BUSINESS

How to shrink, but not to disappear

STEVE MAICH July 28 2008
BUSINESS

How to shrink, but not to disappear

STEVE MAICH July 28 2008

How to shrink, but not to disappear

BUSINESS

STEVE MAICH

The natural challenge of just about every business is to keep growing. However much you sold last year, last quarter, last month, now you’re trying to sell 10 per cent more. Whatever your profits were, raise them 15 per cent. That’s big business in a nutshell. But right now, one of the biggest and most iconic corporations in North America is wrestling with precisely the opposite challenge.

General Motors, the company that dominated North America’s auto business for generations, must find a way to shrink. If they can do it, one day, they might be able to grow again.

But shrinking is difficult and dangerous. If you’re not careful, you can shrink yourself into bankruptcy.

GM has already slashed production, a painful process that includes plans to shut down an Oshawa, Ont., production line that was thought to be on solid ground just a few months ago. And recent results make it clear that the agony isn’t nearly over. The company has about US$24 billion in cash, but it is currently burning through about a billion dollars a month. Last week, GM’s stock dipped below US$10, its lowest price in more than 50 years; its market value is now less than US$6 billion—minuscule for a company with 250,000 employees and sales ofmore than US$180 billion. But the stock market is all about trends, and GM’s trends are ugly.

In June, GM sold 18 per cent fewer cars than in the same month a year ago. The company’s share of the all-important American market is now around 21 per cent, running neck and neck with Toyota, and it’s sliding across almost every one of GM’s eight brands. Since 2000, Chevy’s market share has slipped from 15 per cent to 13 per cent. Pontiac is down from 3.5 per cent to 2.1. Buick went from 2.3 per cent to one. The company lost US$43 billion last year and doesn’t expect to turn a profit again until 2010, and even that might be overly optimistic. Even at US$180 billion in annual sales, GM cannot afford to pay its enormous costs. And so, it’s time to talk about shrinkage. But how?

This week, GM announced another round of major cuts, including a 20 per cent reduction of its “white collar” workforce costs. It’s also suspending its quarterly dividend, reducing marketing budgets and freezing spending on engineering projects. The more radical surgery involves getting rid of some of GM’s eight brands. Chief executive Rick Wagoner started the speculation last month when he acknowledged that the company is trying to figure out what to do with Hummer, now that the market for gas-guzzling, road-hogging tanks has gone into retreat. There are plenty who think more brands need to go, with Buick and Saab being the

prime candidates for the chop.

Once upon a time, when GM had close to half of the car market to itself, having lots of brands was seen as a way to diversify the product line—Don’t like Chevys? What about this Pontiac? Now, all those brands just look like an extravagance, especially given that every one, except Cadillac, is suffering. Toyota has just three brands (Toyota, Lexus and Scion) and the whole world wants GM to be more like Toyota these days. But that’s easier said than done.

In a perfect world, GM would sell the weakest brands to some willing buyer. But while GM sells vehicles under different names, the cars and trucks themselves are often exactly the same once you strip away the nameplates and decoration. They are engineered on common platforms and often built on the same production lines. For example, beneath the surface, the Saturn VUE is the same as a Pontiac Torrent, which is the same as a Chevy Equinox. The Saturn

Ion is a Pontiac G5 is a Chevrolet Cobalt. Even if you could find a willing buyer (hard) ready to pay a decent price (really hard), separating the brands from the rest of the GM family would be like trying to untie the Gordian knot with mittens on.

In theory, a shutdown would be simpler. But then, theories are always simpler than realities. A few years ago, GM shut down the Oldsmobile brand, and the company still bears the scars. They figured it would cost about US$1 billion to shut down production lines and pay off angry dealers who would no longer be getting their shipments of Aleros and Bravadas. Once all the smoke cleared and the lawsuits were settled, GM wound up paying out closer to US$2 billion. The company went to war with its dealers to get rid of Olds, and there are plenty within the company who think it was a bad mistake.

Those dealers, however, remain a key obstacle to GM’s restructuring. GM has way too many dealerships, but getting them to go away isn’t easy. In the past 12 years, roughly 2,000 have closed in the U.S. (mainly through retirements and consolidation), but there are still almost 7,000 left. That compares to about 1,500 Toyota dealers selling almost the same number of cars. The disparity in Canada is nearly as extreme: 732 GM stores, compared to 269 for Toyota. Back when GM ruled the industry, there was enough business for all to thrive. GM had the best salesmen, the top mechanics, and the nicest facilities. Now, with profits dwindling, some GM dealerships are looking a little shabby and the staff aren’t quite what they used to be. Customer service suffers, the brand gets tarnished and all the problems continue to compound. The dealers know the economics don’t work—they want fewer, more profitable dealerships too—they just don’t want to be the ones forced out of business. And when GM starts musing about cutting brands and merging dealerships, owners get the lawyers on speed-dial.

All this is particularly galling for GM’s brain trust because, although they never get credit for it, the company is actually producing some pretty fine cars these days—fantastic, award-winning cars in some cases. But if GM ever wants to capitalize on its improving product, it has to figure out how to get small in a hurry. If only it were as simple as it sounds. M

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