Biggest automaker needs big changes

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Biggest automaker needs big changes

Undesirable cars, costs hurting GMBy Jonathan Weisman

 

Updated: 7:15 a.m. ET June 11, 2005WASHINGTON - In the mid-1990s, then-General Motors Corp. Chairman John G. Smale decided to bring the world's biggest automaker a dose of the give-the-people-what-they-want ethic that had animated Smale's old company, Procter & Gamble Co. And what the people wanted was sexy, edgy and a bit off-key; in short, a head-turner.

 

 

General Motors' culture took over from there. Design would be by committee, the focus groups extensive. And production would have to stick to a tight budget, with all that sex appeal packed onto an existing minivan platform. The result rolled off the assembly line in 2000: the Pontiac Aztek, considered by many to be one of the ugliest cars produced in decades and a flop from Day One.

 

The Aztek experience encapsulates the challenge GM executives face as they try to turn around the fortunes of an auto giant seemingly in twilight. In GM's post-World War II heyday, when it owned more than half the U.S. auto market, it could afford the occasional Aztek. Now, health care and pension costs are suffocating. Tensions are rising with GM's unions. And management, labor and industry analysts agree the company simply cannot get past its stubborn inability to create cars and trucks that people want to drive.

 

Its latest line of vehicles, including the Pontiac G6 and the Buick LaCrosse, has failed to catch fire, while its large sport-utility vehicles are sinking fast under the weight of high gas prices and low appeal.

 

"That's the big gorilla sitting in the corner of the room," said Gerald C. Meyers, former chief executive of the defunct American Motors Corp. "Just look at the Aztek; it was hokey, nonsensical, ugly -- there are not enough adjectives to describe that vehicle. It . . . was indicative of the failed product development system that has been nurtured over there for so long."

 

'Like turning the Titanic'

GM executives, privately, are quick to concede the point. "The Aztek was a turning point because it did articulate everything that was wrong with the system," said one GM official, who spoke on condition of anonymity for fear of losing his job. "But it's been like turning the Titanic."

 

GM chairman and chief executive G. Richard Wagoner Jr. signaled earlier this week that the company's top management was coming to grips with the severity of GM's position. That will mean reducing production, focusing on profit and perhaps even coming to terms with the once unthinkable: Toyota Motor Corp., already the world's most profitable automaker, may soon overtake GM as its largest.

 

Many GM executives are loath to admit that out loud, but one executive pointed to the comments of Mark R. LaNeve, GM's sales and marketing vice president, in a Detroit News column last month: "The chapter is over," LaNeve told columnist Daniel Howes. "Japan Inc. passed us up. It's old news. Our mindset is -- we've got to fight back."

 

The stakes in that fight are high. The Fortune 500's third-largest corporation may be considerably smaller than its 1979 peak of 600,000 workers, but it is still home to 110,000 blue-collar laborers and 39,000 salaried staff members. Even after GM sheds 25,000 jobs by 2008, as Wagoner promised, the company will still be one of the largest employers in the United States.

 

Health care burden

In addition, it pays health insurance costs totaling about $5.6 billion for 1.1 million Americans, making it the nation's largest private health care provider. Of those beneficiaries, roughly 450,000 are retirees and their spouses.

 

And many of its problems -- in product design, health and pension expenses and in the "legacy" costs of retirees and former workers -- are bedeviling other major corporations, including rival Ford Motor Co. and the steel and airline industries. If corporate management succeeds in shifting pension and health care burdens onto the federal government, what's bad for GM may, in a very tangible sense, be bad for the nation.

 

The "rapidly rising health care burden is not, in fact, unique to GM," Wagoner warned shareholders Tuesday. "It is a critical national competitiveness issue for the United States, affecting our entire economy's long-tem strength. It's clear that the health care crisis could benefit from stronger leadership by governments at all levels."

 

In an interview, United Auto Workers President Ron Gettelfinger and Richard Shoemaker, the UAW vice president in charge of GM relations, said they are willing to work within the confines of the existing labor contract to bring down some health care costs. But both said GM's problems have much less to do with labor costs than what they see as Asian currency manipulation, unfair tax advantages for foreign competitors and health care inflation that is fundamentally the federal government's responsibility.

 

"Total labor costs [at GM] are 15 to 20 percent," Shoemaker said. "How can anyone believe that that small a piece of the overall costs can be their fundamental problem? There's no rationale to that."

 

The real fight will come when the UAW's next contract must be negotiated in 2007, and union leaders were not signaling a great willingness to compromise.

 

"There is obviously a reluctance on the part of members to make changes that will be a detriment to their well-being," Shoemaker said. "I don't think we'll have an overwhelming show of support for anything which will negatively impact our benefits, and I don't think anybody should expect that."

Cultural shift

In reality, GM will be able to only nibble at the margins of its labor cost issues, Meyers said. That means the company will have little choice but to retrench, accept that rival Toyota will soon overtake it as the world's No. 1, then get some products to sell, said Tom Libby, director of industry analysis at the Power Information Network, a J.D. Power and Associates affiliate.

 

All of those moves will take a major cultural shift within the company, said Peter Morici, an economist at the University of Maryland's Robert H. Smith School of Business. GM's design and production problems arise from a culture honed by decades of unrivaled dominance. Everything is done by committee, Morici said. No one is held responsible for failure, so no one has any authority.

 

"It's a culture of entitlement akin to the Postal Service," he said. "If the Postal Service made cars, it would be GM."

 

GM's executives are open about those shortcomings, especially about the offerings in the showrooms, which the anonymous GM official conceded were "at the low point of the product trough."

 

The Aztek represented all that is wrong with GM's design process, that official said. The concept car actually did something few GM designs do: arrive before a trend -- this time, the crossover SUV that combines the attributes of a truck and a passenger car. And GM had high hopes to sell 50,000 to 70,000 Azteks a year, establishing Pontiac on the cutting edge.

 

Then came production, the executive said. The penny-pinchers demanded that costs be kept low by putting the concept car on an existing minivan platform. That destroyed the original proportions and produced the vehicle's bizarre, pushed-up back end. But the designers kept telling themselves it was good enough.

 

"By the time it was done, it came out as this horrible, least-common-denominator vehicle where everyone said, 'How could you put that on the road?' " the official said.

 

Ugliest car of 2005

Sales never reached the 30,000 level needed to make money on the Aztek, so it abruptly went out of production last year. The tongue-in-cheek hosts of National Public Radio's "Car Talk" named it the ugliest car of 2005. "It looks the way Montezuma's revenge feels," one listener quipped.

 

Wagoner said on Tuesday that GM would "step on the accelerator" and start developing products in studios throughout the world, especially in Europe. He promised "crisper production execution, shorter life cycles, better quality, lower cost" and a nearly $1 billion increase in capital expenditures this year, mostly for product development.

 

"First and foremost, we need to continue to raise the bar in the execution of our new products," he said.

 

But analysts are skeptical. Wagoner pointed to three pending launches as proof that GM has found its way from the dark days of the Aztek: the Hummer H3, not quite as hulking at its predecessors and priced at a cheaper $29,500; the sleek, two-seat Pontiac Solstice roadster; and the Chevrolet HHR, a new crossover SUV, priced to move at just under $16,000.

 

But George E. Hoffer, an economist at Virginia Commonwealth University and a GM consultant, suggested the three offerings only point out how far the company has to go. Sleek as the Solstice is, Mazda Motor Corp.'s Miata proved in the 1990s that a roadster will never sell enough units to carry a company. The new Hummer may be cheaper, but it feels like a vehicle that is overpriced at $30,000, he said, not to mention the headwind it will face with gas prices well over $2. And the HHR is basically a restyled Chrysler PT Cruiser, released a half-decade after the original, when that model is already in decline.

 

Another trumpeted new model, the Chevrolet Colorado pickup, released in 2003 to replace the mainstay Chevy S-10, just ranked dead last among 12 compact pickups reviewed in the July Consumer Reports magazine.

 

"There's no convincing the pundits," the GM official shrugged. "Until the vehicles go out there and are accepted by the market, we're just going to have to bite our lip."

 

© 2005 The Washington Post Company