These are grim days for a storied company, but General Motors is finally taking some of the radical steps it needs to survive. Up till now, GM has been following a gradual turnaround plan, focusing on recasting its product lineup, securing more favorable terms with its unions, and doubling down on a few breakthrough technologies. Right ideas. Wrong pace. A wheezing economy and the ramifications of $4 gas have simply transformed the auto market far faster than GM foresaw.
So with its sales and share price in a free fall—and analysts starting to worry about the company running out of cash in 2009—CEO Rick Wagoner has devised yet another overhaul plan. The company will cut its white-collar workforce, eliminate bonuses, suspend its stock dividend, sell some assets, and take other steps to improve its cash reserves by $10 billion through 2009. The moves reflect adjusted expectations of oil prices staying in the range of $130 to $150 per barrel and depressed annual auto sales of 14 million in 2008 and 2009, about 15 percent below recent trends.
Although the markets have cheered the moves, be prepared for yet another big announcement (or two, or three) down the road. Analysts still think GM has a way to go before it gets healthy. Here are some of the steps that would really persuade critics that GM is on the road to recovery:
Killing a couple of brands. GM has already said it wants to sell its Hummer franchise (although no buyers have materialized), and it probably needs to divest some other brands, too. GM has eight vehicle brands, and at least half of them—Saab, Saturn, Pontiac, and Buick—are struggling. Saturn, Pontiac, and Buick cars are mostly redundant "badge jobs" with the same underpinnings as Chevrolet, GMC, or Cadillac vehicles, and Saab is a low-volume niche brand that most likely loses money. The problem is that getting rid of a division costs a lot of money, mainly to buy out dealers. In its latest announcement, GM said it's considering the sale of unidentified assets to help raise $4 billion to $7 billion. That could include Saab. Stay tuned.
Accepting a smaller market share. Another reason GM won't kill off any of its mainline brands is that it will instantly lose market share, since there's no guarantee a Pontiac or Saturn customer will automatically become a Chevrolet or GMC customer. So GM is effectively sustaining underperforming divisions to keep its market share up, and no company can succeed for long by paying for market share. GM's new plan assumes a U.S. market share of about 21 percent, but even that might be optimistic. If GM fixates on sustaining that number, it will have no choice but to keep offering rebates that cut into margins.
Building competitive small cars. GM knows it has to offer small cars just as good as Hondas and Toyotas. Maybe even better, since GM is so far behind its Asian rivals in this segment. GM has greatly improved the quality of its passenger cars, and some new small entries are on the way. Recent plans call for shifting even more resources from trucks and SUVs, which are rapidly falling out of favor, to smaller cars. Honda and Toyota have a huge lead, though, and even with some killer offerings, it will take years for GM to challenge them.
Investing even more in breakthrough technology. GM hopes that the plug-in Chevrolet Volt, due in 2010, will be a buzz-mobile that helps it regain industry leadership. While cautious of GM hyperbole, analysts and industry experts are buying it—so far. If GM cuts funding for the Volt or stumbles, it will be a major credibility blow. But if GM delivers—on time—the Volt could signify a resurgence in Detroit.
Aggressively waiting. The most agonizing part of GM's recovery—if it happens—is that huge savings from a deal reached last year with the unions won't begin to materialize until 2010. That's when GM will finally start to deal with its mountainous healthcare obligations to retirees. While not exactly saying so, GM leaders seem to have been putting off other big changes while hoping the retiree fixes that are on the way will help solve many of its problems. It's now clear that GM needs a lot of other surgery before then.