MANAGERIAL CHALLENGE Can a Leaner General Motors Compete Effectively?! In 2009, Toyota with 1,556,174 cars became the top- American households finding it hard to justify buying selling brand of auto in North America. Ford was second even a small appliance such as a toaster, car sales with 1,445,742 cars sold. Chevrolet fell to third. The fell off the cliff. In just one year, North American light 1,344,829 Chevies when combined with 259,779 GMCs, vehicle sales declined by fully one-third from over 178,300 Pontiacs, 109,092 Cadillacs, 102,306 Buicks, and 15 million to 10 million, jettisoning all the sales gains 72,660 Saturns still made GM the world's largest car of the previous decade. company, but not by much. GM products were largely The Big-3 American automakers could depend at one stale, labor rates were sky high, and investment capital time upon scale economies to provide a cost advantage was more interested in Silicon Valley than the Rust Belt. over rivals. Massive multimillion-dollar pieces of auto Moreover, Goldman Sachs had estimated that GM, more assembly equipment such as the body-stamping machine so than any other car company, was destroying share- were responsible. A stamping press uses hydraulic pres- holder value. At a price point quite similar to VW, Nis- sure to force sheet metal into the desired shape of fen- san, Honda and Toyota, GM was earning for investors a lower return than its risk-adjusted cost of capital. ders, floorpans, hoods, and trunks. Since annual style change required such a machine and since it could not As in other businesses subjected to highly effective be retooled from one model year to the next, wearing low-cost foreign competition (such as textiles and furni- out such an expensive piece of equipment was the only ture), GM had to find massive cost savings somewhere, and it needed to do so quickly. The Great Contraction way to reach minimum unit cost. Otherwise, a large write-down of factory assets had to be taken every year had deepened in the fourth quarter of 2008 to -9 percent and that expense passed along to the customer. To wear of GDP. Automobiles were one of the first con- out a body-stamping machine necessitates producing sumer durable industries to plummet downward. With and selling at least 250,000 units per model year, ContMANAGERIAL CHALLENGE Continued 20,000 per month, 1,000 per day-at the normal assem- hire "tier two" employees who receive half the pay of the bly line rate of one per minute rolling off a double-shift longer-term UAW workers. This blend of labor rates has 16-hour-per-day plant. Most of the GM and Ford mod- driven GM's wages and fringe benefits down to $56/ els sold in the 1960s and 1970s reached these minimum hour, almost identical to Toyota's. Consequently, even efficient scale rates in long production runs that offered GM and Ford pick-ups as well as several popular larger further learning curve cost advantages. sedans became money-makers. In addition, growth of But the North American auto market has fragmented overseas sales of Buicks and Cadillacs exploded, espe- across seven firms with at least a 5 percent market share. cially in China. By 2011, GM reported a company-wide As a result, only five models-the F-series and Chevy return to profitability and began repaying its Silverado pick-ups, the Honda Accord, Toyota Camry, government-funded debt. and Nissan Altima- sell at least 20,000 units a month. All 172 other models in U.S. showrooms fail to achieve minimum efficient scale. A further problem for the Big 3 was labor rates and Discussion Questions fringe benefits that in 2007 had reached $77 per hour for In light of the successful turn-around, do you experienced United Auto Workers (UAW) employees in think the federal bailout of GM was war- unionized plants. Workers in competing foreign trans- ranted? What are the pros and cons after the plant plants in Tennessee, Ohio, and Mississippi made fact? $55 per hour at Toyota, $45 per hour at Hyundai, and Which factors that were pivotal to the sales $38 per hour at Volkswagen. With higher costs and rebound at GM were unknown in 2009 when many models that customers found undeserving of the U.S. government acted? brand premiums, GM. Ford, and Chrysler were all Consolidation mergers such as Chrysler-Fiat "destroyers of substantial value," which Mckinsey man- and phenomenal sales growth in China have agement consultants define as a company whose return restored what type of cost advantage for the on invested capital falls well below its cost of capital. Big 3? By 2010 Ford's North American auto sales had Drawing parallels to the trade debate over rebounded 20 percent, and with redesigned models Boeing-Airbus subsidies, do you think GM Chevrolet picked up two share points to 20.4 percent exports to China sold through Greely, its from Toyota, whose share fell to 17 percent. Small Chinese partner, will be saddled with coun- fuel-efficient cars such as the Chevy Cruze, the Ford tervailing duties or other tariffs? Why or Fiesta, and the Chrysler-Fiat 500 swept into the market. why not? Hybrids like Ford's very successful Fusion competed head to head with the category-defining Toyota Prius. Most importantly, rather than being loss leaders, all "A Survey of the Car Industry: Driving Change," The Economist (September these models were profitable. 4, 2004). pp. 21-22: "U.S. Car Business in Major Shift," Wall Street Journal After a government-assisted bailout to recover from (January 5. 2011), pp. BI-B2: "Car Making in America," The Economist bankruptcy, GM won a collective bargaining right to (September 24. 201 1). pp. 75-76