So, Toyota’s No. 1. What Now GM?

By Michelle Krebs April 25, 2007

We’re recovering from the shell shock of Toyota dropping Gm_logo_resized_180 the bomb that it had surpassed GM as No. 1 in global sales in the first quarter –- news the industry had expected. It was a matter of not if but when.

“This was not an unexpected turn of events,” said Edmunds.com Senior Analyst Jesse Toprak, “but it happened a bit earlier than forecasted.”

And, as I told NBC’s Detroit affiliate Tuesday, it’s also not the end of the world. While certainly not a positive trend -– no one likes being No. 2 when they’ve been No. 1 for more than seven decades -– GM’s dethroning could have a silver lining. The pressure is off to maintain the No. 1 sales spot, while allowing GM to focus on the more important race -– the one for profitability.

As a Detroit marketing professor told a local reporter: “[GM is] no longer the New York Yankees. They can be the pursuer rather than the pursued.”

At the same time, Toyota will don the bull’s eye of the press and public, while it struggles to ensure quality, control costs and maintain profit margins during its rapid growth.

But what now for General Motors?

Focus on Profits, Not Sales

As analysts from Edmunds.com’s Toprak to Maryann Keller talking on National Public Radio pointed out yesterday, the more important race is not the volume race. Anyone can win a sales race with enough money. But in the auto industry, that’s a race no one can win since Toyota has the fattest bank account.

Rather, the more important race is the one for profitability. Look at BMW and Honda. They aren’t focused on being No. 1 in global sales; they are focused on growth with profits, image and their brands.

That’s been GM’s mantra as well, of late.

The Detroit Free Press features an interesting graphic on page one of its business section. It shows GM and Toyota pretty close in a number of areas: number of employees -- Toyota 2.35 million; GM 2.26 million; 2006 vehicle sales -- Toyota 8.8 million, GM 9.1 million; 2006 production -- GM 9.2 million, Toyota 9.0 million.

But where the road diverges is in profitability. GM lost $2 billion in 2006; Toyota is expected to earn $13 billion. GM's market capitalization is $17.4 billion; Toyota's is a whopping $233.5 billion.

GM is on the right track in many areas. For starters, GM -- rightly -- slashed fleet sales, which left it open to Toyota taking over the No. 1 spot.

“GM wasn’t making much money on those cars anyway,” noted Edmunds.com’s Toprak. “All GM sacrificed in this decision was ego, since the executives knew Toyota would become No. 1 sooner when much of GM’s fleet sales were removed from the count.”

In addition, GM is focused on expanding in markets that are growing, ones in China and India. Face it; the mature markets of North America and Western Europe represent little future growth, but guarantee intense competition.

North America: GM’s Challenge

Still, North America is GM’s home base, and the carmaker has its work cut out for it here.

It’s still got too many employees -– both salaried and hourly –- in its ranks. Clearly, GM needs a favorable contract with the UAW this fall and could use some help on health care issues, as the entire country could.

But it’s also got bloated ranks of salaried employees, many of the complacent and adding no value; in fact, they may well be hindering value. Only yesterday, hours after the “Toyota surpasses GM” announcement, I sat at a high school sporting event with a GM employee. He was telling me about co-workers just putting in their time until they were offered a buyout or were due for retirement. One, that very afternoon, was seeking out a quiet spot for an afternoon siesta, he told me. GM, get rid of them!

GM also must continue to cut costs but not to the point that it hurts quality and misses promising opportunities.

On the revenue generation side of the equation, a part GM has often disregarded in past turnaround attempts, GM must get on the shopping lists of buyers and convince them of the value of its vehicles -– not only to purchase but to purchase with fewer incentives and less discounting.

As the following chart indicates, GM and Toyota in the U.S. tell the tale of two companies.

GM’s cost of incentives, days to turn vehicles from inventory to a sale and discounting from list price have cost GM dearly. That’s in complete contrast to Toyota. Yet, at the same time, GM’s market share has slid as Toyota’s has gained.

U.S. Market Share True Cost of Incentives Days To Turn Discount % From MSRP
Year GM Toyota GM Toyota GM Toyota GM Toyota
2002 28.6% 10.1% $2,723 $376 58 29 -17.5% -7.8%
2003 28.3% 11.1% $3,595 $722 74 39 -20.7% -9.6%
2004 27.5% 12.3% $3,872 $601 82 35 -20.8% -7.8%
2005 26.4% 13.4% $3,603 $973 75 31 -19.3% -8.2%
2006 24.6% 15.5% $2,987 $1,061 77 29 -14.8% -7.9%
2007 23.3% 15.7% $2,702 $999 83 35 -13.5% -6.9%

Source: Edmunds.com

Related Posts Plugin for WordPress, Blogger...

LEAVE A COMMENT

Click here to comment on this entry.
Michael Karesh says: 6:48 AM, 04.25.07

As I think I mentioned in a comment yesterday, I don't buy the whole "pressure's off" and "no more bulls-eye" rationalizations.

If anything, I wish GM had felt more pressure to maintain their lead. Instead, their attitude has been very defeatist. Lutz said a few years ago that he felt this change was inevitable.

The problem is not bloat. Employees become lazy because the organization gives them no way to apply themselves. Trying to get things done in these organizations is a recipe for frustration and burn-out.

My Ph.D. thesis, written based on fieldwork inside GM, was on this very topic. Exec summary of the report I gave them here:

http://www.truedelta.com/execsum.php

Again, it's all too easy for outsiders to blame middle managers and factory workers. The fact of the matter is that senior management created this situation. They get the middle managers and factory workers they deserve.

Chris says: 12:12 PM, 04.25.07

Michael, many of us tire of your posts all over the internet. They're on every automotive site, blog and forum. Your shameless website plugs are equally as tiring. You have your own blog, keep your comments there.

Alex Law says: 2:58 PM, 04.25.07

The really interesting part of Toyota's rise involves the sales hopes of the other Asian car companies it has crushed. Not one of them is going to get near the volume projections they were making a couple of years ago. They're the big losers, not GM, which is selling more vehicles in the growing markets (China, for example) than Toyota.

Paula says: 6:53 AM, 05.03.07

I hope I'm not intruding where I have no business, but we are currently living the GM philosophy(?)..... My husband is a graduate of the University of Michigan(not engineering) . He worked for a number of years in car dealerships. He learned a lot about how they work, how the business works, how parts work. Since car dealerships are fairly unpleasant places to work, he started to look beyond that - short stints with managing a paint contracting company and some technical writing - he has always been loyal to GM. Why? I can't honestly say, but he always buys GM cars and finally got a job at the tech center. What started out as exciting possibilities have now been pretty much dashed. Here's this guy with a degree from a respected university and automotive experience and genuine enthusiasm for the company and its products and he can not get hired direct. Within one year he has taken on more work than anyone else in the group he's in - he has tried and tried to get hired direct in another group, and been told being hired direct in his own group is absolutely out of the question. Yet, he is surrounded by co-workers making twice or three times his salary doing crossword puzzles, passing all their work over to someone else, calling meetings and leaving at three. Just recently his contract company got bought out by another contract company and we have lost all our benefits, The hiring manager for the new contract company says "what are you doing here, you look like management" yet, he just got word they are hiring a new person right out of school to do the same thing he does for more money and groom her for other positions. There's three other guys in the same position. Experienced, college educated contract employees, who all they want to do is work for GM and because they're contract they don't even get spoken to in the common hallways by the direct employees!!! I have encouraged them to just leave, GM has no respect for people. The one guy in interviewing for a job at Ford and my husband is talking to some people at VW... How does a company like GM think? They let good workers just go based on some caste system, the employ people with seven figure salaries who do absolutely nothing, they take all the interest and design out of the cars they produce, they wait for the government to tell them what to do about fuel standards and then they sit back and let Toyota, who at this point is a more "American made" car than GM (in terms of parts and asembly). Why is anyone even discussing that they aren't no 1 anymore. How are they still in business?

Scott says: 10:00 PM, 05.04.07

It's about time somebody else more deserving of the title won the race. GM hasn't been a leader at anything in my entire years of driving. Toyota has earned it, they have earned the respects of millions of people and now they shall enjoy the fruits of their labor. Don't get too complacant, arrogant or cocky and the future should look just as bright.

GM is just too big to be competitive. Too little effort strung out over many brands with too many vehicles and a continued dedication to full size trucks and SUV's. That's not including Hummer, the biggest waste of space on the roadways. Too bad 4 dollar gasoline is right round the corner.

A smaller, more focused GM would be a better GM.

Cut the fat.

ADD A COMMENT

No HTML or javascript allowed. URLs will not be hyperlinked.