General Motors
and the Auto
Industry: A
Strategic Analysis
Drexel University
Management 450
5/21/2009
Helena Boe, Diane Ketler,
Nicole O’Keefe, Andrew
Rubenstein, James Siverio
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Table of Contents
Executive Summary ...................................................................................................................................... 3
A Snapshot of General Motors Today .......................................................................................................... 4
The Strategic Issue Facing GM: Avoiding Bankruptcy ................................................................................ 5
The Economy Today ..................................................................................................................................... 6
History of the recession ............................................................................................................................ 6
Economic Climate......................................................................................................................................... 7
Stimulus Package ...................................................................................................................................... 7
Gross Domestic product ........................................................................................................................... 8
Inflation Rate ............................................................................................................................................ 8
Unemployment Rate .................................................................................................................................. 8
The Auto Industry Today .............................................................................................................................. 9
GM’s Strategy ............................................................................................................................................. 11
Threats Affecting GM ................................................................................................................................. 12
Threat of Rivalry ..................................................................................................................................... 12
Threat of suppliers .................................................................................................................................. 14
Economic Threats ................................................................................................................................... 16
Threat of Substitutes ............................................................................................................................... 17
Threat of Buyers...................................................................................................................................... 18
Threat of Entry ........................................................................................................................................ 20
Weakness of Internal Cost Structures ......................................................................................................... 21
Government Intervention and the Restructuring of GM ............................................................................. 22
GM’s Outlook/Recommendations .............................................................................................................. 23
Works Cited ................................................................................................................................................ 25
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Executive Summary
General Motors (GM) is one of the big three auto makers of the world (GM, Ford, and Chrysler)
and has historically been the largest and most successful. They have built some of the most famous and
classic vehicles on the road which have portrayed messages of both modesty and display of class for a
market of consumers who range from working class to music superstar; as Alfred P. Sloan, CEO of the
1920s put it, GM makes “a car for every purse and purpose.”
In recent years however, GM has taken an unexpected turn for the worse due to the changing
economic climate that is affecting the world. Many economists argue that the US has been pushed into
a recession that had started with the housing crisis of 2008. From this crisis stemmed a major banking
crisis that has lead to financial institutions implementing tighter lending guidelines for business and
personal consumers. This has greatly affected GM since the company, along with many other auto
making companies, rely so heavily on short term returns to fund such a complicated value chain and
large portfolio of brands.
Of the auto making companies facing the turmoil of falling sales and crashing returns, GM has
no doubt been hit the hardest and is facing complete bankruptcy. The fact that GM has such a large
portfolio is working directly against their success because of the fact that they are spread completely
too thin; by being unable to focus on the core products vital to the company’s success, GM is forced to
spread money it does not have around to failing brands which are only driving the company further into
debt. Even with initial governmental funding, GM is still unable to find a remedy for its failing success.
GM has historically built brands around the assumption that they will be consumed whether or
not they are built around consumer tastes. This lack of versatility and inability to explore long term
consumer consumption has created a number of threats with which the company is now faced. Rising
gas prices has shifted the majority of consumer tastes to energy and fuel efficient options which GM has
not sufficiently adopted, rather just the opposite since they focus more on their pick up and SUV
products which are extremely wasteful and fuel inefficient. In light of this, GM is losing business to
competitors who have extensively explored and who have begun to master the production of fuel
efficient vehicles.
President Obama is unwilling to serve the option of governmental aid to GM without a serious
and foreseeable restructuring; lending money without this strict restructuring plan is seen as
undeserved and wasteful. GM is faced with mass downsizing to more efficiently designate funds which
will help bring the company up from what is now a major failure. Although many options and tactical
decisions have been discussed, GM has until June 1st to present a clearly defined and finite decision for
restructuring.
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Company History
General Motors was founded in 1908 originally as a holding company for Buick. The firm slowly
began to take over Buick and bought out other model lines such as Pontiac, Cadillac, and Oldsmobile.
With help from these many different car lines, GM managed to dominate the US auto market
throughout the 20th century and was unrivaled in market share by any other company (“GM Corporate
Information”). GM’s market share peaked in the 1960s where they held 48.3% of the overall US market
share. This total began to decline in the 1970s and continued to present day, due to greater
international competition, mainly coming from the Japanese companies of Toyota and Honda. These
companies provided a new style and design of a car. They strayed from the traditional American muscle
cars, which were bulky and had poor gas mileage, to sleeker designs with better quality and efficiency
(“General Motors Corporation” NYT).
A Snapshot of General Motors Today
The General Motors Company today is in a state of complete turmoil, “surviving on Federal
loans” until it either “restructure[s] its debt or face[s] bankruptcy reorganization” come the first of June
(Detroit Free Press). According to Yahoo! Finance, the company most recently traded its stock at an
abysmal $1.09 on May 15, 2009, the lowest of the major players traded publically, trailing behind Ford
Motor Company’s $5.49. (See Graph A for GM-F 3M Stock Prices)
No more Federal bailouts (March
30th): Obama rejects GM’s
restructuring plan. GM has 60 days
to revise its plan.
Graph A: http://finance.yahoo.com/echarts?s=F#chart19:symbol=f;range=3m;compare=gm;indicator=volume;charttype=line;
crosshair=on;ohlcvalues=0;logscale=on
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GM’s failure has been a long time in the making. In an advertisement issued by the company in
December of 2008 which was published in AutoNews, the corporation admitted to its poor choices over
the years: neglecting quality, creating unrealistic compensation plans, overlooking changing consumer
tastes, and focusing its product lines too heavily on trucks and SUVs, to name a few (Stoll). And while
the ad continues on to say that GM is changing its ways, producing a hearty lineup of cars, crossovers
and hybrids, its reaction may be too little, too late.
What had changed for GM since its almost half-century ago all-time-high market share was its
lack of innovation over the years. “’Until the 1960s, innovation was part of G.M.’s DNA,’ said John
Casesa, a veteran industry analyst with the Casesa Shapiro Group. ‘Now, it’s a matter of trying to play
catch-up’ (“GM Corp”).” The problem that GM faces is, not only is the company slow to pick up on
consumer trends, it often fails to adapt to these demands all together. With gas guzzlers like the
Hummer and 12 MPG Cadillac Escalade in its lineup, neglecting the production of hybrids and fuel
efficient cars leaves GM hard pressed to see increases in its market share (Sanger). GM’s path of poor
choices has led the company to where it stands today: overhauling the entire company and praying for
survival.
The Strategic Issue Facing GM: Avoiding Bankruptcy
With GM’s recent talks of restructuring, downsizing, and the possibility of bankruptcy looming
around the corner, the days of being on top in the auto world are beginning to sound like a myth of the
past. In GM’s 100 year history, the company has gone from being an automotive powerhouse, grabbing
up more than half of the US auto market in the 1960s, to now hanging on by the mercy of the US and
Canadian governments, begging for financing and hoping to avoid filing for bankruptcy (“GM Corp”). As
it stands now, GM’s main concern is simply staying afloat. The company is facing questions like how
many plants to close, how many jobs to cut, and what brands to do away with from the portfolio
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(Sanger). The question that remains to be seen, however, is whether or not the company can pull itself
out of the mess in time to satisfy President Obama’s June 1st restructuring deadline and dodge a Chapter
11 filing. GM’s dismal future outlook is deeply embedded in the current economy.
The Economy Today
History of the recession
The current economic crisis in the United States has been debated time and again. While some
economists argue that the US recently entered into a recession, other economists state that the US has
been in a recession and that it initially started with the housing crisis of 2008. The National Bureau of
Economic Research declared that the current 2008 – 2009 recession officially began December 2007.
Their analysis was based on a number of factors, which includes the dramatic decline in layoffs, a sharp
decline in consumer spending, a credit crisis that has not been alleviated by the massive government
rescue plan, and increasing foreclosures that continue to put downward pressure on home values in
communities. Agreed by most economists, the prominent reason for the 2008 - 2009 recession stems
from the United States housing bubble and the subprime mortgage crisis which led to the banking crisis.
Subprime loans are loans that are given by financial institutions to borrowers who do not meet
the standard financial requirements to qualify for and obtain mortgage loans under normal underwriting
standards. Unfortunately this large scale, irresponsible lending produced the subprime mortgage crisis.
This crisis was initiated by the Federal Reserves’ decision to lower interest rates following the bursting of
the dot-com bubble and the government’s decision to relax regulations on underwriting standards in an
attempt to increase home ownership, particularly among minorities and the less affluent (Liebowitz,
2008, p. 34). To profit from the lowering of underwriting standards, financial institutions jumped at the
chance to give mortgage loans to borrowers without an appropriate background check to verify that the
borrowers could financially afford the mortgage payments. In fact, to expand markets and profits,
financial institutions aggressively marketed a host of mortgage and consumer credit products to nonPage | 6
traditional homeowners (Beitel, 2008, p. 31). Financial institutions were offering borrowers an
adjustable rate mortgage (ARM) instead of a traditional 30-years conventional mortgage. Some
borrowers were given the option of interest-only ARMs for a stated period of time (i.e. a seven year
interest only ARM). After the seven years, borrowers had to pay the principle and interest on the loan.
The problem with this contract was that many borrowers’ incomes did not increase in proportion with
the increase in their mortgage payment. This meant that unfortunately some borrowers were forced to
default on their loans. Due to these foreseeable conditions and the loan default of so many borrowers,
massive foreclosures have occurred in the United Stated and serve as the chief contributor to the
current 2008 – 2009 recession. This has led to financial institutions implementing tighter lending
guidelines for business and personal consumers. Since certain industries such as the auto industry rely
heavily on short term and long term borrowing, these tightened guidelines have negatively affected the
auto industry.
Economic Climate
Stimulus Package
The $787 billion American Recovery and Reinvestment Act was approved by Congress and
signed by the President in February of 2009; the purpose of this physical stimulus package is an attempt
to revive the United States 2008 – 2009 recessional economy from the exponential increase in job loss,
falling GPD, and unstable capital market. The package contains provisions for short term and long term
goals. Some of the short term goals include standardizing the economy, creating and saving jobs,
reducing taxes and spending money on programs and projects. The long term implications include
creating innovative approaches to the infrastructure, rejuvenating the healthcare, education and energy
sectors, and to make a positive impact on the economy as a whole (PWC, 2009). The stimulus package
provides tax benefits for individuals as well as the business sector. The stimulus money is broken down
as various sectors; there is a $3.7 billion home buyer credit funds set an aside to help generate home
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purchase. Under the home buyer credit plan, first time home buyers will be eligible to obtain a
nonrefundable $8,000 tax credit as long as they stay in their home for more than three years. To help
stimulate the auto industry, $2.5 billion will be used to make sales tax paid on new car purchases tax
deductible; new car buyers will be able to deduct sales or excise taxes, an above the line deduction (USA
TODAY 2009). The package covers numerous other spending credits to help stimulate the environment.
The million dollar question for most is when we will begin to see the results of the $787 billion package.
Opinion varies to this question, some analysts predicts fourth quarter of 2009, other say 2010.
Gross Domestic product
The United States current Gross Domestic Product (GDP) growth rate is (6.29), lower than the
forecasted GDP of 4.7% (Financial Forecast Center 2009). According to the Bureau of Economic Analysis
the decrease in GPD was due to the decline in exports, private inventory investments, equipment and
software, nonresidential structures and residential fixed investments. The private inventories
investment declined in the first quarter over $137 billion. Consumer spending was up 2.2% as consumer
responded to the lower prices of goods and services (Wachovia Economic Group, 2009).
Inflation Rate
According to the Bureau of Labor Statistics, America’s inflation rate has had relatively steady
changes until 2009. In 2007 the inflation rate was 2.8%, a slight decrease from previous year; but in
2008, it increased to 3.8%, which decreased the purchasing power of the US dollar. As of March of 2009
the US inflation rate is (-0.45), this deflation rate indicates a dramatic decrease in the prices of goods
and services due to our current domestic as well as global recession.
Unemployment Rate
The US unemployment rate has been dramatically increasing since December of 2007. According to the
Bureau of Labor Statistics, in April of 2009 there were (-539,000) jobs lost; less than what was
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forecasted. The unemployment rate has risen from 8.5 to 8.9 percent. Since the beginning of the
recession the US economy has lost 5.7 million jobs, bringing the unemployment total to 13.7 million.
The Auto Industry Today
The US auto industry as a whole is an extremely competitive market place. Each automotive
company is fighting for the largest market share of the world’s number one automotive market. The
US’s own Big 3, which includes GM, Ford, and
Chrysler (GM – Blue / Ford – Yellow / Chrysler
– Black) have been losing the fight to keep a
dominant hold over the domestic auto market.
Prior to 1985, the Big 3 controlled a vast
http://online.wsj.com/mdc/public/page/2_3022-autosales.html
majority of the US market share,
approximately around 80%, but since then they have seen their share decline to below 43%. As shown
in the chart listed to the left (Chart 1), the main competitors come from Japan and Europe, more
specifically the companies of Honda and Toyota (Honda - Green / Toyota - Red). These importers are
gaining market share because they seem to produce more dependable and more efficient cars.
Consumer Report listed the top 3 most reliable cars in these 6 separate categories which
include, Family cars, Large cars, Small cars, Minivans, Small SUVs and Midsized SUVs. Of the 18 cars
listed, 14 were Japanese engineered, and of those 14 cars, 12 were made by: Toyota, Honda, or Nissan.
Overall Japanese firms account for 78% of the most reliable automobiles while the US automakers
account for only 22%.
However, in the past few years with the housing bubble bursting and the economic contraction
that followed, auto sales as a whole have been declining rapidly, due heavily to credit markets freezing
and the steep drop in consumer spending. This tightening up of American money has greatly impacted
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the major players in the US automotive market, causing a dramatic decrease in sales from the year
before. GM sales are down 33.1% from April 2008, Ford’s are down 31.3%, Chrysler 48.1%, Toyota
41.9%, and Honda is down 25.3%. This drop in overall sales is staggering for the 5 largest market share
leaders in the US, and it is having a more devastating effect on the American car companies than the
international firms. (Sales figures - Wall Street Journal)
The US automotive market as a whole can be considered a mature industry structure. Singlecompany and industry growth have been slowing, due to the economic contraction as well as the lack of
large new markets. International competition has been growing since the 1970s and the international
firms have become major players in the industry. These new international competitors have eaten away
at the dominant market share that the Big 3 once held. Toyota and Honda have been taking advantage
of this mature industry structure and have
been creating new lines, such as the fuelefficient hybrid models. The hybrid model
cars were introduced in 2001, which was the
perfect time for this new technology to be
unveiled. Gas prices across the US were
spiking and the cost of fuel became a major
concern for the American consumer (Chart 2). The combination of low pricing and fuel efficiency began
to drive US automotive buyers toward the international companies and away from the old tradition of
owning and driving large SUVs.
The Big 3 lagged behind the international companies when creating fuel-efficient cars and did
not release one until 2004. The Big 3 are working on refining their products, however they are still
lagging behind the international firms. For years the consensus has been that Japanese automakers
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build quality cars while the US automakers build unreliable cars that will break down quickly. Over the
past few years, the Big 3 have begun to increase the dependability of their cars, which is shown by
higher rankings from Consumer Reports Magazine.
GM’s Strategy
General Motors’ strategy from the beginning was to be a product differentiator, and with the
Detroit based company (until recent restructuring) spread over 13 brands worldwide, GM has a highly
diversified product mix (GM Vehicles). The company’s slew of brands was no accident, for, as GM’s CEO
of the 1920s Alfred P. Sloan put it, GM makes “a car ‘for every purse and purpose’.” The company’s
strategy proved to be successful for most of the 20th century, as it was the largest car maker in the world
from 1931 up until 2008 (“GM Corp.”). And with 13 brands, countless car models, plants in 34 countries
and sales to 140 countries, it’s no
wonder the giant reigned supreme
for so long (“About GM”)(Bensinger).
“GM’s strategy of just a year ago” Bill
Vlasic of The New York Times
explains, “was waging a spirited
battle with Toyota for the title of
world’s largest automaker (Vlasic).”
This strategy, which brought the company great success for a major part of its existence, is no
longer working for the Detroit automaker. With increased foreign competition, the disregard for
changing consumer trends, and a portfolio spread too thinly, GM’s vision to be the world’s largest car
producer is no longer a viable goal. The main problem in GM’s decisions over the years was its overly
extensive lineup. With such a large and diverse portfolio, GM couldn’t give each brand the attention it
needed. As New York Times writer Micheline Maynard explains:
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The more brands a carmaker has, the more it must spread money around to develop vehicles
and market them. As a result, “every brand suffers,” said A. Andrew Shapiro, a managing
partner with the Casesa Shapiro Group. “No particular brand or brands can achieve the share of
voice that they need” (Maynard).
Historically, GM had used its brands as a competitive advantage over Ford, the company whose opening
lineup featured a monochromatic mix of all black vehicles. And in part, this was GM’s solution to a lot of
its competitor’s advances. Rather than fix what wasn’t working, GM simply added more brands. To
compete with foreign entrants Toyota and Honda in the 90s, GM introduced Saturn, a decision which
cost them $5 billion. But according to BusinessWeek, upon building its Saturn brand, GM consequently
put Oldsmobile on the back burner (Welch). And as priorities shifted again, rather than nurture its new
Saturn brand which may have had a fighting chance, GM started focusing on its other lines instead,
waiting five years before adding new cars to Saturn’s mix (Maynard). Its game of favorites lasted for
years: invest in Oldsmobile, disregard Saturn; build up Cadillac and Buick, forget about Pontiac and Saab
(Welch).
The company’s strategy to juggle its brands clearly proved to be an unsuccessful means of
portfolio management. Whether the company would have changed its ways if it weren’t for the
insistence of the Obama administration is hard to say. Regardless, the company appears to be moving in
the right direction. GM’s North American Vice President Mark LaNeve explains that “‘over time, the
strategy is to focus [GM’s] resources on the core brands…It's clear that we can't afford the kind of
product and marketing investment that eight brands need.’ (Welch)." Understanding the threats that
affect General Motors provides a clearer picture of the company’s failed strategy.
Threats Affecting GM
Threat of Rivalry
The threat of rivalry on the industry level is intense and highly competitive. General Motors is a
member of the Big Three (GM, Ford and Chrysler) and is one of the top four automakers when including
Toyota. These four industry leaders are estimated to make up 62.4% of the market in 2009 (IBIS World,
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pg. 9). And being that the market shares of these leading automakers are nearly equal (as shown below),
the fight for market share is fierce.
*IBIS World Car & Automobile Manufacturing in the US, page 24
Competition is also high amongst GM’s diverse portfolio of brands. With GM parenting eight
unique US companies—of which only four will survive the new restructuring of the company—the firm
faces eight different sets of competitors: one set for each brand (Roy). The degree of competitiveness
varies for each brand and depends on the type of product being offered. Direct competition for each
brand from rival products aimed at the same target market poses a greater threat than indirect
competition from products aimed at a different target market. Therefore focusing on direct competitors
can allow General Motors to better protect against the threat of rivals.
The companies under the GM umbrella need not only worry about domestic competition but
also about foreign competitors in the home market in addition to the rivals of their foreign interests. For
this reason, it is clear that one of the biggest threats to General Motors is the threat of rivalry. When
compared to Japanese automakers, GM has higher costs of production, partially due to greater labor
costs (IBISWorld Car & Auto, pg. 25). High costs of production threaten GM because it becomes more
difficult to offer competitive prices.
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Additionally, the brand image associated with the GM family (and the other American brands,
for that matter) is not one that embodies the highest quality products on the market. The confidence in
the brand is also fading as the danger of potential bankruptcy looms in GM’s future. This can definitely
sway consumers to purchase from rival firms, as well. Furthermore, GM’s lack of innovation in
employing new technologies, such as hybrid technology, or adapting to market trends can make rivals
seem more appealing.
The threat of rivals presents the greatest challenge that the GM brands have to face. There are a
number of reasons behind this fact, only some of which are listed above. Competing firms attack from
every angle and will take every opportunity that arises in hopes of becoming the market share leader.
However, GM’s product differentiation strategy does offer some protection from the threat of rivals in
that it develops specialized market niches. This helps to mitigate the threats from rivals because GM
aims to offer brands that are significantly different from competitive products so that no other company
competes directly. This strategy is only successful when enough resources are devoted to each brand.
Threat of suppliers
The supply chain in the automotive industry weaves a tangled web of intricate relationships
among suppliers and producers. In the three-tiered supply system used by General Motors and many
other automotive companies, the direct suppliers, or first-tier suppliers, distribute products straight to
GM. These first-tier suppliers rely on the second-tier suppliers for their parts for production and the
second-tier, in turn, relies on supplies from the third tier for necessary parts for production (Beene). This
complex relationship among the different suppliers and the automotive firms indicates a heavy reliance
on each link of the value chain.
These relationships often lead to smoother operations, as goods travel up the value chain to
reach the final production facilities to be made into finished products. During times of economic
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struggles like those being faced today, however, this interdependency can spell disaster for a number of
firms in the supply chain. All three tiers of suppliers suffered a severe blow when Chrysler recently filed
for Chapter 11 Bankruptcy and GM announced that it would be halting production at 13 plants in the
U.S. between May and July (Krisher). With this extreme drop in the production of new vehicles, many
suppliers have lost a major source of sales and now face bankruptcy themselves.
The stressful conditions within the economy already caused automotive suppliers’ revenues and
bottom-lines to decrease, but this lowered demand for auto parts has proven to be too much to handle
as many firms began working below their break-even point. A noteworthy reason that suppliers are so
hurt by the decrease in orders from auto companies is because this increases their cost of capital.
Suppliers use the projected orders from automotive companies as collateral to receive the necessary
capital to continue production (Gopwani). With so few orders being received, these already struggling
auto supply firms are being forced into bankruptcy. Although the government recently provided direct
automotive suppliers with $5 billion in aid, second- and third-tier suppliers are still struggling to survive
while hoping for the payments to trickle down the line (Beene).
So what does this mean for GM? It means that despite its efforts to reduce costs and inventory
by temporarily halting production, GM may not be able to finally resume production in the future
because of the devastating effects that decreased production will have on its supply chain. Additionally,
many of the tight-knit relationships between General Motors and its suppliers will be harmed in the
process which could lead to higher supply costs. With fewer suppliers available after the shakeout,
suppliers will have more bargaining power over the auto companies, also leading to higher costs for
supplies. Overall, the biggest threat of suppliers comes from the interconnectedness of not only General
Motors and the three tiers of suppliers, but also among other automotive firms in the industry.
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Economic Threats
Within the last few years, GM’s poor performance has manifested as a result of a global
economic downturn. In light of high gas prices and the recession heard around the world, GM was
greatly affected by money conscious consumers moving towards smaller, more fuel-efficient cars. As a
Washington Post article reiterates from just one year ago:
Pickup sales have been falling for months because of the slowdown in housing construction. The
trend away from SUVs began several years ago as baby boomers aged and roomy but more fuelefficient crossover vehicles gave consumers more choice. But automakers said gas prices are
accelerating the trend (Durban).
According to The New York Times, in April of
last year, one out of every five cars
purchased was either a compact or
subcompact car, compared to only one in
eight when SUVs were in high demand ten
years ago (Vlasic). And for a company like
GM whose lineup is dominated by larger
vehicles, the fall in sales of SUVs and pickups
http://www.latimes.com/media/graphic/2008-06/39594343.gif
severely impacted the company’s bottom line, with a sales drop of 27% in the summer of 2008 when gas
prices were largely inflated (Bensinger). In the following year, the trend of lost sales continued with
379,000 fewer GM vehicles on the road (Marr).
The company’s new plan for success needs to keep up with the changing times and its
competitors’ abilities to satisfy changing demand. With companies like Toyota producing smaller, more
fuel efficient vehicles, GM needs to be doing the same to remain an active player (Marr).
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Threat of Substitutes
Rising fuel prices and decreasing purchasing power causes commuters to reconsider their
transportation options. Although automobiles still tend to be the preferred method of transportation in
many areas, the threat of substitutes is increasing due to the current economic environment (California
Green Solutions). Substitutes for standard automobiles include bicycles, walking, public transportation
such as bus and train services, and even energy-efficient vehicles including hybrid and electric
automobiles. The Green Movement is another reason behind the recent shift towards substitutes for
cars and trucks.
A number of conditions have contributed to a higher threat of substitutes for the automotive
industry and General Motors, in particular. Increased fuel prices and insufficient fuel-mileage are a
major source of consumer discontent with automobiles as they have led to higher operating costs
associated with the vehicles. Even with the gas prices falling in 2008 and 2009, car and truck purchases,
especially, have continued to decrease whereas public transportation usage is at 5 year high high
(IBISWorld Public Transportation).
Public Transportation Revenue
Public Transportation Revenue Growth Rate
IBISWorld Industry Report: Public Transportation in the US, pg. 8
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Furthermore, as consumers’ disposable income decreases, they become less likely to make
discretionary purchases. With less money and wavering confidence in the market, people are more
hesitant to drop large sums of money on automobiles when there are so many other transportation
options available including public transportation, carpooling, cycling and walking.
Additionally, in today’s world of increased awareness of global warming and its causes, the
Green Movement is not just a hippy philosophy anymore. More and more people are doing their part to
reduce their carbon footprint and this includes decreasing the amount of emissions contributed from
automobiles. For this reason, Earth-conscious and budget-savvy consumers are looking to hybrid and
electric vehicles and other ‘greener’ transportation methods. Fuel-inefficient cars and trucks seem
particularly unattractive to modern consumers who are now exploring new technological options like
hybrids or the tried-and-true means of transport such as cycling and walking.
The threat of substitutes can be seen as both a challenge and an opportunity for General
Motors. Public transportation, cycling and walking provide a growing threat of substitutes. While
automakers are unlikely to begin competing in these markets, the hybrid market is primed for growth.
General Motors can reduce the threat of substitutes from hybrid and electric cars by further penetrating
this market while it is still relatively young.
Threat of Buyers
General Motors operates with a large number of domestic dealers. The total number of dealers
in the U.S. is 6,200, but GM is aiming to close 2,600 of them under the new business plan (Neill). With
the restructured goals of decreasing cost and increasing profitability, GM has high standards for their
dealers. Only those with sufficient profitability and customer satisfaction, as well as proper location and
up-to-date facilities will continue to operate (Neill). Because there are so many dealers, the buyer power
appears to be rather low, especially now while GM is downsizing.
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Although there is a high quantity of automobile suppliers in the industry, most dealers become
specialized in selling only one firm’s vehicles. This drastically decreases any buyer power the dealers may
have had because significant switching costs associated with selling for another company exist. Because
of such high switching costs, dealers are forced to accept the prices that the GM brands decide are
appropriate (Neill).
The threat from buyers is not a significant one for GM, particularly when compared to other
threats the automaker faces. One of the only reasons buyers could pose a threat to GM is that the
dealers are often part of a bigger group or association of dealers, which could offer the buyers strength
in numbers. For the most part, however, the GM family of brands will not suffer severe threat from their
buyers.
As pertaining to the planned closing of GM’s dealerships, the company has found this venture
be extremely costly. The problem occurs when GM has to put itself in further debt to make payments to
the State Legislature to protect its dealers prior to closings.
Colorado was one of the first states to protect the auto dealer in its relationship with the
manufacturer. Found in an article recently written by Jerry Kopel , the role of the dealer is explained as:
“The sale and distribution of motor vehicles affects the public interest and confidence of
the purchaser in the retail dealer from whom the purchase is made and the expectancy
that such dealer will remain in business to provide service for the motor vehicle
purchased.
“Proper motor vehicle service is important to highway safety and
(1) the manufacturers and distributors of motor vehicles have an obligation to the public
(a) not to terminate or refuse to continue their franchise agreements with retail
dealers
(b) unless the manufacturer or distributor has first established
(i) good cause for termination or noncontinuance of any such
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agreement,
(ii) to the end that there shall be no diminution of locally available
service.”
The term “good cause” in this article has been the cause for much debate and in most
cases where GM has closed its dealerships, it has been easier and more cost intelligent to just
pay “out of pocket for payments to the bad franchiser” (Kopel) unless the good cause can be
proven within thirty days, which is a section added by Senator Chris Romer. Thirty days is often
too short a period to prove that the reason for closure has “good cause.”
Threat of Entry
The automotive industry is lucky when it comes to the level of threat faced from new entrants,
which is relatively low for several key reasons. Incumbent firms like General Motors have a definite
advantage over potential firms hoping to enter the industry. The major causes are the high barriers to
entry associated with the automotive industry. For one, auto manufacturing is a highly capital-intensive
undertaking, which makes it difficult for new firms to start-up, let alone compete. The efficient
production capacity gained from economies of scale is also large and therefore costly to establish
(IBISWorld Car & Auto, pg. 16). Additionally, the automotive industry is fairly saturated, being a mature
industry, and therefore in order to be successful a new entrant would need to ensure its ability to
capture a large enough market share to be profitable. This can prove to be a less than feasible venture
for entering firms.
The technology costs needed to partake in vital research and development processes adds still
another barrier to entry. In order to stay afloat in such a competitive industry, firms need continual
innovation to provide products that appeal to the desires and demands of choosy consumers. New
entrants rarely have the necessary capital to fund such extensive R&D operations.
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Additionally, there are extremely strict regulations imposed on the automotive industry by the
government. These laws must be adhered to if a firm wishes to avoid heavy fines or penalties, and
complying can increase the cost of production significantly enough that it often drives away potential
new entrants to the industry (IBISWorld Car & Auto, pg. 16). The ability to afford the costs of imposed
regulations also comes into play when firms look to go global. Existing firms have access to the capital
and the managerial experience and know-how necessary to expand into international markets whereas,
new entrants most likely lack both.
The threat from new entrants does not impose a significant threat to an incumbent firm like
General Motors. Its long history in the market and the strong relationships with buyers, suppliers and
consumers built over time will add yet another deterrent for new entrants. The costs of capital needed
for production, the costs of R&D needed to remain competitive, and the costs of developing the
network and knowledge needed to become successful offer the greatest safety belt to protect GM from
new entrants.
Weakness of Internal Cost Structures
“GM is a benefit-paying organization masking itself as an auto dealer”, Donald Coxe chairman of
Coxe Advisors LLC. One of the major issues facing GM is their large liability consisting of pension, retiree
health care and other liabilities. As of the December 31, 2007 balance sheet, GM postretirement
benefits other than pensions were $47,375 billion and pension liability was $11,381 billion; the
company’s total liability was $184,363 billion. For the past 15 years, GM’s annual average of pension and
retiree healthcare cost has been $7 billion; however the company plans to reduce this number to $1
billion by 2011(GM Annual Report). The Company plan to drastically reduce some of these liabilities by
eliminating over 100,000 retirees’ healthcare insurance (USNEWS), reducing U.S. hourly employment
from about 61,000 in 2008 to 40,000 in 2010, and leveling off at about 38,000 starting in 2011(GM.com).
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If GM files for bankruptcy, the US government will be dumped with $13.5 billion dollars of unfunded
pension, the largest of any US company. If GM is able to alleviate majority of their pension and retiree
healthcare liabilities, they will have a greater chance of survival.
Government Intervention and the Restructuring of GM
As a result of the current economy, the state of the auto industry, the company’s failed strategy
and the threats facing it, GM is in need of major restructuring to turn itself into a viable company for
future success. The Federal Government decided to partake in the company’s restructuring in the
winter of 2008 when the Bush administration okayed a $17.4 billion loan to both GM and Chrysler in
hopes of buying time for a restructuring plan slated to fall into place in March (McKinnon). However, in
the changeover to the Obama administration, Obama recently required a stricter, more feasible
restructuring program, cutting off all funding unless serious results were produced. GM was given until
June 1, 2009 to cut costs and start producing a plan which will aim GM for the green (Ruggeri).
As it stands now, restructuring is the company’s highest priority. Its latest plan “calls for
trimming 47,000 jobs worldwide, closing more than a dozen plants in the United States, eliminating four
brands and shuttering 2,600 dealerships (Saner).” All said and done, GM will be left with 34 plants, a
fifth of what it boasted almost 40 years ago (Vlasic). Its lineup will focus on its strongest brands,
Chevrolet, Cadillac, Buick and GMC, while it will eliminate Saturn, Saab and Hummer, and will scale back
on Pontiac (Maynard). While General Motors is finalizing bids for its Hummer brand, the Italian
automaker, Fiat, is contemplating taking over the company’s European brands Opel and Vauxhall ((2)
Bunkley) and (Matlack).
In addition to making General Motors a much smaller company, the overall structure of GM will
see a drastic change in both its leadership and ownership. In March of this year, the Obama
administration requested that CEO Rick Wagoner step down from the company. Grounds for his
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dismissal included the fact that his company had requested the highest amount of aid in government
bailout plans, at $26 billion, and the fact that he “is considered responsible for increasing GM's focus on
trucks and SUVs—at the expense of the hybrids and fuel efficient cars that have become more popular
in the last couple of years (Allen).” Wagoner, who had been CEO for eight years and apart of GM for 30,
was replaced on March 30th by Fritz Henderson (Bury).
General Motors’ ownership is also in the lineup for an overhaul. The US Government plans to
take a 55% majority stake in the company, in return for which, the government will pardon the
company’s $10 billion outstanding federal loan (Saner). General Motors also plans to offer its “holders
of $27 billion in unsecured debt 225 shares in G.M. stock for every $1,000 in debt (Vlasic).” However,
this exchange gives bondholders only 10% share in the company, with the remainder left for the United
Automobile Workers Union (Vlasic). Unfortunately bondholders wanted nothing to do with the offer,
regarding the proposal inadequate and politically favored. If GM doesn’t come up with a solution by
June 1st, it will be faced with bankruptcy.
GM’s Outlook/Recommendations
As shown throughout this report, General Motors faces a number of strategic issues that
demand the firm’s full attention and immediate action. The strategy that had gained the automaker a
wealth of success in the 20th century, “a car for every purse and purpose”, is no longer practical in the
current global marketplace in which it operates. GM’s lack of innovation and resistance to change, in
addition to the recent economic recession, led to the firm's present state of unpaid debts and financial
failures.
As the threat of bankruptcy is perhaps imminent, GM is scrambling to restructure its company
to prove to the Obama Administration, its shareholders, and the world that it can in fact succeed. As it
stands now, the company is downsizing, planning to focus on its four core brands, and is eliminating
unneeded costs at all possible steps. And while the company has until June 1st to prove it is headed in
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the right direction, General Motors must continue with its new strategy; keeping up-to-date with the
latest technologies, listening to consumer demands, and producing cars which meet the needs of
today’s driver. The American public is eagerly counting down along side GM as it awaits the results of its
most recent restructuring plan. Whether the Detroit-born automaker will ever reign again as the largest
car manufacturer in the world is hard to predict, but with the correct measures put into play, General
Motors has a chance of saving its company with the hopes of a brighter, more successful, and certainly
more sustainable future.
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