On January 9, 2013, Daniel Akerson, the chief executive of General Motors, pointed out that his firm had shown profits on a consistent basis over the past eight quarters. He expected GM to show even better performance in the coming year, largely because it was expecting to launch new models of many of the cars in its lineup. At the same time, Akerson acknowledged that the firm still had a long way to go before it completed its turnaround. “Obviously we still have a lot of work to do in some areas and we’re taking the necessary corrective actions to get the ball over the goal line,” he recently told analysts and reporters.
Net Income by Operating Regions, 2012
Region Net Income
North America 6,953
Asia & Australia 2,191
South America 271
GM was forced into bankruptcy in 2009 by the U.S. government when it received shares in the firm in return for providing $50 million in emergency funding. GM emerged from bankruptcy as a smaller, leaner competitor with fewer brands, fewer employees, and less production capacity. It revamped most of its management team, which was eventually taken over by Akerson. Soon after he took over, GM offered shares in the new company, in one of the nation’s largest initial stock offerings ever, and the federal government sold most of its 60 percent stake after shepherding the firm through bankruptcy.
There were some signs of progress under Akerson after three years. He had made some headway in dealing with GM’s notorious internal bureaucracy. The firm had also managed to cut costs, particularly in its long- term obligations with health care costs and pensions. GM had successfully introduced new cars in the U.S., such as the Chevrolet Cruze and the Cadillac ATS, and was set to unveil a redesign of its Corvette sports car. Partly as a result of these actions, the firm was also generating profits in most regions with the exception of Europe.
2012 17.9 11.5
2011 19.6 11.9
2010 19.1 11.5
2008 21.0 12.5
2006 24.2 13.5
2004 27.2 14.3
2002 28.3 15.0
2000 29.0 15.2
1990 35.0 16.5
December 31, 2012 to December 31, 2011
Chevrolet 1,851 1,775
GMC 414 398
Buick 180 178
Cadillac 150 152
Canada/Mexico 423 421
Opel/Vauxhall 1,054 1,218
Chevrolet 550 528
Rest of world
Chevrolet 1,186 1,087
Buick 700 646
Wuling 1,335 1,194
Holden 124 134
GMC 40 39
Cadillac 35 35
Other 195 147
South America 1,046 1,057
Worldwide 9,288 9,024
In spite of these positive developments, there were still many questions about the strength of the firm’s comeback from its bankruptcy. In 2012, GM experienced a sharp decline in its domestic market share, dropping to its lowest level in more than 50 years. It continued to search for answers to its long-standing problems in Europe, where its yearly loss, mostly from its Opel and Vauxhall brands, deepened from $700 million in 2011 to $1.8 billion in 2012. Finally, even as it had persuaded the U.S. government to sell back to the firm a large chunk of shares, GM was still struggling to overcome the lingering, politically charged stigma of being “Government Motors.”
These lingering problems were reflected in a drop in the price of the firm’s shares, which were trading at around $30, somewhat below the $33 at which they had been sold when they had been refloated on the stock market in 2010. GM had also dropped behind Toyota in worldwide car sales and was being challenged by a more aggressive Volkswagen. Summing up the firm’s position, industry analyst Rebecca Lindland said, “It was a very mediocre year for GM. They are still kind of finding their way post-bankruptcy.”
Pushed into Bankruptcy
For most of GM’s history, the firm had been run as a collaboration of relatively autonomous geographical divisions that rarely worked with each other. In 1994, there were 27 different units within GM that were developing their own cars, making it difficult to achieve economies of scale. After being named president in 1998 and CEO in 2000, Rick Wagoner worked to tear down the boundaries between the firm’s divisions. Over the course of nearly a decade, he managed to restructure the firm’s four different geographical units in order to get them to collaborate with each other on designing, manufacturing, and marketing cars.
Wagoner faced an even bigger challenge in dealing with the high costs, which made GM’s cars much more expensive to build than those of its foreign-based competitors. He carried out three major restructurings, eliminating dozens of plants, cutting tens of thousands of jobs, and jettisoning hundreds of dealers. Wagoner even managed to deal with the lavish health and retirement benefits that GM had accorded to its workers in response to a prolonged strike by the United Automobile Workers during 1970. He was finally able to persuade employees and retirees to pay for part of the firm’s escalating health care related costs. In 2007 Wagoner negotiated with the union to develop a health-care trust, called a voluntary employees’ beneficiary association, which would take over the responsibility for these costs.
In spite of these efforts, GM announced a loss of $30.9 billion dollars for 2008, amounting to a staggering $50 a share. The firm had not managed to post a profit since 2004, running up cumulative losses of over $82 billion between 2005 and 2009. Wagoner eventually began to run short of funds and turned to the U.S. government for loans in order to survive. The Obama administration finally demanded his resignation in return for further support. “It’s a pretty unceremonious ending,” said John Cesesa, an industry analyst, of Wagoner’s downfall. “G.M. lost its way in the 70’s, but the company didn’t know it until 20 years late. The hole was much deeper than he realized when he became C.E.O.”
Wagoner was replaced by Frederick A. Henderson on an interim basis as chief executive of GM. Henderson had taken the position of chief financial officer in 2006 and had been moved up to president and chief operating officer in 2008. Under Henderson, the firm was asked to negotiate with bondholders and the union for further concessions in order to reduce its bloated cost structure. Unable to reach any agreement, the firm announced in late July 2009 that it must seek Chapter 11 bankruptcy protection.
Under the terms of the bankruptcy protection, GM was able to wipe out a big chunk of its debt, reducing this from over $46 billion before the filing to around $17 billion afterward, saving about $1 billion a year in interest payments. Bondholders were forced to exchange their debt for stock at about 10 cents of equity for every dollar owed by the firm. The union agreed to accept stock to finance half of its $20 billion health care fund. The U.S. government agreed to invest another $30 billion in the firm, in addition to the $20 billion it had already contributed, in exchange for 61 percent of the stock in the new GM. Commenting on the moves taken by the government to develop a new firm out of the ashes of the old one, the firm’s vice chairman, Robert Lutz, stated: “Their number one goal is to make us successful.”
Moving through Successive Leaders
As soon as Henderson took over, he began to shake up the ranks of GM’s senior management. But even more changes were made after the firm made its bankruptcy filing, which was tied to additional funding from the U.S. government. The board of directors was reconstituted in July 2009 with eight new members joining five from the old guard, under the leadership of Edward E. Whitacre, Jr. One of the newly appointed board members recently remarked that 12 of the 13 members are either automobile industry rookies or new to their jobs. Even Whitacre, a six-foot, four-inch Texan, was a former telecom executive who was responsible for turning a broken Baby Bell into the resurgent AT&T.
Under Whitacre’s direction, Henderson began to cut layers of bureaucracy, slashing its executive ranks by a third and giving broad, new responsibilities to a cadre of younger managers. The new board was determined to address problems that had been laid bare by the task force that had been assigned by the government to investigate GM in early 2009. The task force members had been particularly astonished by the emphasis on past glories and the commitment to the status quo they had found to be widespread among the firm’s management ranks. “Those values were driven from the top on down,” said Rob Kleinbaum, a former GM executive and consultant. “And anybody inside who protested that attitude was buried.”
Less than five months after he had taken charge, GM’s board of directors decided to replace Henderson with Whitacre. Early in his tenure, Whitacre eased out 4 more executives, reassigned 20 more and brought in 7 outsiders to fill top jobs. He also made changes to the criteria on which to assess the caliber of the entire management team, which he deemed to be essential in turning GM around. Whitacre decided to cut his performance criteria down to six: market share, revenue, operating profit, cash flow, product quality and customer satisfaction. Above all he believed that GM could only be rebuilt if all of his managers were able to make decisions quickly and correct mistakes even faster. “We’re all in this together,” he recently reassured workers at a GM factory in Kansas, where he walked the assembly line, stopping to shake hands with workers.
In the fall of 2010, without much notice, Whitacre was replaced by Daniel Akerson, who had been appointed by the U.S. government as a board member during GM’s bankruptcy. A no-nonsense former navy officer, Akerson had a military man’s attention to detail. He reviewed most of the firm’s operating procedures. One of the bold decisions that he made was to reverse the outsourcing of GM’s massive IT systems, after realizing how central they were to its business. He believed that regaining control of the firm’s software systems would help him to make more changes to their layers of bureaucracy.
Despite the series of changes that have been made since 2009 by three different CEOs, analysts questioned whether GM has learned the necessary lessons from its bankruptcy and bailout. Among company executives, however, there was a strong consensus that the company had changed its approach to their business. As Akerson recently wrote in an internal memo: “Our results show that we are changing the company so we never go down that path again.”
Pushing on Fewer Brands
For years, GM built its position of dominance by offering cars that were designed for different customers by separate divisions. Each of these divisions came to represent a distinct nameplate, or brand. Its extensive brand lineup had long been GM’s primary weapon in beating back both domestic and foreign rivals. But as the firm’s market share began to decline, it became difficult to design and market cars under several brands. In order to cut costs, GM began to share designs and parts across divisions, leading to some loss of distinctiveness between the different brands.
Analysts had been questioning for many years GM’s decision to stick with as many as eight U.S. brands, after its addition of Hummer. The decision to carry so many brands placed considerable strain on GM’s efforts to revamp its product line on a regular basis. However, Wagoner agreed to cut out four of its brands—Pontiac, Saturn, Saab, and Hummer—only after it was forced to turn to the U.S. government for funding to stay afloat. A. Andrew Shapiro, an analyst, believed that GM should have started to think seriously about cutting back on its car divisions during the 1980s. To explain why they didn’t, he said, “There are always short-term reasons for not doing something.”
Since cutting down on its brands, GM has been working on revamping its remaining lineup of cars. The firm was able to successfully reinvent Chevrolet as a global mass-market brand, with 60 percent of its sales coming from outside the United States. Recent sales were driven by the new Cruze and the plug-in hybrid Volt. But the firm hoped to boost the image of Chevrolet through the much-delayed revamp of the carmaker’s classic Corvette, which would resurrect the Stingray name last used in 1976. The new model had several features in design and controls that would target younger customers.
GM also focused on strengthening its roster of higher-profit, luxury models for its Cadillac and Buick divisions. It introduced a new small Buick SUV called the Encore and was working on a compact Buick called the Verano. But it had even higher hopes riding on a much-anticipated Cadillac ATS, a compact sedan that was intended to compete with top-selling smaller luxury models from BMW and Mercedes-Benz. The new model was an attempt to cast off the flashy image of Cadillac by replacing the sharp creases and lavish chrome of previous models with a more refined design that emphasized the sculptured hood and body panels. Talking about the attempt to change the image of Cadillac, Mark Reuss, head of GM’s North American operations said, “I’m fully aware this change isn’t going to happen overnight with this car alone. We have to keep doing what we did with this car over the next 10 or 20 years to prove it.”
GM was still struggling with its European brands, Opel and Vauxhall. The firm recently announced that it was more committed than ever to fixing Opel, its major brand in the region, by improving revenues and cutting costs. Akerson believed that the European brands, with their expertise in small-car technology, would be crucial to the future of the firm, both in the U.S. and in emerging markets. “Opel is not an island unto itself,” said Stephen J. Girsky, the firm’s vice chairman and acting European head. “It is an integral part of the company.”He hoped to improve Opel’s position through an alliance with Peugeot, an equally ailing French carmaker, in which they would share overhead and work together on various types of cars and engines. Through this partnership, GM hoped to save $1 billion a year by 2016.
Rethinking Product Development
Over the past decade, GM had been trying to get all of the functional areas to work together more closely throughout the product development process. In the past, even if a bold design made it off the drawing board, it had little chance of surviving as it was handed over to marketing, then passed to engineering, and finally sent to manufacturing. Since then, there has been a concentrated effort to wean the GM culture away from a focus on engineering processes. The firm has pushed designers to get more involved with the development process and for engineers to find ways to stick with the original car design.
Another problem that plagued GM’s product development process was the lack of standardization of “platforms” on which the firm built its cars. A platform is the basic underpinnings of a vehicle, and building multiple vehicles on a single platform reduces development and production costs. GM lagged behind its rivals and only recently decided to cut the number of platforms to 14 by 2018—compared to 30 in 2010. It also planned to cut down to the use of 12 engine families and eventually just 10, compared to 20 a few years ago.
In a recent analyst conference, executives from GM said they were also working to eliminate wasted spending on new products by keeping their investments more stable from one year to the next, rather following the ups and downs of the market. “The start-stop, herky-jerky, on-again, off-again product development was grossly inefficient,” said Akerson, “and it resulted in poor product.”
Daniel Ammann, the chief financial officer, said that GM had put about $1 billion a year into projects that were later cancelled.
GM also refocused its production development efforts on offering smaller and more fuel-efficient cars to lure back consumers who had given up on it. The firm had shifted its emphasis to SUVs in large part because of its relative lack of success with smaller cars. Its most dramatic move back into the small-car segment was with the launch of the Chevrolet Sonic. The car, with a base price of around $14,000, was being built in a revamped factory in Michigan with a compact production line and fewer and cheaper workers. Diana D. Tremblay, GM’s head of global manufacturing, explained the motivation behind designing and producing the firm’s smallest and most fuel-efficient conventionally powered vehicle: “We wanted to prove we could do it.”
Finally, Akerson also continued to push for GM to roll out new models faster by changing its cumbersome decision-making process. Under the old system, any product decisions would be reviewed by as many as 70 executives, often taking months for a decision to wind its way through a series of committees. To replace this, the firm came up with a new system where all product decisions were made in a single weekly meeting that was run by the top management team, which led to much faster decisions. At the same time, the company also began to encourage people to raise concerns during the development process and to take steps to hold back a new model in order to make the changes that could improve its chances of success.
Firing on All Cylinders?
Akerson believed that all of the changes provided a strong foundation for GM to show considerable growth in the future. The firm was preparing to embark on the most drastic overhaul of its offerings in its entire history, as it refreshed a lineup that was starved of investment and left to go stale following the government bailout.
In 2013 and 2014, it planned to replace models representing about half of GM’s entire sales volume. “This is going to be a strong year for product introductions, not only in North America, but around the globe,” said Akerson in a briefing with reporters. “In 2013 and 2014, the sun will be at our backs.”
GM was also celebrating that the U.S. government had agreed to sell 200 million of the firm’s shares owned by taxpayers back to the firm and had pledged to sell its remaining 300 million shares by early 2014. The government’s ownership of shares had forced the firm to adhere to strict guidelines about various parts of its operations. It had also disturbed investors and prompted some consumers to avoid its products in an increasingly competitive U.S. car market. “I think it’s important for that chapter to close on that part of our history,” Akerson said.
Akerson also believed that GM’s finances had improved to the point where he hoped it would be able to shed its junk credit rating in 2013 and return to an investment-grade rating. This would allow the firm to reduce its borrowing costs, leading to further improvements in its bottom line. Jessica Caldwell, an automobile industry analyst, stated that by 2013 GM’s results were actually in line with the rest of the industry. “G.M.’s global performance is hardly out of line with any other automaker, whether it’s the company’s strength in the North American market or its weakness in the European market,” she said
However, it would likely take time for GM to reap the full benefits from its revamped lineup, to find a way to stop losing money in Europe, and to sufficiently trim its entrenched internal bureaucracy. Critics believed that it would be necessary to wait a couple more years before it became clear whether the firm indeed had been reborn as a winner or was just going to be a plodder. “The reality is that this company still has many challenges ahead,” said analyst Lindland. “It’s not the behemoth it once was, but they’re still not quite nimble yet.”
1. Is GM diversification strategy successful in all of its ventures?
2. Ackerson was planning to replace about half of GM’s entire model lineup by 2014, and hoped to improve the company’s financial situation enough to return its stock to an investment-grade rating. How Could GM invest to be reborn as a winner?