General Motors: A Case Study Revisited

It was announced today that GM has lost $15.5 billion - in the second quarter alone! People have wondered for decades about the future of the American auto industry. Will one of the Big Three fall? Convinced it is inevitable, some just wonder when. The SUV boom of the nineties kept them afloat until roughly 2001, when $1 / gallon gasoline went extinct. They all started hemorrhaging money for years. I was among those who were sure that one had to fall. How long could they last? Then, in July 2007, I participated in a team case study on General Motors for a required course in my graduate studies - Strategic Management and Implementation. Although I had been waiting for GM or another American automaker to fall, I became more optimistic after studying the case a little more indepth.

I identified GM's strategic group competitors to be Ford, Chrysler, Toyota, Renault-Nissan, and Honda. In examining these companies, I noticed the American automakers all had the same problems. The story was less of a GM vs. all-the-rest story as it seemed an American automaker vs. the Japanese automakers story. The statistic that stuck out was the $30 / hour, or 67%, difference in labor costs between the Japanese and American companies. The Japanese Big Three paid an average of $45 / hour to their American employees compared to the $75 / hour paid by American companies. The bulk of the difference is explained by American companies' massive retiree health benefit totalling $90.5 billion, or an estimated $1,000 - $1,800 per car sold!

This, in my opinion, is the bulk of the story. How does a manufacturing company compete when its labor costs are 2 / 3 higher? For a short run, they competed on profitable trucks and SUV’s. But those days are gone. As I was researching the case, I learned that negotiations over the next labor contract between the automakers and the United Auto Workers (UAW) would be taking place soon after the course was completed. For years, the American automakers practiced “pattern bargaining,” in which all three negotiate with labor during the same week and all three get virtually the same deal. Historically, this had the effect of removing labor costs from the realm of competition because each company could be confident they were paying their employees the same. Instead, they focused on design, quality, etc. Removing labor costs from competition put American companies at a disadvantage as they began to face global competition from less benevolent employers.

In researching labor relations at the time of the case, I found the UAW in a virtual death spiral. Auto parts companies, including Delphi, Dana Corp. and AC Delco, had recently emerged from bankruptcy and received more favorable deals from the union. In fact, every UAW negotiation leading up to the Big Three involved sweeping concessions due to manufacturers’ financial woes and tough competition from other countries or foreign firms with non-union US plants. Ex-UAW president Doug Fraser was quoted as saying that this was “the most difficult time in the history of our union. Period.” In the final presentation, I stressed the importance of gaining a favorable deal in the upcoming negotiations. I emphasized that GM needed to “hang on” financially long enough to take advantage of its opportunities.

Next, I showed several studies of consumer perceptions toward American autos. As you can guess, they were highly negative. However, I contrasted those perceptions with reality in JD Power & Associate rankings. American automakers had made great strides in closing the quality gap of the late eighties and early nineties. However perception is crucial. Perception, I contended, needs a much longer time to change when it pertains to durable goods like cars. People won’t be convinced the quality is comparable until word spreads about American cars that last ten years without major repairs. It could take ten years from when the quality is truly comparable. If GM could just “hang on” until perception caught up with reality.

In 2006, GM grew sales in emerging markets China and Brazil by double digit figures. They made plans to build a manufacturing plant in Russia while closing plants in the US and Germany. Their classic brands are particularly strong and saw solid growth in Latin America, the Middle East, and Africa. The nature of the changing world economy presented new fronts for GM to gain leads over the competition.

The price of gas, global warming, and dependence on foreign oil are on the domestic conscience more and more every day (exponentially more so in July 2008 than July 2007). While Toyota marketed the best-selling hybrid, the Prius, GM is very competitive in its green technology. They were the first automaker to market an electric car in the 1990s and announced a new all-electric car in 2010, the Chevy Volt.

My main analysis of the case was that if GM could just “hang on” until (A) they become financially sound through reduced labor costs and (B) the perception of quality changes (which it will), then the company could take advantage of its main opportunities in (1) emerging markets and (2) green technology. If GM could just hang on…

Back to 2008, the price of oil has doubled in less than a year due to emerging markets’ growing demand, instability in Nigeria, and increasingly confrontational politics from oil producing countries like Russia, Iran, and Venezuela. High gas prices have all but destroyed the SUV and light trucks market (American automakers’ only real apple cart) at the same time as the subprime mortgage crisis has morphed into a worldwide economic slowdown. Subprime mortgage was on the radar in 2007, but it wasn’t projected to be what it has become (Bear Stearns, Fannie, Freddie, Countrywide). The ensuing global credit crunch has further reduced GM’s options and breathing room in staying afloat. GM lost $15.5 billion dollars in the second quarter. A month earlier, a Merrill Lynch analyst commented that a GM bankruptcy “isn’t impossible,” sending the stock tumbling to a pitiful $10 / share. Suddenly, the big qualifier in my analysis seemed a lot bigger, an obstacle almost insurmountable – “if they can just hang on…” While hanging on, GM will have to pay the costs of designing competitive, fuel-efficient vehicles while, at the same time, converting SUV and truck plants into manufacturing facilities for small cars. At the same time, it will also have to continue to lead the efforts in green technology while not short-changing investment in emerging markets. Time will tell if it is up to this tough challenge.