Financial Crisis of General Motors - Case Study Example

Introduction General Motors, a company passionate about designing, building and selling the world’s best vehicles, has been in operation for over 100 years. The company has employee strength of 212,000 employees working at 396 facilities across six continents, speaking 50 different languages and operating in 23 times zones. The company has 21,000 dealers working across the world and manufactures and sells cars of different models such as electric and min-cars, heavy-duty trucks, and monocabs and convertibles. General Motors is recognized for innovation and creativity, and has introduced cars with innovative features. At one point, GM was the largest corporation in the United States. It was also the single largest employer in the world but despite being industry leaders for several years, GM could not sustain competition from European and Japanese car makers. The company was beset with financial woes and in November 2005, GM had to lay off 30,000 employees and several plants had to be shut down. This is when its decline started which led to a complete restructuring of the company following the financial crisis in 2008. In this paper, after a brief history of the company, the financial crisis that the company faced and how it handled the situation would be evaluated. History of General Motors (GM) General Motors was incorporated on September 16, 1908 in New Jersey by William Capro Durant, a school drop-out. However during this period the auto industry in the US was in a mess with 45 different car companies already existing in the United States. By 1920s the demand for cars was high and GM brought in innovation in design and marketing. They introduced ‘a car for every purse and purpose’ and thus had Chevrolet, Vauxhall and Opel under its banner. The introduction of the Cadillac in 1927 made people see cars as more than a mode of transport. GM’s commitment to innovation continued even during the difficult times. Challenges gave way to changes during the 1960s and 70s as environmental concerns and competition from foreign car makers forced GM to reengineer its cars. This led to much lighter, aerodynamic and more fuel-efficient vehicles. Several innovative concepts were introduced by GM such as air bags, the use of unleaded gasoline while its contribution in reducing emissions is also recognized. In 1990, GM also introduced electric cars. However, as GM recognized the challenges in the US market, it started international expansion by opening its first production unit in Spain in 1982. This was the era of globalization when GM also formed joint ventures in India and China. In 1995, GM’s sales outside North America exceeded three million units for the first time. Subsequently, GM also entered into joint venture with Toyota which taught GM a new way of doing business. By 2000, GM had completed transformation as a single global company. However, even though it improved upon its design and quality, GM could not regain the lost market share to offshore competitors in the United States. GM continued to shake the industry as it introduced battery-operated cars in 2010 and was also the industry leader in flex-fuel vehicles. GM also has significant equity stakes in major joint ventures in China and Korea. Financial Crisis In 2008 all the automakers in the US experienced phenomenal drop in sales to the extent that they needed emergency cash. Even purchase of raw materials became difficult. GM too needed to be bailed out of the situation to save it from bankruptcy and liquidation. This was not the outcome of the global economic downturn but years of decline had finally surfaced in the form of crisis. While all the Big Three (Ford, Chrysler and GM) of the auto industry in the US had demonstrated decline, Ford managed to jump back to a workable situation through renegotiations and by shedding unprofitable subsidiaries. GM and Chrysler were on the verge of collapse, burdened with labor contracts and benefits for the former employees. GM had lost $40 billion in 2007 and its sales declined by 45% in 2008 alone. Just at this time, the credit crunch and the financial downturn of 2008 added to the company’s woes, leading it to on the verge of filing for bankruptcy. Even though GM knew there was no way out, it refused to file for bankruptcy in the hope that the federal government would not allow the company to suffer as other poorly managed companies in America had been subject to. Hence, instead of bankruptcy filing, GM pleaded for federal bailout stating that if Washington refused to bailout the company, the company would have to go into liquidation which in turn would have far-reaching consequences. They pointed out that this would eliminate thousands of jobs not only at the company but at the dealers and suppliers’ end as well, in addition to denying the retired employees of health and pension benefits. Under pressure, the federal government granted $17.4 billion jointly to GM and Chrysler from the TARP (Troubled Assets Relief Program) on the premise that within three months they would restructure and prove that they were viable companies. GM received another round of government loans in 2009 but seeing no recovery signs, GM was forced to file for Chapter 11 bankruptcy in June 2009. Description and Analysis of the Situation However, this appears to be a part of the story but the financial crisis of GM can be traced back to its history. The economic downturn added to the pressures GM was already facing. This crisis led many of its production units to be shutdown and also reduce the workforce at the plants. The financial crisis that General Motors suffered from was not a part of global financial downturn of 2008. However, even in 2003 auto sales had weakened globally following a substantial rise in the price of fuel. Because of this energy crisis purchase of SUVs (sport utility vehicles) and pickup trucks was adversely affected. The bigger vehicles allowed for higher profit margins which had prompted GM to focus on these vehicles. However, since the larger vehicles were not fuel-efficient, as the price of fuel soared, sales of these vehicles declined. Consumer sought smaller, cheaper and fuel-efficient vehicles which GM could not supply. Prior to the economic downturn, GM had also faced union strike at its production units following which agreements were signed with worker unions, providing them with employment guarantees. Strikes by unions also leave the company under financial pressures because GM had to agree to pension and healthcare benefits to former employees. Added to the situation was GM’s lack of innovation in its cars. While its competitors – Toyota and Honda – focused on compact and fuel-efficient cars, GM continued to focus on larger vehicles. GM tried the strategy of changing the names of its newer vehicles without making any design and efficiency changes. Since the company had already lost reputation and brand image, such tricks did not help reverse the situation. GM introduced the first hybrid cars in 2004 but sales did not pick up. In fact, during the economic crisis in 2008 GM sold only 843 hybrid cars in the first quarter against its competitors Ford and Toyota which sold 5225 and 430,000 hybrid cars respectively during the same period. GM did not keep pace with changes in technology as did the Japanese automakers. The Japanese car makers offered creative and comfortable features at affordable pricing and GM was clearly unable to sustain competition. GM was just a company but a legend in itself. It was one of the most well managed companies incorporating the latest technology, with an immaculate supply chain and concern for employees. The global economic downturn cannot impact such a well managed company to the extent of bankruptcy unless there were strategic drawbacks for years before the crisis actually surfaced. For instance, in 1990, GM introduced electric cars with zero emissions and named it EV. This product had to be scrapped as it did not achieve the intended sales. This suggests that market research had not been conducted before production planning and nor was the need for such cars ascertained. The failure of EVs can be attributed to the low oil prices due to which consumers were not keen for electric cars. GM financial crisis can be attributed to a wrong strategy, wrong market perception and instead of paying emphasis on the consumer wants and needs, they focused on what they perceived to be consumer need. GM also demonstrates lack of perseverance capacity as it started a new venture and just scrapped it without evaluating the causes or attempting to remedy the situation. This is evident from its ventures EV and the hybrid cars both of which failed but GM took no initiatives to rectify its mistakes. It did not learn from its mistakes, is what can be surmised. GM received challenges from German and Japanese automakers as they started exporting cars to the US after the World War II. These cars were fuel-efficient compact cars and GM too tried to develop small vehicles. However, the company was too large and too successful for too long with too many production units spread all across the country, which made it difficult to change its course of direction suddenly. Possibly it was overconfidence on the part of the company that their reputation would be enough to fetch sales. This also shows that the company during that period was ill-equipped to respond to sudden changes or adapt to the changed business environment. How Managers handled the situation Filing for bankruptcy occurs when a company is financial distressed or economically failed. GM was financially distressed and it succumbed under major financial liabilities. For instance, poor management was responsible for expensive labor contracts which resulted in massive pensions and healthcare benefits for the old and retired employees. This implies that union labor contracts were negotiated on short-term measures without keeping in mind its impact in the long run. This resulted in heavy financial burden on the already cash-strapped company. The company also had an overgrown distribution system of dealerships that were not streamlined. Since it has manufacturing units across different continents, it also had dealers in every region. The distribution system clearly did not match sales and production. The business environment had changed but the management at GM was not prepared to accept the change. They felt they had been market leaders for years and they could continue to thrive on the past reputation. They were unable to keep pace with the pace of change. This is because they were not attuned or trained to recognize such upheaval in established beliefs. Since the basics had changed so dramatically, they were unable to cope with the situation. It is common belief that when change negatively affects performance the management immediately starts reengineering, reorganizing and restructuring. The prime focus is on cutting cost which GM engaged in without considering the impact of cutting costs. The company laid off employees, shut down units all of which were aimed at cutting costs. However, product innovation was ignored. Globalization and international competition enabled new entrants in the market to introduce innovative products. Simultaneously these companies also introduced newer business models which should have made the management at GM recognize the changes. In fact GM and Ford had seen the fate of Chrysler in the 1980s as it could not keep up with the pace of change in the industry. GM did not learn any lessons from the downfall of Chrysler and hence did not attempt to bring any changes in its structure and operations. The only efficiency that the managers at GM showed was in not filing under Chapter 11 for bankruptcy. They instead sought bailout from the federal government thereby employment both directly and indirectly. Critical personal evaluation of Managers’ Handling An evaluation of the situation and the unfolding of the financial crisis at GM points to the inefficient management at General Motors. The management was not willing to respond to the changes environment and take suitable measures. The company wanted to thrive on its past success and hence adopted a complacent approach to problems. General Motors was one of the largest corporations in the US and also the single largest employer. Factors such as these made them believe that a company as large as GM would not be severely affected by any change. They acted and took decisions as if GM’s success in business was inevitable and that they were entitled to continued success. The situation analysis also suggests that GM took its customers for granted; they hence did not feel the need to be in constant touch with their customers. Customer relationship management at GM appears to have not been implemented. Auto makers try to understand customer needs and comfort and fulfill these needs but GM did not take these into account. This is the reason that the quality of product suffered and no new innovation was infused into the product. It also appears that managers did not evaluate the external business environment when taking product decisions. For instance, when fuel price was low consumers would not be willing to spend on electric cars and hence their timing for electric cars was wrong, which resulted in massive losses. The managers at GM were ill-prepared for change. Technology had changed, competition had set it, customer needs and wants had changed but GM did not give any of these any importance. They demonstrate a laid back attitude and hence could not sense or respond to the changes in the external business environment. GM was unable to ascertain user expectations, needs, evaluate the external business environment which includes competition. Overall they lacked vision and their sense of timing in undertaking new launches also appears to be wrong. Conclusion The case of General Motors suggests that a company may become the largest corporation but no organization can thrive on its reputation and past success. Sense and respond – these should be the philosophy of any large or small organization if the organization intends to sustain competition. Unless a company upgrades to change, failure is inevitable. The top management needs to be visionary in steering the organization at the time of crisis. Crisis was imminent but the clues were not taken from its situation as well as from the failure of Chrysler. Thus, several lessons surface from the failure of General Motors in managing change. Clearly defined vision, sense of timing, technology and product innovation, evaluating competitors, evaluation of the external business environment, understanding customers are all important and critical factors that contribute to success. The company may have been the industry leaders and passionate about designing, manufacturing and selling the best of cars at one point in time, but this is not enough to guarantee success. Crisis management at General Motors also appears to be lacking. Staff training becomes essential in recognizing change and managing change. They pursued a wrong strategy and carried a wrong conception of what the market wants. Flexibility and adaptability are some of the important qualities that managers must possess. The financial crisis could have been avoided or at least minimized had the company been pro-active in managing change. Read More