What changes would you suggest regarding the overall management and corporate governance of GM? This includes the issue of duality and the background/experience of the top people in GM

\f3. \"Product, product, precinct.\" Throughout the 1980s and 1990s, the competition, Toyota and Honda in particular, established a solid reputation for better product quality and more appealing models. The Big Three had been slow to respond. 4. \"The eet-boomerang effect." To explain the lower resale values of cars manufactured by the Big Three, as compared to the import competitors, some analysts pointed to large sales by the Big Three to the eet operations of rental companies, governments and corporations. The lower resale values were a negative issue for consumers considering the purchase of a new car. 5. "The used-vehicle time-lag affect." Most rst-time buyers purchase used vehicles. Older Big Three vehicles carried the poor quality problems of earlier years, and so rst-time buyers had a bad impression, which inuenced their later vehicle purchases. 6. "The bandwagon effect." The Big Three market share had fallen, and consumers interpreted this trend as reecting poor value compared with foreign vehicles. Furthermore, the special price discounts of the Big Three were seen by some consumers as an indication of\" poorer quality. 7. "111a lagged incentives effect.\" The repeated use of incentive programs to sell new vehicles served to depress used-vehicle prices as well as new-vehicle prices. This trend became apparent to consumers who would prefer to purchase a vehicle that maintained its resale value. In addition, repeated price and interest rate concessions led some vehicle owners to delay new purchases until another incentive program was announced. a. "me 'puslt' industry aoat." The response of the Big Three in recent years included the closing of plants and the reduction of\" vehicle production numbers, which automatically resulted in a decrease in their market share. contribution would come from a new automotive fund recently established by the Ontario government to counter the subsidies offered by Mexico and US. state governments. However, with GM's announcement of plant closures and dismissals, the Ontario and Canadian governments became involved in balancing possible job losses in GM's restrucmnng against possible reductions in their promised subsidies. This process of government nancial assistance would impact where GM would eliminate jobs and where GM would introduce new technologies and equipment. Governments throughout the world were also concerned about their environmental policies to reduce pollution and carbon dioxide emissions, to replace gasoline with alternative fuels and to increase nrileage. Girl's Heallhcare and Pension Strategies As of 2005, GM had [31,000 employees in North America. However, as a result of retirements, GM had about (179,000 families who relied on it for pensions and reimbursement of healthcare costs. GM's annual total cost for health care in 2005 reached $5.6 billion, which was the equivalent of $1,500 per vehicle. This amount per vehicle was three times the level of Japanese automakers who had much younger workforces and Fewer retirees. United Auto Workers (UAW) members paid only seven per cent of their healthcare costs, while GM's white-collar workers paid 27 per cent. By 2005, GM was attempting to roll back these enormous healthcare obligations. Meanwhile, the decrease in global interest rates and the attening of stock market returns meant that the amount of money set aside to fund pensions was no longer adequate. In 2002, GM had a pension shortfall of $19 billion, an amount as large as its market capitalization at the time. In response to this shortfall, GM increased its debt by $16.5 billion from the bond market, and contributed this capital to its pension fund. It was unclear how much GM would have to contribute in future years in order to maintain adequate funding for its pension programs. Irt view of the enortnous and steadily increasing nancial obligations for its healthcare and pension programs, some analysts felt that GM should plan to follow the example of many US. steel and airline corporations who entered Chapter 11 bankruptcy in order to shed such liabilities. In such cases, the government's federal insurance agency would be obliged to accept responsibility for at least some of these obligations, but the federal agencies' funds were already rtmning low. Furthennore, shareholders would lose all or most of their equity. In 2005, GM threatened to unilaterally cut benets for retired UAW workers, but the UAW contended that such action would violate their contract. In a display of good faith, the UAW hired investment banker Lazaro Ltd. to analyse GM's Glil's Environmental analogy Many governments were actively pursuing the objective of increasing the gasoline mileage in order to reduce gasoline consumption and emissions. Of special importance, the U.S. government had implemented corporate average iel economy {CAFE} standards that were at a level of\" 21 miles per gallon in 2005. Under these mileage regulations, each manufacturer had to reach the eet-wide mileage target. Honda and Toyota had been successi] in selling small cars and their light-weight trucks, and so were able to achieve the eet-wide CAF E target relatively easily. For GM, however, the predominance ot'large vehicles in the eet made the attainment of the CAFE target Far more difcult. Consequently, GM was forced to sell its smaller trucks at lower prot margins in order to raise its fleet- wide mileage average to the govemment's requirement. Automotive makers were pursuing several alternative engine modications as a way of substantially increasing gasoline mileage. Some planned to rely on batteries that would power electric motors, which might drive all Four wheels or just the front wheels. In other strategies, batteries or some other electrical source would act as auxiliary power in a hybrid drive system. At this point in time, hybrid systems essentially had to contain two separate but related power trains. As catty as 1996, GM had created an all-electric vehicle, the EVI, which relied on lead acid batteries. This vehicle had a range of\" only 55 to 130 miles, after which the battery pack required a ve- to eight-hour charge. GM received government nancial incentives, but invested more than $1 billion of its own Funds. However, GM's EVl had fewer than 1,000 customers in its rst four years. Meanwhile, GM was working on the development of a six-cylinder diesel engine for some SUVs. Toyota had created a battery and gasoline hybrid engine for its new Prius and for an SUV. The Prius was selling very well even at a premium price. BMW was working on the creation of a new kind of engine that could use either gasoline or hydrogen. Burning hydrogen would eliminate tailpipe emissions, but hydrogen was highly flammable, relatively expensive and available at only a few filling stations. Like several other automakers, General Motors continued to count on Fuel cells to produce electricity, with only water as a byproduct, and most automakers had developed test vehicles. In 2005, GM announced its intention of developing by 2010, a hydrogen fuel-cell vehicle that could compete on cost with traditional benets of its retirees, and by 2005, these were estimated at $77 billion. Gurrent healthcare costs were 55. 6 billion annually. Furthermore, the reduction of returns on its pension fund had compelled GM to increase its pension contributions substantially. Nevertheless, there were optimists who believed that GM could act strategically in ways that would dramatically increase shareholder value. GM did have a cash reserve of about $20 billion with which to cover cmrent losses and implement new strategies. Recent surveys by 3.1). Power and Associates indicated that GM quality had increased substantially in recent years. GM had already outsourced most of its components to lower cost suppliers, retaining manufacturing of only engines and transmissions. Vehicle manufacturing in lChina was yielding strong prots. GM's nancial activities under General Motors Acceptance Corporation (GMAC) remained extremely protable, enabling the corporation as a whole to show a net income, of $2,805 million, in 2004. Some analysts felt that GM should spin off GMAC as a separate corporation, estimating that GMAC alone would be worth $60 a share, while GM currently traded for $30 to $35 per share. In this way, shareholders would have shares in a strong viable nancial entity even if GM's automotive operations continued to stumble- Chief Executive Ofcer (CEO) Richard Wagoner stated that he was condent that GM could maintain its dividend, which gave shareholders a substantial 5.9 per cent annual yield (2015}. Meanwhile, billionaire Kirk Kerkorian announced that he would increase his stake in General Motors to 3.3 per cent, indicating his condence in the future oFGM. TEN FACTORS CHANGING THE INDUSTRY STRUCTURE Exhibit 1 presents US. market shares for major automakers in the years 1990 and 2004. Over this 15-year period, GM's market share fell from 35.5 per cent to 21.3 per cent, and Ford's market share fell From 23.9 per cent to 18.3 per cent. Meanwhile, Toyota, Honda and Nissan climbed from a combined market share of 18.3 per cent to 26.2 per cent. The combined share of all foreign automakers reached 31 per cent. The industry structure meant that each of the North American Big Three quickly copied each other's decisions in regard to changes in models and prices. This pattern continually threatened sustained protability. A central reality facing General Motors, Ford and DaimlerChrysler was the more intense competition caused by the substantial increase in market share of foreign corporations. Initially, increases in imports posed the new competitive threat. By the 19903, however, foreign rms had built a large number of manufacttn'ing plants irt both the United States and Canada. By 2005, these "transplants\" had achieved the same cross-border tariff concessions under the North American Free Trade Agreement (NAFTA) that the Big Three had naditionally enjoyed. Exhibit 2 presents a list of plant locations and vehicles of foreign automakers in the United States and Canada During the 1980s and 1990s, each of the major automotive corporations had also created a global network of production and distribution, resulting in intensied competition in each region ofthe world- Faced with the success of their foreign competitors, each of GM, Ford and DaimletChl'ysler had experienced decreases in market share and faced significant nancial difculties. Desrosiers Automotive Consultants Inc. pointed to a series of 10 factors that explained the decline of the Big Three.3 At least some of these factors were the result of inappropriate strategies. Furthermore, the Big Three had been rescued by the fortunate creation of vans and sport utility vehicles (SUVs) on which the margins were larger than those of automobiles. Consequently, the Big Three had not had to make the really tough strategic decisions in the past. 1. \"It is not what the Big \"tree have done wrong, it is what everyone else has done right.\" Over the past several decades, Foreign competition, Japanese automakers in particular, introduced successful models with widespread customer appeal. Quality and lel efciency were particularly important attributes. Beginning with lower priced models, these foreign competitors now offered luxury vehicles and trucks as well, extending their competition throughout the entire product range. Meanwhile, foreign competitors had built numerous plants within North America, using non- union labor. Having an employee group with a much yotmger age prole titan the North American automakers, these transplants Faced much lower costs for health care and pensions. While GM retained its position as the number-one vehicle producer in the world, other company groups had also established global networks of production and sales, including Toyota, W and Renault-Nissan. 2. \"It's all labial": fault.\" Over the years, the unions at the Big Three had negotiated a multitude of work niles to protect workers and establish seniority rights. However, these work mles impeded the introduction of new technologies and other organizational changes. While previous management might be blamed for these concessions, current management was now in a trap. 9. "The heat-up, youriclosnsI-friandc effect." The Big Three had continuously negotiated price reductions from their suppliers and price increases From their dealers. However, this process reduced prot margins of their suppliers and their dealers and hurt the value chain as a whole. 10. \"It takes time." The Big Three were large complex companies. Signicant time was required to change the corporate culture and production technologies. Consequently, they always seemed to be behind their competitors. CORPORATE RESTRUCTURING AT GENERAL HOTORS GM had not been standing still in the face of these challenges. In GM's 2004 annual report, Wagoner discussed a series of major restructuring activities that he claimed now placed GM in a much stronger competitive position. As we move forward, it's useJ] to pause and look back down the road we've traveled. When my predecessor, Jack Smith, took over in 1992, he instilled a business philosophy that still guides us today and is embodied in our cultural priorities: product excellence and customer focus, act as one company, embrace stretch targets, and move with a sense of urgency. After more titan a decade of driving our business with this philosophy, GM today operates far differently. For example, in 1992, we had 27 different purchasing organizations just in North America. Today we have one global organization using a common, globally based sourcing process. Given GM's sine and global footprint, this move continues to represent a competitive advantage. Another area where GM has undergone radical change more recemly is in product development, engineering and planning. We have gone from a highly decentralized structure, with 1] different engineering centers in the United States alone, to a single US. engineering organization, and this year to one globally integrated product development organization. The institution of common business processes and computer systems, and the ability to Fully utilize our global design and engineering talents, will mean more new cars and trucks, shorter lifecycles, lower costs and higher quality. We see many opportunities here going forward. We also see plenty of opportunity ahead in continued productivity improvement. According to the Harbour Report for North America, GM has had the highest annual productivity improvement among all automakers over the past six years. "this is the direct result of applying a common manufacturing system around the world, and leveraging our global manufacturing engineering organization, which will provide us with more exibility and savings down the road.' However, these reshuenning activities had not yet resulted in new designs that could really appeal to the consumer. Somehow, GM had to get more customers into its showrooms. on North America {Guam GM was divided into four regions For purposes of administration and reporting. GM's consolidated automotive nancial results are presented in Exhibit 3. GMNA was by far the largest market for GM with annual sales of about 5.5 million vehicles. Exhibit 4 presents data in regard to net income, net margin and vehicle sales for GIVINA for the years 2002 to 2004. This division provided a relatively small net income in each of the three years, reaching $1,533 million in 2004. However, prot margins were very thin, being only 1.4 per cent in 2004. In 2005, this thin margin suddenly disappeared GM's nancial statements explained the low net income gures as the result of low volume and an unfavorable product mix. Several one-time events also had signicant impacts on net income, including tax benets of various kinds, changes in reserves for product liability and plant closures. on Europe {onE} As Exhibit 5 indicates, this region had yielded consistent losses for GM, reaching nearly $l billion in 2004. GM's annual report explained the 2004 losses as primarily due to continued negative price pressures and unfavorable exchange rates with respect to the weakening of the 1.1.3. dollar. In October 2004, GM announced a major restmcmring initiative to reduce its European workforce by up to 12,000 in 2005 and 2006. "these restructuring costs would remain a nancial burden in future nancial statements. \fGH'S STRATEGY OF ALLIANCES GM had followed a strategy of creating alliances with local manufacturers in many of the countries where it hoped to expand its business. GM had acquired an equity position in the Swedish manufacturer Saab, which it increased to 100 per cent in 2000. In 2001, GM created a joint venture with the Russian auto manufacturer AvtoVAZ to build an SUV For the Russian market. In 2004, GM entered an alliance with Suzuki of Japan, under which GM would manufacture its GM- designed V6 engine for use in Suzuki trucks and cars. Most dramac had been GM's alliances with Fiat, SAIC and Daewoo. Girl's Fiat Strategy Fiat was one of Europe's largest industrial groups, operating in 61 countries and employing more than 220,000 people. The automotive and machinery sector accounted for 72 per cent of Fiat's revenues. In 2000, General Motors and Fiat established a strategic alliance. Fiat had been the weakest of the European car manufacturers, and it sought an international partner to strengthen its competitiveness. Fiat also hoped that the alliance would enable it to increase its sales of luxury models, Alfa Romeo and Lancia, in the United Sates. Meanwhile, GM had Faced sales difculties in Europe, and hoped that this new alliance would strengthen its competitive position. GM and Fiat planned to reduce costs by sharing engines and platforms. They also anticipated synergies in the reduction of purchasing costs and in nancial services. They hoped to strength their competitiveness through the exchange of technologies. GM acquired 20 per cent of Fiat Auto in exchange for GM shares that constituted approximately 5.1 per cent of GM's capital- The exchange was valued at $2.4 billion. GM received the right to purchase the remaining 80 per cent of Fiat if Fiat decided to sell. Legally, this right came to be seen by some as an obligation. Unfortunately, the strategic alliance was a disaster. The Fiat operations experienced declining sales as their competitors took larger market shares. In Italy, it was not easy for a corporation to impose mass layoffs and factory closings. As sales declined, prots fell dramatically, and Fiat's factories operated at only mmirds of capacity. The alliance structure had left GM and Fiat as independent companies, and they continued to be competitors. The collaboration that had been hoped for was very slow in materializing, and the cost synergies never appeared. Worse for GM, Fiat shareholders argued that GM was technically obliged to purchase the remaining 30 per cent of Fiat. Legal controversy was resolved only by GM paying an out-of-court settlement of$2 billion. GH'S "HON-HARKEI'" STRATEGIES Governments throughout the world were continually implementing public policies that impacted automakers' strategies. GM's strategies for health care and pensions and even For investment location decisions were impacted by the degree of\" govemment nancial assistance, and by government regulations in regard to funding requirements. While the average cost of health care per vehicle exceeded $1,500 annually in the United States, many governments, including Canada's, provided ee health care to residents, reducing the cost of production and inuencing plant location decisions. For several decades, governments had viewed the automotive industry as an important creator of\" jobs, both directly in assembly operations and also indirectly in purchases From suppliers of\" parts and services. Consequently, governments offered substantial nancial assistance to automakers that would promise new plants or MD Facilities. This simation led to continual lobbying by each automaker for goverrnnent nancial assistance. Exhibit 10 indicates the size of government subsidies from US states to attract new pllns, from 1993 to 2002. Many analysts pointed to this process as one reason for the global overcapacity. This process also entered into decisions concerning plant closures. In 2005, for example, General Motors announced its $2.5 billion \"Beacon Project" that it claimed would create 500 new jobs in Ontario, Canada. GM promised to upgrade its assembly operations and also to establish new research and training centres. As part of this strategy, the Ontario government promised to contribute $235 million, and the Canadian federal government promised $200 million. Ontario's