Autoworkers Richard Salter and Edward Sauvie were spending an idle afternoon having a few beers in Jim’s Garage, a rundown little tavern near the huge General Motors Corp. plant in Flint, Mich. At the same time in near by Detroit, GM chairman Roger B. Smith was releasing the company’s 1986 re-
sults: on record sales of $137 billion, profits dropped 26.4 per cent to $3.91 billion. General Motors of Canada Ltd.’s profit results were worse, falling 41 per cent to $418 million. But Salter and Sauvie were preoccupied with more immediate problems. Their plant, a decades-old facility that produces Buick, Oldsmobile and Cadillac bodies, is one of 11 plants and operations that GM will close in the United States over the next three years. The cost cutting could leave 29,000 workers unemployed, and this week the first group of 3,500 workers was to be laid off. “I’ve got just eight years before retirement,” said Sauvie. “The closing has forced me to reexamine my life.”
The situation is also disquieting for the world’s largest automaker. In
1980 the firm launched a $54-billion plant-improvement program that was designed to ensure that GM would retain its share of the North American car and light-truck market. But since then its position has steadily eroded. Both increases in foreign-car sales and the resurgence of Ford Motor Co. and Chrysler Corp. have cut into its lead. And some analysts claim that
GM has hurt its performance over the past decade by not reducing production costs and by not altering new car designs enough to accommodate shifting consumer preferences.
The future could be even tougher. Some analysts predict that car and light-truck sales in both Canada and the United States will remain virtually stalled at 1986 levels until at least 1995. They add that foreign automakers will attempt to increase their North American sales by producing 1.8 million vehicles annually in mostly new plants across the continent. That would aggravate GM’s already severe overcapacity problem. Said Daniel Luria, a senior researcher at the Industrial Technology Institute in Ann Arbor, Mich.: “GM faces still further losses. It could shrink by
25 per cent if something does not change.” Still, other analysts are not so pessimistic. Arvid Jouppi, president of Arvid Jouppi Associates Inc., a Detroit research firm, says sales will be off slightly but the industry as a whole could grow in 1987.
Meanwhile, GM continues to produce many of North America’s topselling cars. Indeed, it turns out five of the 10 top-selling cars in North America, including the continent’s biggest seller, the Chevrolet Celebrity. As well, the company employs about 725,000 people in its auto parts and assembly plants worldwide, including 510,000 in the United States and another 46,000 in Canada.
But even with those successes, GM’s market position has deteriorated dramatically. It held almost 48 per cent of the U.S. market in 1978, but its share had dropped to 41.6 per cent in 1986. Its decline in Canada has been even more dramatic, falling to 38 per cent last year from more than 48 per cent in 1980. The company’s largest domestic rival in both countries is Ford, with just under 20 per cent of the market, followed by Chrysler at close to 11 per cent. Foreign imports, led by Hyundai and Honda in Canada and Toyota and Nissan in the United States, have held close to 30 per cent of the North American market since 1980, but they have not been able to increase their share.
Many industry observers say that in such a congested market GM has very little chance of recovering its lost share of North American car sales. Indeed, GM of Canada president George Peapples predicted that there will be 15 million vehicles aimed at North America by 1990, but with only 12 million potential buyers for them. (Currently the industry has a 12-million-vehicle capacity for a market of 10 million customers.) And despite a buoyant North American economy, car sales will remain sluggish for demographic reasons. The so-called baby boom market has been saturated, severely limiting the number of potential new consumers.
But the automakers are still increasing their overall capacity to produce cars. GM’s problems in the 1990s will also be reflected across the auto
industry as a whole. Retail analysts say that North American consumers are spending more of their disposable income on services, and on expensive toys such as video cassette recorders and personal computers. Lexington, Mass.-based analyst Data Resources said that sales in the sporting goods sector would climb to 3.4 per cent annually, compared with annual growth of 2.5 per cent in the auto sector, which is down from a growth rate of five per cent in the years between 1970 and 1985.
Now, in their attempts to lure back customers, the North American carmakers have begun to promote the reliability of their products. John McNeil, a Data Resources auto analyst, said that, particularly in the intermediate price range which accounts for a quarter of the market, car buyers are putting dependability ahead of prestige. “GM needs to make cars so that a guy will drive around in a mid-sized Chevy and think it’s as good as a Honda Accord,” said McNeil, “and right now they just don’t think it is.” But last month GM became the first North American
manufacturer to offer a six-year or 100,000-km warranty. Ford, Chrysler and American Motors Corp. were quick to follow the action with sixyear, seven-year and six-year warranties respectively.
But GM executives, adopting the latest fashion in business thinking, appear to be convinced that production cost reductions may be the best way to increase conventional profits over the next decade. Indeed, in a letter to shareholders last week Smith said that he expects to cut costs by $13.4
billion a year by 1990. GM already has excess manufacturing capacity, said Wendy Beale, a New York-based analyst with Smith Barney, Harris Upham and Co. Inc. In fact, the company had enough capacity in September, 1986, to serve 60 per cent of the North American market, but it captured roughly 41 per cent last year.
The 11 closures announced in November were the first attempt to bring plant capacity into line with production, said GM spokesman John Mueller. He added that more shutdowns are likely. And the Detroit
Free Press reported last month that GM will close another 20 plants over the next two to three years.
Canadian workers could be hit hard as the world’s largest auto firm cuts back. “Equity-wise you deserve a closing,” said Luria. “The United States has absorbed all the assembly closings so far.” One of the most likely targets might be GM’s car assembly plant at Ste-Thérèse, Que., located 30 km north of Montreal. The plant, employing 3,700 workers, has suffered from labor disputes and high produc-
tion costs for years.
Industry observers say that GM will have to reduce its cost of production at least to the level of Ford and Chrysler to remain competitive. Ronald Glantz, an automotive analyst and partner with Montgomery Securities of San Francisco, said that GM produces 70 per cent of the parts and components in all of the company’s vehicles, but high labor costs now offset the savings GM once achieved through internal parts production. By comparison, Ford produces 50 per cent of its parts and components internally while Chrysler produces 30
per cent of its components. As a result, Ford and Chrysler are able to produce cars more cheaply by purchasing a larger share of their parts from low-cost, nonunionized parts manufacturers.
GM’s high production costs are also partly a result of overstaffing, according to some analysts. Researcher Luria contends that the firm uses 20 per cent more management and assembly-line workers than its rivals do to produce an automobile. Other experts, such as David Andrea, a University of Michigan auto industry researcher, said that GM could overlook such inefficiencies when it controlled close to 50 per cent of the North American market. But he added that overstaffing is now a serious drain on the firm’s profits.
GM’s profits have also suffered from a relative unpopularity of some of its new models, particularly at the top end of the car market. GM used a common body in 1986 for its Cadillac Seville and Eldorado models, as well as the companion models Buick Riviera and Oldsmobile Toronado. Sales in those lines fell from
161.000 in the first 11 months of 1985 to
79.000 in the same period for 1986. Said Victor Lonmo, president of the Automotive Parts Manufacturers’ Association of Canada: “People don’t like to spend $38,000 for a car that looks like other cars.”
GM recently severed its ties with Texas businessman H. Ross Perot— who some analysts claim could have revitalized the huge company. In 1984 GM purchased Perot’s Dallas-based Electronic Data Systems Corp., a computer services company, for $3.35 billion. The purchase was made to acquire the technological edge that GM management wanted to give them an advantage over the opposition. Perot was given a seat on the board of directors and then began meeting GM dealers, factory workers, executives and investment analysts across the United States to find out what was wrong with the company. Perot’s goal was to cut into the sales of Asian
manufacturers by making GM more consumer-sensitive. But eventually GM bought back all Perot’s 11.3 million shares, and he had to leave the board.
GM chairman Smith says that the corporation will continue to develop advanced manufacturing techniques. One of its most innovative projects is a $2-billion overhaul of its Oshawa, Ont., complex. And next fall GM will demonstrate its resolve to cut costs over the long term when it opens one of the most advanced assembly plants in the world. Located in Saginaw, Mich., 160 km north of Detroit, the $80.4-million plant will have no em-
ployees directly assembling cars, just computer-operated robots on the factory floor. The 20 attendants will supervise the operation without being directly involved in the planned production of front-wheel-drive axles.
Corporate spokesmen say that GM has launched its technological revolution to control costs, improve quality and keep the company competitive with foreign and domestic rivals. But if North American auto sales stagnate and manufacturing capacity continues to grow, most industry observers contend that GM will have to fight hard just to retain its market share.
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