Is there more to General Motors' 2.9% car loans than a simple, drastic clearance sale of the million-plus cars backed up on its dealers' lots?
There sure is. The auto giant's Big Discount of 1986--announced almost two weeks ago--is the latest evidence of a crisis in the long-term vision of GM Chairman Roger B. Smith. That vision was born in 1980 when Smith, an MBA who came up through finance, got the top job and discovered that the largest auto maker in the United States spent $2,500 more to build each car than its Japanese competitors.
Even allowing that the yen-dollar relationship accounted for a third of that disparity, Smith recognized that GM faced a serious problem of costs. So he set out to solve it by improving GM's manufacturing through massive installations of the latest in computer-aided manufacturing and engineering processes. Smith has spent more than $50 billion on plant and machinery and acquired two high-technology companies in the effort.
The way the plan was supposed to work, the new manufacturing systems would not only make GM the world's lowest-cost car producer but also would give it the flexibility to respond to shifting markets with new and snappy automobiles.
Trouble With Schedules
But the results so far are disappointing. Delays and glitches--some inevitable, some not--in getting the automated wonder-plants to work have left GM as the highest-cost producer, instead of the lowest, among the American Big Three auto companies, to say nothing of foreign competitors. GM has had trouble producing new models on schedule. And when it does, the customers have shown that they don't want them except at steep discounts or concessionary loan rates.
OK, most things take a little longer. Nobody doubts Smith's long-term vision. "Roger had the right objective of improving productivity," said analyst Maryann Keller of the investment firm of Furman Selz Mager Dietz & Birney.
But there also seems to be impatience and change at GM today. Some of Smith's most ambitious and futuristic plans have been trimmed this year. The all-plastic Chevrolet Camaro has been scrubbed, as has a plan to produce an all-new intermediate-size car. A major tooling program has been reduced and the Saturn project, which was intended to produce not only a new small car but new ways to produce all cars, has been throttled back a bit.
Smith himself has been testy, telling a Fortune magazine interviewer that "one of the big problems is our frozen middle management," and promising a 25% reduction in GM's white-collar staff.
Most tellingly, visitors to GM's imposing headquarters on West Grand Boulevard in Detroit hear mutterings in the corridors that patronize Smith. "Roger did important things," say the purveyors of a new party line within GM's bureaucracy, "but he had two weaknesses: He knows nothing about cars, and he has mistaken the process for the product."
Translation: Talk of high technology and productivity is fine, but what GM needs are a couple of snappy, hot-selling automobiles. Smith, now 61, will be chairman until 1990, but the bureaucracy's new hero appears to be Lloyd Reuss, a 50-year-old engineer who was made head of the North American car group and a GM director last February. Reuss talks of GM once again producing automobiles of distinction but most emphatically of not surrendering any more market share until it does produce such cars.
General Motors currently holds 42% to 43% of the U.S. car market, imports included, according to analyst Michael Luckey of Shearson Lehman Bros. It wants to get back to 45% to 46% and is willing to spend--as it is doing in subsidizing 2.9% auto loans--to get there.
The expenditure is understandable, given the fact that each market-share point is worth $1.25 billion in car sales. Besides, having put $50 billion into a bid to regain world leadership in automobiles, GM has no desire to move now to a lower level of operations. With its enormous financial strength--only $2.5 billion in long-term debt against $29.5 billion in shareholders' equity and $5 billion in ready cash--it can afford to buy a share of the market, for a while.
Ultimately, of course, it will have to earn it by getting both the cost reductions promised by Smith and the snappy cars promised by Reuss. And more than GM customers and shareholders have a stake in whether it succeeds.
For GM in this decade has given a pretty good example of a company making long-term investments at the expense of short-term profits--the very opposite of the myopia that U.S. business is usually criticized for. But with its success still in doubt, the issue for even disinterested observers of U.S. industry is whether one of our leading companies can make a go of automated manufacturing, as Japanese companies seem able to do. If GM can't do it, maybe we have more than snappy cars to worry about.