Wednesday, April 13, 2011

GM Turnaround

General Motors - GM - was ranked a top 20 innovative company in the world according to the BCG - Business Week 2008 survey. In early 2008, everyone was bullish about GM's future. However, in just over a year since this review was published, the big question on everyone's mind was: "Can GM survive?" If you answered this question with YEA, then you ask the next question: "How can GM turnaround?" General Motors was really close to going bankrupt. Were it not for the federal loan in late 2008 to the tune of a whopping $13.4 billion, GM would have bellied up by now.

And to make matters worse, GM made this announcement on Friday, March 13, 2009:

General Motors Corporation Recalls More Than 276,000 Vehicles For Gear Fix

"Reuters reported that General Motors Corporation is recalling 276,729 passenger vehicles to correct a problem in certain cars that could cause them to roll when parked, the U.S. government said. The National Highway Traffic Safety Administration (NHTSA) said in a recall notice that a suspected flaw in the transmission cable system may not allow gears to fully engage when the vehicle shifter shows the driver that car is in 'park.' The vehicle could roll away after the driver has exited, NHTSA said in its notice. The 2009 Models affected include the Chevrolet Cobalt, HHR, Malibu, Traverse and the GMC Acadia, Pontiac G5, G6 and the Saturn Aura and Outlook."

On a positive note, GM reported 127,296 Deliveries In February. Is that positive?

  • Chevrolet retail cars continue to gain share, led by Malibu's 33 percent retail sales gain compared with last year
  • Chevrolet Traverse, GMC Acadia, Buick Enclave and Saturn Outlook drive mid-utility crossover retail sales up 35 percent, share up 10 percentage points, compared with a year ago
  • GMAC retail penetration increased dramatically to more than 30 percent of sales in February; Credit Union-financed sales now about 10 percent of total

"General Motors dealers in the United States delivered 127,296 vehicles in February, down 52.9 percent compared with a year ago, driven by a 75 percent reduction in fleet sales." On surface, this is a recipe for bankruptcy! When sales go down more than 50% year over year, you better have enough cash to survive, or get ready for a fire sale.

But there is a positive - a faint light at the end of the tunnel: "GM's car sales compared with January were up nearly 23 percent, and crossover sales increased 6 percent, as financing availability continued to improve and slightly more fleet orders were able to be filled."

The biggest problem facing GM today though is: The Cash Burn. GM's operating costs are very high, and unless GM finds a meaningful way to bring these costs down, it will need another cash infusion from the government - very soon! Or file for bankruptcy, and push the time-table for turnaround back by a few years. Or, GM has to find new ways to sell lots of cars at very high profits - but in this recession and tough economy, this may be a very steep uphill climb. So, we go back to the central question: What can GM do in order to survive in 2009, and then plan forward for a possible turnaround in 2010 and beyond?

First things First: A matter of survival

In order to survive 2009, GM must first clean out the closet!

Let's say, as a dual-income working family, you are planning your monthly budget:
Husband's salary = 47.5% of total
+ Wife's salary = 47.5% of total
+ Interest income from savings = 5% of total
Total Income = 100%

Your Total Expenses are typically divided into Fixed, Discretionary and Unplanned Expenses.

Fixed Expenses would include home mortgages or home rentals, car payments, insurance, utilities, groceries, taxes, gas, etc.
Discretionary expenses would include shopping, eating out, travelling, movies, education, buying a new car, etc.
Unplanned expenses would include emergencies, healthcare, legal, something breaks down, etc.

In general Total Income should be at least equal to Total Expenses for you to live comfortably. It is recommended though that Total Income should be at least 20% higher than Total Expenses for you to save for the future, and build out a nest egg. In tough economic times such as what we are facing today, families reduce their Discretionary Expenses considerably including buying a new car to alleviate for a lost or reduced salary (or fear of losing a job), and hope that they do not get burdened by Unplanned expenses.

What does this have to do with GM?

In the case of GM, on the one hand, it is losing revenue (salary) owing to reduced sales of its automobiles by more than 50% year over year (in part, due to reduced Discretionary Expenses by consumers, in large part due to non-competitive product mix), but it is also suffering from high fixed costs (expenses) owing to very large manufacturing workforce, higher pension and union costs, and many non-performing divisions.

Let us look under the hood

GM Revenue has been declining rapidly since reaching a peak in 2006. From over $200 billion in 2006, total sales are down to under $150 billion in 2008. A decline of over 25% in total revenue. And 2009 promises a potential 50% decline from 2008 revenue (unless we see some turnaround in second half), so this could mean total revenue in the neighborhood of $75 billion for all of 2009.

GM Gross Profits have been been falling even faster since 2006. The slide in Gross Profits is even steeper than the fall in revenue, and this shows management misdirection. While the revenue was falling, GM management did not take adequate measures in 2007 to reduce the operating costs. And the climbing operating costs suddenly became a huge burden in 2008.
GM Gross Margins are in low single digits, and shrinking further. This is another way to look at how well GM is operating - or Not! Lower sales and higher operating costs are a recipe for huge losses! And this is exactly what happened at GM. The margins were constantly pressured not only due to lower sales and high operating costs, but also owing to increased competition on key market segments, and forced reduction in prices on major GM brands.
Resulting in huge operating losses for GM in 2008. Losses are accelerating further in 2009 owing to higher operating costs (GM has still kept many of the plants open), non-performing assets, higher salaries and retirement provisions, 50% reduction in sales, increased competition from brands with superior, innovative products, and lack of innovative products launching in 2009.

How can GM turnaround in 2010 and beyond?

If GM were to survive 2009 (most possibly with another government aid), GM first has to cut back massively - every non-performing division, every loss-making operation has to be cut. These are hard decisions. But there is no reason to continue making automobiles that lose money even before they are shipped! GM knows today what cars make money, and what cars don't. Start with every car that does not make money, and scale back everything with that car. This also means that for the cars that are making money today, it may make sense to invest further in these initiatives. This should give GM some breathing room in 2009.

Next, GM must innovate! GM has to go back to the drawing board. After all, this is the company that made automobiles mainstream using the assembly line. Incidentally, Toyota surpassed GM as the world's largest maker of automobiles in 2008. Toyota is facing major challenges as well owing to the current economy, and may post its first annual loss in over 50 years in 2009. Just look at how GM compares versus Toyota in 2008.
However, Toyota's total revenue exceeded GM's by about 50% in calendar year 2008.
And Toyota remained profitable in calendar year 2008 as well, albeit considerably less than its 2007 profits.

But the key difference is Gross Margins - Toyota maintained double-digit gross margins in all of 2008. This is huge considering that GM's gross margins shrunk to low single digits, while Toyota had closer to 14%. This means Toyota runs it operations with considerably less expense than does GM. Call it Toyota's operational and innovation excellence, or GM's management hibernation, Toyota delivered vehicles that mattered to consumers. And consumers bought a lot of hybrids in all of 2007 and 2008.

Finally, GM's return on equity investment (stock performance) vis-a-vis Dow Jones (of which GM is a component) and Toyota Motors is terrible.

GM's Turnaround Plan

If GM were to turnaround its business in 2010 and beyond, it has to be grounded on business innovation. Open innovation driven by excellence in products, creativity in design, change in business model and streamlined operations. Process Innovation driven by change and leadership.

GM gave up the leadership position it once enjoyed to the likes of Toyota, Honda, BMW, Nissan, Volkswagen, Ford, Tata, and even Hyundai. How does GM become a leader again? It is going to be hard for GM to be many things to many people in 2010 and beyond. It simply does not have the fire power to create so many products. So, GM must compete on its own turf in specific markets. GM must first take the markets where it is profiting today. If Chevrolet Malibu is performing well, GM must go all out, and conquer this segment of the market outright. Easier said than done, but GM must out-market the competition in this segment, and do so profitably. A fine line indeed.

GM must find similar brands that are winning with today's consumer. What are these car brands? And GM must invest smartly in these brands. This is where GM has to invest for the future. GM must not focus on hitting a home run with the Chevy Volt in 2010 and beyond. What if GM fails in this venture? Chevy Volt cannot be the "save all" of GM strategy. Rather, GM must innovate with the brands that are making money today, and invest in a meaningful manner with these brands. GM knows it is very hard to build a brand, and much harder to create winning models. As for divesting brands, now is the time. Every non-profitable brand must go. This could mean closing down operations outright for all loss making divisions.

GM must make products that matter to today's consumer. This means taking a page out of Apple's innovation strategy: Make cool cutting-edge advanced technology products that sticks, create the cool marketing and cool brand that resonates with young buyers, provide excellent customer service and experience that matters, capture the emerging landscape of demand and trends such as hybrids and alternative energy, and execute! GM has to capture the imagination of the young buyer in the twenties and thirties. GM has to be appealing and sexy to these buyers. GM has to become a brand that is fresh and modern.

GM Dealership Experience

I visited the local Power Chevrolet GM dealership in Irvine, Orange County along with my son to check out the latest Chevy Malibu. Whereas the car salesman was great to talk with, and eventually helped us with a test drive of the Chevy Malibu LT2 (in between, he began helping a new customer), the manager of the dealership was not as friendly. I wanted to test drive the Chevy Malibu LTZ that had full leather seating and offered the highest performance. However, this particular Chevy LTZ was located inside the showroom. The car salesman asked the manager to check if he can take the car out of the showroom for me to test drive. To which, the manager replied: "Why don't you find something similar from the lot outside?" And there was not any LTZ in the lot. So, I ended up driving the LT2 instead. LT2 is no LTZ. I did enjoy the spacious interior, and the LT2 gave a spirited ride. The acceleration was spotty, and the engine sound was noticeable as I stepped on the pedal. The car was also running on empty gas, so I had to cut short the test drive. I think Chevy Malibu offers a good value, and I am going to hold my judgment until I test drive the LTZ (hopefully, second time will be a charm).

Where would be GM in 2011 and beyond? I for one will be watching as GM's management tries to steer it out of a shipwreck for a safe landing.

GM in 2011 - Mother of all turnarounds!

GM emerged out of bankruptcy courts in 2009, reestablished as a new company in July 2009, and began turning around its business in 2010. GM went IPO again in November 2010, and it was the world's largest IPO. On February 24, 2011, General Motors reported its first full-year profit since 2004. Equally amazing is this fact: The automaker suffered $103.7 billion in losses from 2005 through 2009 (not sure if any other company can match these staggering losses). GM avoids paying taxes on the $4.7 billion it earned in 2010, and on future profits for years to come, because of a favorable government ruling in 2010 on previous losses. The Wall Street Journal estimated the tax break, including credits for costs related to pensions and other expenses, can be worth as much as $45 billion over the next 20 years.

Household nameplates such as Pontiac, Saturn, Hummer, and service brands like Goodwrench were discontinued. Others, like Saab, were sold. Daewoo brand in South Korea has been replaced with Chevrolet.

GM recently introduced the all new Chevrolet Volt, or Chevy Volt, the marquee plug-in electric car that makes GM a real innovator. The Chevrolet Volt is an electric vehicle with back-up generators, powered by gasoline. The production Chevrolet Volt was available in late 2010 as a 2011 model with limited availability. GM delivered the first Volt during December 2010. Volt may perhaps become the best-selling GM car. Even if Volt does not become a best seller, Volt will provide GM an innovative edge in the auto industry that will have a huge halo effect. Of course, GM needs to make sure that Volt is a profitable brand from day one. Volt gives GM a new launchpad for plug-in vehicles. Volt looks great on the street, and I am looking forward to my first test drive.

GM Turnaround is for real... And Kudos to GM management for making this happen!

Originally published March 2009
Updated April 2011

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