April 9, 2008

A “What if?” scenario for GM.

By Peter M. De Lorenzo

Detroit. With industry sales estimates regularly dipping below 15 million units for the 2008 model year and the nation’s economy rapidly going into the tank, it doesn’t take much to see that the very existence of the U.S. auto industry is being threatened. Not since the earliest beginnings of the industry, when countless cottage auto manufacturers either went bust, were bought out or merged into other companies has the upheaval to this nation’s auto industry been so pronounced, or dramatic.

Right now, the fear of the unknown within the industry is starting to emerge in a series of “What if?” scenarios that no one really wants to think about. As in, what if the economy does go deep into a sustained national recession? Or, what if gasoline continues to go upward in price and the supply gets threatened?

And to make matters worse, there’s one giant “What if?” that has already become a reality, and that is that the light truck market has begun to contract at an alarming rate - and none of the Detroit automakers are even remotely prepared for it. Even Toyota has gotten caught up in the massive correction to the light truck market, as its brand new pickup truck plant south of San Antonio reminds them of their glaring overcapacity in trucks every single day.

In an industry that’s hanging by a thread as it is, those kinds of “What ifs?” - though not wildly unrealistic – are not the kind of advance planning scenarios that a car company can spend a lot of time on. They can’t ignore them to be sure, but they can’t dwell in them for very long, either, because after all, investment in the future for a car company means spending money on R&D and product development (its lifeblood) now, and to “short” funding for those essentials is inevitably a recipe for disaster.

But in GM’s case, for instance, what if things did go really bad, and as a result the company had an opportunity to retool its fundamental divisional structure in the U.S. to reflect its new reality?

I’ve been writing about GM’s ingrained “too many models-too many divisions-too many dealers” problem since the very beginning of this website, and each time yet another example of the true costs associated with GM’s structural Achilles Heel rears its ugly head, I’m reminded that this company is unlikely to ever make a profit in the North American market until it can reconfigure itself.

The latest example of this? GM’s Saturn division. Even with showrooms filled with a glittering array of new products, Saturn sales are down dramatically. Why? The most obvious explanation is that GM’s cycle of marketing money hasn’t reached Saturn because GM has been busy with other things, like the launches of the Cadillac CTS, the Chevrolet Malibu, the Buick Enclave, etc., etc. This is the reality of having a divisional structure that still reflects when GM controlled almost 50 percent of the U.S. market – now 40 years ago and counting – and the fact that GM is constantly juggling those divisional balls in the air at the same time, which means throwing money at the priority of the moment. The result of that is that some divisional balls are up, and some are down, and Saturn has been the “down” ball for some time now.

But since we’re dealing with “What if?” scenarios today, what if GM didn’t have to be saddled with its traditional divisional structure? What if it was a company that actually reflected a 25 percent share of the market? And what if the state franchise laws in this country didn’t exist so that GM could configure its dealers to reflect its new divisional structure?

Here is what my vision of newly configured GM would look like:

Small and Compact Cars: This means micro, “B” class cars and compacts, the kind we’re going to get more used to seeing in the U.S. what with the onset of $5.00 per gallon gasoline. These would be sold by Chevrolet.

Mainstream Sedans and Crossovers: Mid-size and full-size cars and crossovers, but not veering into luxury territory. Again, Chevrolet would be the lead division, think Malibu, Impala and Traverse.

Luxury Cars and Crossovers. Cadillac would occupy this position, with the CTS, a larger sedan (STS-DTS replacement) and two luxury crossovers, one smaller and one larger.

High-Performance and Ultra High-Performance: This category would allow for SS models from Chevrolet and of course, the Corvette and its supercar variants.

Luxury High-Performance: The “V” Series cars from Cadillac (with or without the XLR) would live here.

Pickup Trucks. Chevrolet would be the only brand of pickup, ending the GMC era.

Mainstream and Luxury Trucks: This would be a catch-all category encompassing everything from the Chevrolet Tahoe and Suburban to the Cadillac Escalade (at least as long as GM keeps making them anyway), and vehicles from Hummer.

A controversial list, to say the least. First of all, it’s obvious that when the dust settles GM, at least in North America, would have two main divisions – Chevrolet and Cadillac. Saturn vehicles would be faded into the new structure as needed. For instance, the Aura would no longer be necessary with the Malibu reestablished in the market, but the Vue would live to fight on for Chevrolet and possibly Cadillac. The rest of Saturn? Why? The Outlook doesn’t exist when you have the Chevrolet Traverse. Period. And the Astra would either find its way as a Chevy or just go away.

And as much as it pains me to say, Buick would only be sold outside of the U.S. I think the Enclave is the clear design statement of GM’s full-size crossovers, but with Cadillac getting the luxury version and Chevrolet the mainstream version, there’s no need for Buick to exist in this market any longer. Besides, GM can keep a plant going here to handle Buick exports to China, if needed.

The same goes for Pontiac. Spiritually my favorite GM brand, Pontiac gets caught in the crossfire of Chevrolet’s performance variants and the fact that GM can’t afford to sustain its presence in the market as a mainstream player. So it goes away too.

And GMC? At what price point does GMC exist between Chevrolet on the mainstream end and Cadillac on the luxury end? It’s simple, it doesn’t.

And yes, surprisingly enough, I would keep Hummer, because the upcoming H4 can justify the brand’s existence, it’s going to be that good. As for Saab, it’s a money-losing entity that GM will not be able to afford to keep much longer anyway.

Now, the most obvious criticism of my list will come from the pundits who say that I’m taking out too much volume and profitability and that it’s corporate suicide to do so.

And I would argue this: Are you suggesting that GM can’t replace that volume and profitability by focusing its engineering and design talent and marketing resources on fewer, class-leading brands and models instead of trying to justify the existence of its traditional divisions - just “because” - ?

I’ll argue that one with you until the cows come home.

Will this scenario ever happen in my lifetime? No. GM is too interesteded in keeping its entrenched divisional structure alive, and with the franchise laws the way they are they can only reduce their dealer count through attrition and consolidation.

But it’s nice once in a while just to say “What if” and envision a leaner, meaner, more competitive GM.

Thanks for listening, see you next Wednesday.