RANTS #448

June 4, 2008

GM’s 20 percent solution.

By Peter M. De Lorenzo

Detroit. Several years ago when I argued that GM would have to get smaller here in the U.S. in order to become better suited to its newly downscale position in the global automotive world, the minions – big and small - down at the RenCen took great umbrage with even the mere whiff of such a suggestion. Chief among those who dismissed the notion out of hand was none other than GM CEO Rick Wagoner, who, when queried about the idea by another journalist, scoffed dismissively at such a notion. Getting smaller to get more fit and ultimately get better is anathema to an accountant’s mindset, apparently, and The Rick wanted nothing to do with it.

But when you spend all of your time reacting in business, instead of focusing on being proactive, bad things and bad days inevitably happen. And for GM – and the entire domestic-based automobile business - the bad days are well and truly here.

Yesterday, Wagoner outlined a series of drastic moves in conjunction with GM’s annual shareholder’s meeting that are directly attributable to the recent spike in the pump price of gasoline and the collapse of the large SUV and “casual use” light-truck market. Specifically, the shuttering of three truck plants: Oshawa Truck Assembly in Canada (which builds the Chevy Silverado and GMC Sierra); Moraine, Ohio, (which builds the Chevy TrailBlazer, GMC Envoy and Saab 9-7x); and Janesville, Wisconsin, (which builds medium-duty trucks and the Tahoe, Suburban and Yukon). And also the elimination of Chevrolet Kodiak medium-duty truck production in Toluca, Mexico, by the end of this year.

GM also stunned the assembled media multitudes yesterday by announcing that “GM is undertaking a strategic review of the Hummer brand to determine its fit within the GM portfolio. At this point, the company is considering all options, from a complete revamp of the product lineup to a partial or complete sale of the brand.” (Read more on this in this week’s On the Table – ed.)

No, no one knew that the pump price of gas would jump 50 percent in a matter of just a couple of months, so Wagoner & Co. can’t be blamed for that, but the signs of the end of the full-size SUV and “casual use” light-truck market were everywhere long before now. I first wrote about the “SUV Bubble” three years ago, and though vehemently chastised and accused by some for exercising my own wishful thinking on a market that showed no signs of distress whatsoever, I knew in my gut that the American car-buying consumer had reached the end of the line with these vehicles and the “fad” of driving around lumbering SUVs and city-slicker pickups for personal daily transportation had just about run its course.

Why this was a surprise to anyone in the executive suites of the Detroit automakers is shocking to me. Yes, Detroit built massive amounts of profitability into building these behemoths, but while gorging at the trough of those seemingly endless profits, isn’t it just a little bit odd that no one bothered to pick their head up and ask the fundamental question of, “What if?” As in what if the American consumer finally woke up and realized that these SUVs and light trucks they were using to run up to Home Depot and the local market with made zero sense? What if the global demand for the world’s resources forced the price of oil to record highs? And what if the subsequent consumer reaction was swift and final?

The shocking lack of foresight displayed by GM and The Other Two has now been replaced, of course, by a frenzied storm of activity to get with the “smaller and more efficient” program. That these automakers were clearly caught flat-footed in all of this is embarrassing and inexcusable, especially when some of the companies sell competitive products in other markets where the price of gasoline is double what we’re paying, on average, today.

Before you label this as just another case of hindsight being 20/20 while pointing out the obvious now, let me be clear: The reason I’m slamming this point home today is that what’s going on now is consummate proof that the classic Detroit mindset of sticking with something for way too long and running it into the ground – whether it made sense or not - has finally caught up with them with a finality that has not only been swift, but brutal.

What does it mean? It means that right now, the Detroit car business model that has been in place for the last 35 years has been blown to smithereens. Everything that passed for standard operating procedure before is simply no longer applicable. The spike in gasoline has the American car-buying consumer public scared straight. And this isn’t just a brief little flirtation with global reality this time, because even the most obtuse Americans seem to get it now.

Not long ago the debate raging was about the new EPA mileage requirements and how it would affect Detroit and the rest of the automobile industry. There was deep conjecture and distress about how the American driving public would not be ready for the European fleet model of smaller cars and drastically more efficient smaller trucks and crossovers. Those worries seem kind of quaint now, don’t they?

On the flip side and to be fair to Wagoner, GM also announced some good things yesterday. They’re bringing an all-new global compact car program to America to be branded a Chevrolet sometime in 2010 (with a direct-injected, 1.4-liter turbo, no less). That this will be a direct competitor to the new Ford Fiesta is no shock. They’re also bringing a new Aveo here (okay, maybe that’s not so good).

Oh, yes, and the GM board of directors - that tedious monument to steady-as-she-goes, rubber-stamp thinking, that Band of Do Nothing Brothers that has sat back and literally presided over that company’s decline in value of 75 percent since 2000 – has approved the funding for the production “go” of the all-new and all-electric (with ICE support) Chevy Volt. Halle-frickin-luja.

That the approval of the Volt comes three years after Bob Lutz first suggested it internally says a lot about the company, and it says a lot about the fact that left to their own devices, bean counters will never take the visionary path, or venture to put their stake in the ground and believe in something that could actually be a game changer.

The bottom line in all of this is that global events are now conspiring to force GM to be a company that controls only 20 percent of the U.S. market after its leadership not only refused to admit that it was even a realistic notion, but adamantly scoffed that their business would even come to that.

Wagoner summed up his company’s announcements with this: "These moves are all in response to the rapid rise in oil prices and the resulting changes in the U.S., changes that we believe are more structural than cyclical. While some of the actions, especially the capacity reductions, are very difficult, they are necessary to adjust to changing market and economic conditions and to keep GM's U.S. turnaround on track and moving forward."

GM’s turnaround in the U.S. “on track and moving forward?” Please. First order of business for Wagoner & Co.? Stop talking about “the GM turnaround” in the North American market in public or anywhere else, for that matter, because the GM “turnaround” is in turnaround, yet again.

Would a more visionary management structure have seen these cataclysmic events brewing on the horizon and taken steps sooner to prepare the company for today’s globally-dictated reality?

Yes and yes.

GM will of course derive much of its future profitability in Asia, so GM’s current management team will likely dine on those profits for quite some time to come, but that doesn’t absolve Rick Wagoner & Co. for not seeing the negative possibilities or exploring the ramifications and the “what ifs?”

As for GM in North America, that 20 percent solution is no longer a pipe dream, but its day-to-day operational reality.

It would have been nice if they envisioned and planned for it, rather than just reacted to it, but that’s asking entirely too much, apparently.

Thanks for listening, see you next Wednesday.