Defending the foxhole - General Motors (GM)

General Motors per share value plunged to $1.56 today - reaching a company value of less than $1billion (read article here).  The company hasn't been worth this little since before paved highways were common.  Investors obviously don't give the company much chance of surviving.

General Motors simply has not made cars that people want at the price they try selling them for to cover their costs.  You can't blame suppliers for the cost problem.  Costs are the responsibility of the buyer, not the seller.  When costs go up business leaders have to find a way to provide more value - so the business can grow!  Things change, market shifts happen, and all businesses - repeat: ALL BUSINESSES - have to adjust to market shifts.  In the case of GM, their adjustments have not met the shifting market need and thus their revenue growth has not been able to meet the business needs.  The value of the output has not been great enough to cover the cost of the inputs.

So how would should the business leaders react to this problem?  You should want to increase the value of your product - tie it closer to customer needs - so you can entice customers to buy more, or possibly pay more per unit.  Customers are always looking for products that fit their needs.  ALWAYS.  When a business's products don't fit customer needs they quit buying - or they buy something else. 

What did GM do?  Announced it intended to sell or close (possibly bankrupt) what should be its most interesting and exciting business units - Saab, Saturn, Hummer and Pontiac.  Why?  So it can try to "save" Chevrolet, Buick, Cadillac and GMC.  That's because we all know how much we want to own a Chevy.  That's what every American from age 16 to 34 wants - a Chevy.  And because all those people from 30 to 55 strive at work to put a Buick in their garage.  And people from 45 to 75 dream about owning a Cadillac.  And GMC - primarily a truck brand - is the market leader.  I am, of course, being sarcastic.  Young people mostly find Chevrolet an anachronism.  People building families are buying Japanese and Korean cars.  Upscale has become Mercedes and BMW - or Lexus and Acura.  And everyone knows that Ford (the only American car company not asking for bailout money) leads in trucks with its famous F series.  Anyone with half an eye on the marketplace knows the brands GM is keeping are the ones with the least valuable future!

When want GM most needs innovation, but it is selling the places where innovation is supposed to breed.  Pontiac once meant "muscle car" - the place where GM ceated the GTO.   All performance was the Pontiac - with a big engine and barely enough metal to cover it.  Americans still want performance - and Pontiac is a division that could give America the kind of 4-cylinder turbo-charged all wheel drive performance that has young people flocking to Japanese dealerships.  Saturn was a brand with loyal customers who would buy no other American car except a Saturn.  Customers that wanted efficient cars with no fuss dealer made Saturn an overnight success 20 years ago.  Saturn was launched less than 30 years ago by a Chairman intent upon creating a car company that could compete toe-to-toe with the Asian companies and win!  Saturn re-designed everything from manufacturing to parts use, distribution and even fixed pricing.  Hummer may seem out of step today, but it brought to customers a unique vehicle line that smacked of "look at me buddy" - no matter the sex of the driver.  And while 12mpg military-looking vehicles may not be today's fit, when you look at the industrial-designed boxy Scion (a stereo on wheels college kids call them) you can see there is a market for the right kind of car in that segment.  And Saab appealed to buyers who wanted technology ("started by pilots" don't forget) and European styling.  There has always been a market for the technology leader and European design in America.  These are the brands that GM most needs to unleash with creativity and independence to regain growth and market success!

But, alas, GM has systematically tried to breed innovation out of these divisions - and their sales results have shown the outcome.  Cumulatively, they account for only 17% of GM revenues.  So GM says "shut them down."  When what GM should do is kill the most boring brand in all the industry - Chevy - and put its money squarely behind driving new products out of the divisions that are best positioned to give Americans what they want!  GM is still trying to Defend its past - the once proud brands that are now aged and worn out - when it needs to reinvigorate itself.

The leaders at GM "just don't get it" - to use a popular phrase.  They keep trying to keep GM the company it was in 1955, when sales and profits were going up, up, up.  The world has dramatically changed, and they are unable to recognize the type of change needed if the company is to survive.  Investors are right to lose faith in GM, because there is no reason to have faith in these leaders.  With the country's unemployment at very high levels, and the economy very weak, now is when we need leaders able to move their companies toward new solutions that meet future needs, can compete effectvely against global competitors, are able to Disrupt markets in order to adapt, and maintain White Space that will evolve their Success Formula year after year in order to remain competitive.  Just the opposite of what we see proposed by the leaders at GM. 

Ironically, the big losers from GM's failure will not be these leaders.  The Board members at GM, and the top executives, will not lose their homes or cars if GM fails.  The employees - from low-level vice-presidents to directors, managers, plant managers, supervisors, accountants, assembly-line workers and salespeople - will be ones losing their homes, health insurance, pension and cars.  And the vendor companies will have their managers and employees on the unemployment line.  Taxpayers will have to pay for that unemployment - possibly in welfare payments if the economy around Michigan, Ohio, Indiana and Pennsylvania collapses.  Taxpayers will end up paying for the care given to pensioners who lose their only means of support (the 80 year old pensioners will not be rejoining the work force, so who will pay for their groceries, housing and care?).  Taxpayers will end up paying for health care for those thousands of workers who lose coverage due to company failure. 

The cost of failure is high, but will largely be born by investors who bought bonds 10, 20 or 30 years ago, suppliers and employees of GM that find themselves with mortgaged houses no one wants because there is no work within 100 miles of any kind, and American taxpayers that will have to rescue the pensioners and families that have no hope of recovery or finding another job.  So why is the Board of GM still in place?  Why is Mr. Waggoner still CEO?  With the stock at $1.56/share, and all plans for innovation being jettisoned, why are the same people being asked to develop a rescue plan for one of the world's largest employers?

Comments

[Troy Reynolds]

What can we normal people do? How can people get a hold of american companies before they are gone?

[adam]

I'm not sure what constitutes an "American" company any more. Today companies have their registration, assets, employees and customers scattered to the point that it's not clear. What we all care about is jobs. If I have one, I'm less concerned about whether it's "American" or not. For America to keep people employed increasingly means we have to train them to participate in the information economy. We had too many people who knew how to farm in 1940, thus the value of working on a farm became close to pover. Now we have too many people who know how to do industrial jobs, and the value of that work is falling close to the poverty line. "High value" jobs are now related to information jobs, and if you're a "normal American" you need to figure out how you can participate in that job market going forward - regardless of who owns the company or where the customer is located.