Model of Success?

By Ben Thompson

Ridgeway Chevrolet knows all about tough times. The customer pictures and vintage photos that cover the walls at the dealership in Lansing, Illinois, tell the story of a firm that was born shortly before the Great Depression and has survived numerous economic downturns over the intervening years. But even so, when the news came last spring that GM would be axing around 1600 of its dealerships as a means to cut costs and streamline operations – and that Ridgeway was one of the auto retailers on the hit list – owner Bob Van Ramshorst must have wondered whether the auto retailer’s time had finally come.

“I think all of the issues related to bankruptcy will remain controversial. But if the products prevail, the pricing is right, and the consumer perceives that there is real value in the product, that's what will really count”

GM, with whom the company had been associated from the beginning, was going through the most difficult period in its history. Once the largest company in the world, the firm had been losing market share since the early 1980s. A potent mix of high production costs, legacy spending and the collapse in credit markets and consumer confidence led to losses of $30 billion in 2008. Slow to move away from producing gas-guzzling SUVs when consumers were looking for more fuel-efficient vehicles, GM also lost its 77-year reign as the world's biggest carmaker when Japanese rival Toyota announced higher vehicle sales that year. In June 2009, in a widely anticipated move, GM was finally forced to seek bankruptcy protection.

Former GM CEO Rick Wagoner - who fought bankruptcy right up until the point in March 2009 when the Obama Administration decided he was standing in the way of progress - believed the stigma of going under would cause people to stop buying GM products, and drive a lot of GM suppliers into bankruptcy too. But on the one-year anniversary of its exit from Chapter 11, GM is still standing - and many believe it is now better equipped than ever before to meet the realities of business in the 21st century head-on. Bankruptcy allowed GM to tear up its labor contracts, repudiate much of its debt, jettison non-profitable dealers, close factories and brands it didn't need and borrow billions from the US taxpayer. In fact, according to auto experts Edmunds.com, filing for bankruptcy may turn out to be "one of the best things that ever happened to the company."

The slimmed-down GM has cut its operating costs by more than $10 billion annually. The company has fewer dealers, fewer divisions and fewer employees. Most of GM's old-guard management is gone, signalling a fresh, new outlook and a desire to embrace change. The company has also decided to pick up its marketing game in an ostentatious way, hiring current industry top gun Joel Ewanick - architect of Hyundai Motor America's recent marketing successes, including the seminal Hyundai Assurance program - from under the noses of its Japanese rival Nissan. And most importantly, the firm's bloated product portfolio has been significantly streamlined, reducing redundancies and conflicts of interest. "It is the smaller, leaner, tougher, better cost-focused GM we've been hoping for," said George Magliano, an automotive analyst with consulting firm IHS Global Insight, on the firm's emergence from Chapter 11 last year.

Key to the firm's turnaround has been its appointment of Ed Whitacre as CEO. Following in the footsteps of its great rival Ford, GM looked to an auto industry outsider for inspiration; Whitacre took over as chairman of GM on July 10, 2009, and replaced the 25-year GM veteran Fritz Henderson (himself a replacement for Rick Wagoner, jettisoned in March 2009) as head honcho in December. Both Wagoner and Henderson were seen as 'company men' who lacked the ruthlessness and dispassionate eye required for a complete overhaul of the firm's structure, processes and personnel. Whitacre, on the other hand, came from a telecoms background and wore his outsider status as a badge of honor. "I don't know anything about cars," he told reporters on his appointment. "But a business is a business, and I think I can learn about cars." And while that might not have gone down well in the auto industry's Detroit heartland, few could argue that a fresh perspective wasn't exactly what was needed.

The former AT&T CEO already has made a big impact on how his new company operates. Whitacre has shaken up the ranks of top management more than once. He has streamlined decision-making with a few bold strokes. He has set high goals and has frowned on excuse-making. And when it comes to GM's crucial product-development and manufacturing operations, Whitacre has known enough about cars to leave well alone.

David Cole is the Chairman of the Center for Automotive Research in Ann Arbor, Michigan. He feels that the reorganization has been a success - largely because it has not cut too deeply into the company's real areas of expertise. "They've gone through massive restructuring, but have not in any way hurt their product development or manufacturing," he explains. "They've taken a lot of the inefficiencies out of the structure in terms of the management layers and decision-making, but they didn't in any way penalize the product programs or the manufacturing effort. They preserved what was really the core of the company without tearing that up. And I think that was very positive."

To truly give GM a reasonable shot at long-term viability, the new chief had to transform the culture of one of the most ossified large corporations in America. And in this, he's making noticeable progress. "He's done a very good job of cleaning up a lot of the historic bureaucracy inside of General Motors," Cole admits. "He's a pretty impatient guy, but at the same time he's somebody that is very personable, he connects well with people, and that's important. I think with the car guys there, he has a terrific team. It's leaner and faster than the old team, but I don't think they've compromised their ability to do things. If Whitacre had come in and started to tear up the manufacturing or product development organization he would've failed. But he was smart enough to realize that those areas are in good shape and instead he just cleaned out the management structure and tried to flatten the organization. What that does is it takes some of the bureaucracy out."

Cole admits that what has surprised him most is the magnitude of the costs that GM has been able to take out. He explains that just a few years ago the major American manufacturers - with GM chief amongst them - had a cost disadvantage of around $2000-3000 per vehicle when compared with foreign competitors such as Toyota, Honda and others, largely because of legacy cost problems. "The competitor with the better cost structures always sets the price," he says. "When you have a cost advantage, you can put things in that dramatically add to the value. And if you're not that firm, you start to do things to keep costs down, like taking features out, cheapening the materials and the interior, things like that. What bankruptcy has done is to give GM a cost advantage that it has not had in decades."

This is evident in the products currently coming off the production line, with the forthcoming Chevy Cruze a prime example. Due to be built at the Lordstown, Ohio, plant, the new compact sedan is expected to become one of GM's major sellers over the next few years. The Cruze offers more interior room, more miles per gallon in the Eco model, and more standard safety features than any of its competitors, while options include an in-dash navigation system with 40-gigabyte hard drive, pause-and-play radio, downloading of audio CDs, the ability to transfer MP3 files from a USB memory device and heated leather seats. Cole, for one, is impressed. "We drove the car in a back-to-back comparison with its competitors, and the differences in things like ride, handling, noise, etc. were dramatic," he says. "It's a really sophisticated car. And what it tells you is that we're seeing the emergence of a totally new company that is in the sort of competitive position that the old GM hasn't been in for many, many years."

Indeed, GM posted a net profit of $865 million in the first quarter of this year (compared with a loss of $5.98 billion 12 months ago), a turnaround the automaker believes could put it on track for its first full-year profit since 2004. The key to this success has been bringing down the breakeven point for its products. According to analyst estimates, through the dramatic reduction of debt associated with bankruptcy, more global integration, plant closings, layoffs, and the elimination of many of the legacy costs related to retiree benefits and labor unions, the company has been able to take around $5000 out of the cost of a typical car. "Their breakeven point is way lower than it used to be," says Jim Hall, Director of Industry Research at 2953 Analytics. "Before, their breakeven was actually non-attainable with their market share. So they've adjusted that. They've also got a handle on their labor costs, so they have a strategic advantage from a cost standpoint, certainly over Ford; and they have cars in the pipeline that are truly exceptional automobiles. They have a lot going for them right now."

"They have a cost advantage and can now take a leadership position," agrees Cole. "I think they are poised to be more profitable than we have seen them in many years."

Indeed, in many ways bankruptcy - far from being the wholly negative experience that many expected it to be - has actually had a number of strategic advantages for GM. "It's had some very positive benefits," agrees Cole. "One of the things I talk about is the parallel impact on Ford, and the positive and negative aspects of bankruptcy. The good news is they didn't go through bankruptcy. But the bad news is that they didn't go through bankruptcy. There's no question that Ford has benefited in the marketplace from not going bankrupt; it's been very positive PR for them. But on the other hand, they're now saddled with this $30 billion debt obligation as a result, and GM just doesn't have that same burden anymore. I hated the idea of government involvement in the industry; I just thought it was a terrible idea. But when you look at the choice, there was no choice, because we were at the edge of the collapse of a supply structure that would've taken everybody down. From a very practical standpoint, the cost of a failure was much greater than the cost of helping the industry through this period and preventing it from disintegrating."

It raises an interesting point: can the company shake off the negative connotations caused by not just the bankruptcy itself but also by the government bailout? "There's still that perception of them being Government Motors," concedes Hall. "The bottom line is that they have to turn that perception around, and the way to do that is through a successful IPO and advertising that tells the unvarnished truth." It's a touchy subject for GM. If there has been one major misstep made by Whitacre and his management team over the past 12 months, it was the decision to release a series of ads that claimed the company had paid back its government loans in full in April - five years ahead of schedule. Unfortunately for GM, the public refused to fall for its financial cup-and-ball trick, leaving the automaker open to accusations that it was only able to repay the bailout money by dipping into a separate pot of bailout funds. "It appears to be nothing more than an elaborate TARP money shuffle," said Senator Chuck Grassley, the ranking Republican on the Senate Finance Committee, in response to the claims. "I think the one thing that a lot of people overlook with this is where they got the money to pay back the loan. And it isn't from earnings. It's actually from another pool of TARP money that they've already received."

Cole believes that the controversy won't disappear overnight. But he does think that the company can move on from the mistake. "I think all of the issues related to bankruptcy will remain controversial," he says. "But if the products prevail, the pricing is right, and the consumer perceives that there is real value in the product, that's what will really count. And when the company goes public, people will forget about all the negative issues related to bankruptcy."

So where does the company go next? "GM must maximize its second chance by continuing to turn out great products at a profitable level without getting distracted by egotistic pursuits," asserts Edmunds.com Senior Analyst Jessica Caldwell. "It makes no sense to vie for the title of world's biggest automaker if that puts them back into the hole from which we just rescued them." Caldwell's fellow Edmunds.com analyst Michelle Krebs aggress, maintaining that the automaker must concentrate on returning to public ownership, repaying taxpayers, funding union healthcare and earning profits - none of them easy tasks - before even starting to think once more about global domination. "Going forward, General Motors needs strong, stable leadership that assures the American public that the company will remain on track," she says simply.

That should be more than enough to keep Whitacre and his team occupied in the short-term, at least. Both GM and the Obama administration are keen to see a return to public ownership sooner rather than later, and the recent profit statements are likely to lead to rising political pressure to push an IPO through before the close of the year - particularly with mid-term elections coming up in the fall. But a recent GAO report suggests that to buy back just the government's 61 percent stake, the company would have to achieve a minimum market capitalization of $66.9 billion; given that the most GM was ever estimated to be worth was $57 billion - and that in 2000, when GM had eight marketing divisions, controlled considerably more market share and sold more than 17 million vehicles in the US alone - such a figure would seem unlikely. Nonetheless, sources believe the vehicle maker is more likely to cut the valuation on the IPO than delay it, and as such any deal could come as early as August.

The important thing, says Cole, is not to lose focus on the important thing: maintaining the business fundamentals. "Look at the Toyota situation and how quickly they went from the top of the mountain to the valley," he says. "The reality is that if you get too comfortable, the risk of a catastrophe becomes that much greater. Things happen very quickly in this business, and there is no room for overconfidence or complacency in a world moving as fast as this one is today. This applies to Ford, GM, Chrysler, anybody."

Not that this is likely for the Ridgeway Chevrolet team who, along with 600 other GM dealerships, were able to persuade the auto giant of their strategic importance and avoid closure earlier this year. And while cynics called the U-turn the "lesser of the two evils" versus the costs of litigating their termination, others chose to take a more charitable view. Cole, for one, believes reversing the decision on widespread dealership closure was overwhelmingly positive. "Maintaining a positive relationship with the dealers is essential," he says, "not least because in most cases, they're the customer-facing arm of your business and a key part of your brand message and marketing." Ridgeway provides an all too rare tale of success against the odds in the auto industry: February was the best month ever for the dealership in terms of the used car sales and vehicle service departments. "We should not be doing the numbers we're doing based on the sector," says Sales Manager David Crutchfield. "In some ways, GM did us a favor by putting our backs against the wall to fine tune our process. We're very quick to give God the glory."

GM has certainly made significant changes over the last year. But if it fails to learn the lessons of the past, it's unlikely that even God will be able to save it a second time around.

INSIDE THE VOLT

The Volt has been hailed as GM's savior and the future of the American automotive industry. But what makes it so special?

GASOLINE ENGINE

The 1.4-liter flex-fuel internal-combustion engine turns on as needed to power the electric generator. Gas, diesel engines or hydrogen fuel cells could be used

ELECTRIC MOTOR

The Volt is built around a set of components GM calls E-Flex, based on a fully electric powertrain; the only thing that powers the car is a 150hp electric motor

CHARGE PORTS

Ports on each side of the car allow a driver to recharge the batteries; a full recharge takes up to 8 hours on 110V power, and about 3 hours using 220V

BATTERY PACK

A 16kwh lithium-ion battery pack provides enough power for up to 40 miles of driving before the generator is required

FUEL TANKS

Two tanks hold a combined total of 12 gallons of gasoline or E85 (a mix of 85 percent ethanol and 15 percent gasoline)

BRAKES

The Volt's innovative regenerative braking system redistributes power back to the batteries during braking

FIVE THINGS YOU NEED TO KNOW

1. How does it work?

The Volt is not a gas-electric hybrid in the traditional sense; it's a plug-in electric vehicle (EV) propelled only by a powerful electric motor. The small gasoline engine works strictly as a range-extending generator to recharge batteries and provide current to the electric motor. The initial rollout will feature a gasoline engine as the range extending source, but the E-Flex architecture means other powertrain options (clean diesel, fuel-cell) can be built into the design.

2. How far can I travel?

A full charge will provide a maximum EV range of 40 miles; if your commute is shorter than that, the gasoline engine may not need to run at all. After battery power is depleted, the Volt should offer another 360 miles of range with the gasoline engine/generator providing the juice. This makes the Volt more versatile than a pure EV as there's no waiting to recharge batteries. The six-gallon gasoline tank can be refilled in a matter of minutes for extended travel.

3. What's the fuel economy like?

As a plug-in, fuel economy will depend on how long the gasoline range extender engine is operating. In the worst case, when the battery is down to 30 percent charge and the gasoline engine needs to run for extended periods, the Volt should offer 50mpg. If your trip starts with a full charge and is shorter, say 60 miles before plugging back in (40 miles of electric operation and 20 miles with the gasoline engine running), overall fuel economy will be around 150mpg.

4. What will it look like?

The production Volt differs substantially to the concept car, having undergone more wind tunnel testing that any product in the history of General Motors (and perhaps any car ever); nonetheless, it will still be recognizable as the Volt. Small changes to the surface deliver significant gains in lowering aerodynamic drag, which accounts for 20 percent of the energy needed to move the car at speed. The current design is roughly 30 percent cleaner than the concept.

5. When is it due?

GM officials are backing the promised introduction deadline of November 2010. To meet that deadline, GM has made Volt development a top priority with considerable resources brought to bear. The Volt has energized General Motors internally, and analysts believe it will help the company forge ahead through the tough times that inevitably lie ahead. Estimates place the early production versions at $40,000, with costs coming down as production ramps up.

CHEVY VOLT STATS

Availability: Nov.2010

Base MSRP: $40,000

Est. tax credit: $7,500

Technology: Plug-in Hybrid

Body type: Sedan

Seats: 5

Range: 40 miles + gas

Battery size: 16kWh

FROM CONCEPT TO REALITY

FRONT Rounded  side corners, a flat front grill and a long windshield help lower air resistance, which extends battery life

REAR The aerodynamic spoiler and long rear window help air flow away quickly, lowering turbulence and drag

COMFORTABLE RIDE

GM says that the interior will be a strong point for the Volt. A driver-configurable, liquid crystal instrument display, seven-inch touchscreen vehicle information monitor and optional navigation system will all highlight GM technologies. Bluetooth for cell phones and USB/Bluetooth for music will be standard.

Auto industry rebounds

A year on from major brands Chrysler and General Motors filing for bankruptcy, the auto industry looks to be back on its feet. Recovery has been slow but steady, with a number of the brands enjoying growth in recent months.

Chrysler's sales in May rose 32.7 percent from a month previously and sold more than 100,00 units for the first time since they file for chapter 11 in March 2009. Also enjoying considerable growth compared to a difficult year in last year are General Motors, where sales rose 17.5 percent in May. In fact, sales of the company's four leading brands increased 31.8 percent, the eighth consecutive month of growth. Ford Motors saw a 22 percent rise, making May the sixth consecutive month of growth.

Toyota, on the other hand, has found sales haunted by the ghost of its product recall made earlier this year. Sales grew in May by a paltry 6.7 percent from the previous month, and then fell again by 14 percent in June. To add insult to injury, a further recall of 17,000 models was made at the end of June following an announcement from the Japan head-quarters that some of the Lexus luxury cars could have faulty engines.

Despite Toyota's troubles, the auto industry is looking set to increase annual sales in 2010 for the first time since 2007. Sales across the country fell 35 percent between 2007 and 2009, but based on figures from the first five months of this year the industry looks set to rebound.

WHAT WE SAID

Back in October 2008, our cover feature focused on the demise of the American auto industry, and imagined what bankruptcy would mean for the big three. We didn't call everything right (our prediction that Ford would quickly follow GM into bankruptcy has not, as yet, materialized) but the central contention - that bankruptcy would do wonders for a dying industry - still looks sound. Here's what we thought back then...

"If anything, bankruptcy would do the carmakers some favors, affording them protection from creditors and allowing them to restructure without the straightjacket of prohibitive labor and supplier contracts. As to the argument that entering into Chapter 11 would hurt sales and stigmatize that company, one need only look at the example set by the airlines a few years back to see how such a situation would most likely pan out: once one firm declares, others would soon follow in order to share in the cost savings and leaner operating profile, and prevent any one company from gaining a competitive advantage. Sure, it felt odd to fly a bankrupt airline at first, but once practically the entire industry had followed suit no one gave it a second thought. If GM were to file, you can bet your bottom dollar that Ford and Chrysler would not be far behind.

"Tired brands and unprofitable dealers would disappear and the companies' remaining resources could be focused on those products and dealers with the greatest strength and staying power. They might even emerge from the experience as efficient, competitive organizations. "Failure is only the opportunity to begin again more intelligently," Henry Ford once said, and there's a good deal of truth in that statement.

"Finally, any government funding - rather than being poured into prolonging the death throes of an industry in terminal decline - could then be used as seed money for innovative ideas on how to take the industry forward, not merely as sawdust on the oil spills. This could be the start of a new age of American innovation, and a domestic auto industry that offers scope for emerging players with pioneering ideas. The future belongs to firms with greener vehicles, cleaner technologies and more efficient solutions; given a level playing field, none of the current Big Three would survive."