General Motors A journey from Prosperity to Bankruptcy - Case Study Example

General Motors A study of how and why it is in a position it finds itself now A detailed study of the reasons that have pushed an automotive giant asGeneral Motors to the brink of bankruptcy A brief review of how things were General Motors has been in business for one hundred and one years and has been an undisputed giant in international automobile industry with its products setting new benchmarks in fashions and trends in automobile industry. Once upon a time (and that was not too long ago) US auto industry offered one job in every six jobs that were on offer in entire economy of US and General Motors employed more than 3,25,000 people and carried on its operations in thirty three countries. (Adams and Brock) Shifting demographic and socio-cultural trends Till 2004, the US market demanded Sports Utility Vehicles (epitomized by Hummers) as they conveyed a macho image and customers were completely engrossed in discussing the intricacies of air bags and anti-lock braking system. Key less entry and remote trunk releases were considered to be the talking points of desirability of a vehicle. Gasoline prices rarely, if ever, cropped up during these animated discussions. Industry analysts without an exception harp on the sharp rise of gasoline prices and its impact on changing the demand profile of US automobile industry. But an equally fundamental change was sweeping through the US society during this time. Smaller households and nuclear families were gradually becoming the norm and with divorces on the rise single parents also became an accepted feature of society. The teenagers and all those that formed the Generation X started showing unprecedented streaks of independence as they started living on their own away from their parents. All these silent changes in the demographic landscape ushered in a marked shift in consumer demand away from massive thirsty sports utility vehicles to thrifty smaller compact cars that did not carry a hefty price tag and gave higher mileage. The other issue that possibly escaped the notice of top management of General Motors is that unlike US where people use their cars even to pick up groceries from the shop at the corner, in Europe people use public transportation for commuting to and from work and use their personal vehicles only on special occasions. Thus, Europeans generally bought cars that stayed with them for not less than a decade and the American habit of changing cars almost as frequently as soft furnishing in the house has not quite been picked up by them. The beginning of the end Those days of glory and pomp have, one would say, dramatically disappeared within a period of a few years and now the automobile is on the verge of bankruptcy. The downslide began in 2004 when gasoline prices started soaring and consumers suddenly found muscular SUVs and trucks that generated maximum revenues for the company (with their very high profit per unit sold) not so attractive anymore. The need to make a fashion statement suddenly lost its sheen in the face of rising fuel bills and prospective consumers started drifting towards automobiles manufactured by Toyota and other Asian auto manufacturers that were markedly more fuel efficient. General Motors has never been a leader in this category and its profit per unit sold of these products will never be enough for the company to survive. (Rafferty and Stoll) The other problem with General Motors is the strong workers’ union that had been negotiating higher wages, better medical benefits and greater pensions for retired employees over the years. A time has now come when GM is finding itself unable to put up a fight with competitors that worked out of non-unionized factories and are not burdened with these additional costs. A new agreement with United Auto Workers inked in 2007 will start to show effect only in the first quarter of 2010, and, the reality is that the automobile major is finding it very difficult to remain afloat till that magic year. GM’s response to changed market scenario GM hopes to make a marked shift from heavy vehicles to smaller passenger cars by 2010 with the Chevrolet Cruze 1.4L turbo, touted as a replacement for the Cobalt, coming in that year. GM Chairman and CEO Rick Wagoner even claimed that Hummer in a reconfigured format might also make an entry in the market. GM is also going for a technological change and is planning to replace displacement with turbo charging and gasoline direct-injection. Chevy Equinox and Terrain – a product of GMC – and also Saturn Vue will be equipped with a new 2.3L gas direct-injection turbo four, assumed to be a fitting rebuttal to Ford’s latest EcoBoost line of products. GM also has in place a plan to cut down production of trucks and effect substantial savings in component, stamping, and powertrain capacity costs. Thus Trailblazer, Envoy, Saab 9-7 will be made obsolete by 2010, much sooner than one expected. (Lassa) General Motors also went for a substantial reduction of head count in 2008 through normal attrition, early retirements and “mutual separation programs" and also negotiated with retired GM employees for a reduced healthcare liability in lieu of an increased pension as the management felt that rise in healthcare costs would surely be far more than the extra liability due to increase in pensions. To add to all these cost reduction efforts, there were no increments or bonuses for all levels employees in the company during 2008. In spite of such austerity, the company could somehow arrest (it declined by only 8% as against 24% feared by analysts) its June’08 sales by offering interest free financing for 72 months and the moot question still remains whether General Motors would be able to avert bankruptcy till that time. (Moore) Porter’s Five-point Analysis of GM The competitive structure of an industry plays a significant role in determining the sustainability and profitability of a firm operating in that industry and the best tool to assess the extent of such competitiveness is Michael Porters five-force analysis. (Porter) Internal Rivalry Foreign competitors, especially those from Japan and Korea have made strong inroads in US automobile market by aggressively marketing their fuel efficient and cheap cars. Firms compete with each other on both price and non-price fronts and while price competition lowers profits by reducing surplus per unit sold, non-price competition (as interest free loans, new product features at same price) drives up both fixed and marginal cost. (Besanko, Dranove and Shanley) GM has been forced to adopt a defensive posture in such a fierce battle mainly because of the cutbacks and government loans it has accepted of late. This has made it that much easier for its competitors. Entry The basic rules of market economics stipulate that if there are new entrants the market supply increases leading to a lowering of equilibrium prices. But automobile industry requires substantial capital investment to take advantage of economies of scale and as such it is not quite possible for any and every company to enter into automobile industry easily. Thus pressure from new competitors is not that big a threat in this industry. However, General Motors is in such an unstable condition at present that low cost cars from India, Korea or even Italy can have a considerable impact. Substitutes and Complements Though five-force analysis directly does not deal with demand, it gauges its effect by examining the impact of substitutes and complements in great detail. New cars generally exhibit moderate to less elasticity of demand implying absence of genuine substitutes (rapid transit public transport cannot really substitute a car, can it?) but demand for a particular model is highly price sensitive as there are quite a few substitutes readily available. Further, a change in the price of complementary goods (gasoline, tyres and batteries) has a huge impact on demand for an automobile. Recent rise in gasoline prices is bound to adversely affect the big three of US automobile industry in a big manner as their product portfolio is littered with energy efficient huge trucks and SUVs. People might use public transport or even bicycle if they find travelling in private vehicle too expensive and it is not some figment of imagination of some high strung economist or trade analyst. People have not scaled down their movements but there has been an overall slackening of demand in automobile sector. Thus, thus threat is genuine and has to be tackled especially by GM before it is too late. Bargaining Power of Buyers Though customers are now much well informed (thanks to internet) and also have the ability to switch dealers, individual customers represent a very minute portion of total sales and thus have little or no influence over car manufacturers. They might, at the most have limited influence over local dealers who may be offering discounts to attract customers in these difficult times, but that would have no impact at all in the macro environment. Bargaining Power of Suppliers Previously auto manufacturers had large supplier network for components and an individual supplier had but little control over the entire process. But component suppliers generally supply to several manufacturers, thus their bargaining power that might at a cursory glance might seem to be low is in reality not that. There was a 90 day strike in February 2008 in American Axle and Manufacturing Company that forced General Motors to scale down its operation and even totally suspend operations in some of its production centers. This incident, one guesses would sufficiently prove how much dependent auto manufacturers are on suppliers of components. The situation however drastically changes when we talk about UAW – the monopoly supplier of labor. Historically this labor union has exerted tremendous pressure on the big three of US automobile industry and only very recently have they realized the extreme danger that is staring in the face of the entire industry. It has been reported that UAW have relented a great deal in their latest round of negotiations with GM management. (CarFreaks.info) Clock ticking for GM? After providing a temporary lifeline of $15.4 billion Obama administration has given an ultimatum to General Motors to restructure within June 1 of this year failing which they have no other option but to apply for bankruptcy. GM management has almost managed to win blanket concessions from UAW and have finalized plans for jettisoning nearly 1600 dealers and is prepared to offer 50% stake to US government. They are trying pretty hard to maneuver with a heavily debt-laden balance sheet but are willing to offer only 10% equity stake in the restructured entity to holders of bonds worth $27 billion. This, quite predictably, have the entire army of bond holders up in arms against such an arrangement. The UAW healthcare trust would hold the remaining 40% of the company by allowing the company to pay half of its legal obligation (it works out to $10 billion) in stocks instead of cash. It would be an extremely delicate balancing act to manage all the stakeholders (especially the bond holders) in an out of court settlement and quite rightly many analysts are skeptical of an amicable solution to this entire episode. The situation has been compounded by the fact GM does not have a third party suitor as there was Fiat that waited for Chrysler with open arms as it went through the pangs of bankruptcy. (Reuters) Reference Adams, Walter and James Brock. The Structure of American Industry. Pearson Prentice Hall , 2005. Besanko, D, et al. Economics of Strategy. John Wiley & Sons, 2007. CarFreaks.info. "Porters Five Forces Analysis - GM." 16 March 2009. CarFreaks.info. 28 May 2009 . Lassa, Todd. "Motor Trend Blog." 15 July 2008. 2010 or Bust: GMs latest plan includes $15 billion to satisfy Wall Street. 28 May 2009 . Moore, Heidi N. "General Motors: Which Brands Should It Sell?" 7 July 2008. Deal Journal. 28 May 2009 . Porter, Michael E. Competitve Advantage: Creating and Sustaining Superior Performance. New York: Free Press, 1985. Rafferty, Bree and John Stoll. "For GM, Curves Lie Ahead." Wall Street Journal 3 July 2007. Reuters. "General Motors may go bankrupt in 60 days." 19 May 2009. Financial Express. 28 May 2009 . Read More