Mr Akerson’s recent appointments have also raised eyebrows. In October, GM named Robert Ferguson, its chief lobbyist, to run its Cadillac premium brand, with a challenging brief to grow the brand globally and take on the industry-leading German brands. GM has not named a marketing chief to replace Joel Ewanick, who stepped aside in July.
The area is seen as one of GM’s weakest. “We haven’t seen cohesive marketing messages from any of their brands,” says Aaron Bragman, senior analyst with IHS Automotive. The company’s cap on salaries, imposed as part of its federal bailout, is hindering its ability to hire the best in the business.
GM’s post-bankruptcy health is also a focal area of argument in the run-up to Tuesday’s presidential election. Mitt Romney, the Republican challenger to President Barack Obama, has insisted that the intervention to save GM and Chrysler was too costly. He has since said he would have supported government backing for some of the debt needed to bankroll the two carmakers’ reorganisation, but would have expected the private sector to provide the financing itself.
The Obama administration, by contrast, has trumpeted the US auto industry’s renaissance as one of its biggest achievements. Joe Biden, the vice-president, in his current stump speech, sums up the administration’s achievements: “Osama bin Laden is dead – and General Motors is alive.”
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While the White House claims credit for turning round GM, some of the changes now bearing fruit at the company were already under way before the banking crisis pushed it into insolvency in late 2008, in the final days of George W. Bush’s administration.
Before the bankruptcy, GM had joined Ford and Chrysler in negotiating to spin off their massive healthcare liabilities to funds managed on behalf of United Auto Workers. This allowed GM and its rivals to lower their costs per vehicle. In 2007, the union also signed off on a two-tier wage regime for new hires. Many workers at Lake Orion are on lower pay than their longer-serving colleagues, allowing the plant to make the Sonic and compete in the growing US market for small cars.
However, since exiting Chapter 11, GM’s three post-bankruptcy chief executives – most recently Mr Akerson – have sharpened the company’s focus on tailoring vehicles to customers’ needs, producing them competitively and using the worldwide resources of its engineers and designers, from Detroit and Rüsselsheim, Opel’s home town, to Shanghai and South Korea.
Mary Barra, GM’s head of product development, says the company has closed what she admits was a gap in quality of its new vehicles, compared with competitors. She attributes the improvements to technical and logistical factors. “There’s no one silver bullet,” she says. “It was back to basics – engineering, designing for quality.”
Third-party assessments bear this out. According to Edmunds.com, Cadillac and Chevrolet have steadily improved the prices their used cars command – the surest sign of how the market values a brand – in 2010, 2011 and 2012. Buick and GMC, GM’s pick-up truck brand, improved their prices in two of the past three years. “From a product standpoint, they have been fixed,” says IHS’s Mr Bragman. “We are seeing product that is finally fully competitive.”
GM’s business has also profited from the depth and toughness of the Obama administration’s restructuring of the car industry, which saw Washington impose demanding business plans on all three Detroit carmakers, forcing them to close a swath of plants as a condition of the bailout. This has helped all US-based producers’ profitability by reducing pressure on margins caused by a saturated market. It contrasts with the crisis levels of overcapacity in Europe, now hurting Opel, among others.
Steven Rattner, who lead the US Treasury taskforce that restructured GM says: “On balance, in total GM is outperforming our expectations”.
With GM’s core business in fitter shape than it has been in years, its biggest challenges are overseas. After botching its first restructuring at Opel, GM has poured resources into an effort to fix the unit. Steve Girsky, Mr Akerson’s deputy, who was named last year to chair its supervisory board, has stocked it with managers from Detroit. These include Ms Barra, Dan Ammann, chief financial officer, and Tim Lee, head of GM’s manufacturing international operations, including its China business. To begin restoring pricing power in Europe’s depressed market, Opel has reduced unprofitable sales channels such as rental car companies.
It is also seeking to win back German buyers disenchanted by its recent problems; and says just 10 cars have been returned out of 25,000 sold in a “Thrilled or Just Return It” marketing campaign. GM is also pooling logistics, purchasing and vehicle development with its new ally PSA Peugeot Citroën in an effort that it says will save each carmaker $1bn by 2016. Last week Mr Girsky spoke of “green shoots sprouting in the mud” at Opel, saying it would begin narrowing its losses next year and break even by the middle of the decade.
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GM also has work to do in Asia and South America, where its powerful positions in China and Brazil are coming under threat from competitors angling for bigger shares of the global industry’s two biggest growth markets. Elsewhere in Asia, Chevrolet’s core manufacturing operation in Korea faces strong labour unions, and GM is struggling to reduce costs.
As it faces these threats, GM is touting advantages it says will allow it to stay the course: converging global consumer tastes in cars that will favour its geographical reach; a strong product pipeline; and what Mr Akerson last week called a “fortress balance sheet”. As the company invests, he added, “we are confident we will improve our margins by the middle of the decade”.
Given GM’s turbulent recent history and the tough, cyclical industry in which it operates, investors might be forgiven for being less bullish than GM’s chief executive. However, industry experts do not predict that the company will become a burden on US taxpayers again any time soon.
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