Ask the Consultant – Question #1

Brian Shields poses the following:

“Can you post/comment on what you think it will take to “fix” General Motors (GM)? I would very much appreciate your views on the subject.”

Well, Brian, here you go:

GM has an extremely difficult challenge ahead, and continuing to follow Toyota will not get them out of the pickle they are in. GM lost $15.5 Billion last quarter and expect to bleed red ink every month for the foreseeable future. GM claims to be well capitalized and capable of operating through 2008 and 2009 without difficulty. However, GM’s so-called conservative forecasts are likely to be optimistic as America’s credit spigot is turned off and Americans are forced to live closer to their true means. The tightening of home lending standards will spread to auto lending standards (if it hasn’t already), putting added pressure on auto sales. Finally to top it all off, GM faces higher than normal vehicle returns at the end of leases, with GM suffering losses in the resale of those vehicles.

So what is GM to do?

On the finance side they should, of course, continue to work to make themselves cost competitive with others producing on American soil and elsewhere, while also working with labor unions to identify ways to boost union worker productivity beyond what non-union workers are capable of. Reducing salaries is not the only way to reduce costs. For example, in an industry where most apparel is shipped over from China, American Apparel makes a tidy profit despite using American labor. Finally, I’m sure in their search to cut costs GM and others will continue to push the boundaries of what “Made in America” really means.

Operationally, GM should strive to endow all plants with flexibility as a core capability. Here Honda outperforms even Toyota (leading in part to their sales increases while others’ sales fall), and GM would be well served to look at what Honda is doing and try to do them one better. At the same time, they should strive to endow all of their vehicles with modularity as a core capability. This will enable them to break out of the model year trap, and refresh their product line more frequently as improved battery (silver-zinc in 2009), engine, or hybrid drivetrain technology emerges from their design labs. Energy management hardware and software will become more important as the use of electricity increases, and vehicles should be designed to be easily updated as these key components improve. But where the real opportunity still lies in the auto industry is the part of the process that begins when a vehicle drives off the production line. Nobody has nailed that yet, so there is a huge opportunity to better optimize the sales channel.

Finally, on the design side, GM needs to enable customers to choose any vehicle with either their head or their heart (instead of just one or the other). Want a Chevrolet Malibu that gets good fuel economy, choose the head version. Want a Chevrolet Malibu that rockets off the line, choose the heart version. At the same time, trim levels should be sharply curtailed to limit manufacturing complexity, and design modularity should be extended via dealer-installed options and 3rd party partnerships. The end result for the customer should be easy, clear choices for most of us, and easy modification for those customers who require it. GM should consider creating joint production partnerships with 3rd party modification companies to enable GM to ship selected modification partners a mostly complete vehicle for them to customize, deliver, and warranty to the end customer.

Whether GM is up to the task, I’m not sure. I saw a Charlie Rose interview with GM CEO Rick Wagoner recently and I was disturbed that he felt GM should be able to charge a premium on the first round of Chevy Volts and that the government should subsidize it. The company has come up with a brilliant brand promise for the Chevy Volt, referring to it as a “fuel-free” vehicle at every opportunity, but it is really just a plug-in hybrid. Toyota has the lead here, having hybrid vehicles on the market since 2004 and plug-in hybrids nearly as long (through 3rd party mods like Hymotion), and will likely get its own version to market before GM. So, GM faces a stiff challenge, but they are moving in the right direction. They just need to push to get there faster and go farther, or they may come up short.