5 Items on GM’s Laundry List to Address in the Future
General Motors (NYSE:GM) has made its mark on the world as one of the largest auto manufacturers in existence, though the road to this point has been fraught with difficulties and setbacks, including a significant decline in U.S. market share over the last several decades. A paper published though the National Bureau of Economic Research by Susan Helper and Rebecca Henderson attempted to shine some light on what sparked that decline, and we have used it as a basis to identify five key factors that GM will need to work on moving forward.
Helper and Henderson — who hold the copyright for the work — explore why General Motors lost its edge and allowed the market to be left wide open to Asian manufacturers in the 1980s and ’90s. While their findings are not necessarily surprising, the report certainly identifies some valuable areas where GM still has room for progress.
Here are five notable things that General Motors can focus on this year and moving forward.
1. Continue to improve product quality
Product quality has been a thorn in the side of American manufacturers for some time. While quality has undoubtably improved dramatically over the years, the 1980s and even the 1990s proved to be a troublesome period for General Motors, and it was in that window that Japanese manufacturers — namely Toyota (NYSE:TM) — managed to gain a foothold in the American market.
Helper and Henderson assert that General Motors was “seemingly unable to adopt the managerial practices that enabled its Japanese competitors — particularly Toyota — to introduce cars of much higher quality and much better design at significantly lower cost, even though GM was, at least initially, much richer than its rivals.”
Today’s automotive market is a vastly different place than it was two or three decades ago, but it’s arguable that GM has shaken off its subpar quality reputation. Its cars and vehicles have improved greatly, though the company will have to continue to show that its products are on the same level as its competition.
2. Make progress regarding legacy costs and pensions
American manufacturers have long been dealing with a burden that not all companies share: legacy costs and pensions for its retired workers. These two massive expenses have weighed heavily on companies’ risk profiles as a danger to their bottom lines, and these burdens didn’t do the automakers any favors when the financial crisis hit.
“For example, the Associated Press (2007) reported that because of ‘legacy’ health care and pensions owed to retired workers, labor costs at General Motors were as high as $73/hour, while GM’s Japanese competitors’ costs were roughly $48/hour,” Helper and Henderson wrote in their paper. “Another calculation suggests that legacy costs at General Motors were about $1,600 per car in 2005.”
In a recent outlook report, GM reportedly indicated that in addition to returning cash to shareholders, it could make more headway in reducing its pension obligations, which have benefited from higher interest rates. As of October, General Motors owed about $71 billion to its pension fund.
“GM’s legacy costs were high largely because of GM’s declining market share” in the ’80s and ’90s, Helper and Henderson said. “If GM had maintained its 1980 U.S. market share until 2009, for example, its per-car labor costs would have fallen by one-third.“ GM’s market share in the 1980s was hovering around 45 percent; it’s below 20 percent today.
3. Win back pricing power
“Poor quality and poor design was at least as significant a problem as that of legacy costs,” Helper and Henderson assert. “Throughout the 1980s and 1990s consumers complained that American cars suffered from noise, vibration and harshness and from poor ride quality (Train and Winston 2007). When Toyota and General Motors were running a joint venture together in the late 1980s and early 1990s, those cars coming off the line with the Toyota name plate commanded a more than 20 percent premium in the marketplace over their nearly-identical GM brethren (Sullivan 1998).”
That trend wasn’t dispelled throughout the ’90s or early 2000s and was particularly noticeable with the Cadillac range, which often sold at steep discounts to the vehicles that they were supposedly competing against. Only now, with General Motors’ latest generation of Cadillacs, is the price on a more comparable basis to that of BMW or Mercedes.
“More generally, in 2000 all GM cars sold on average for $3000 less than Toyotas or Hondas of comparable size and equipment (Train and Winston 2007) implying that GM’s pricing disadvantage was greater than its legacy cost disadvantage,” the authors of the paper said.
Now that at least some Cadillacs are on their own platforms — the badge-engineering tactics of old made it difficult to command a premium price for a vehicle that consumers didn’t see as being worth the added cost — GM’s pricing power with its models should carry more weight, helped considerably by improved products across the board.
4. Continue to improve efficiency
General Motors is many things, but “efficient” hasn’t been one of them. In the ’60s, workers on the assembly line were given set tasks — Henderson and Helper point to screwing in bolts — and were “not expected or encouraged to do anything beyond this single task.” While this strategy set clear boundaries of responsibilities, it came at the detriment of corporate and production efficiency.
Efficiency is now a defining characteristic for large companies like GM, and it can make or break a company’s bottom line. Per Helper and Henderson, shutting down the production line of a popular model at General Motors for whatever reason can result in about $10,000 in lost profits every minute, therefore pushing the need for more efficient operations and contingency plans to keep the lines open as much as possible.
5. Keep cutting out the red tape
On the topic of increasing efficiency, a big hindrance to GM’s growth in the past has been the lack of fluidity of General Motors as an organization. Over time, as the company grew, it became more cumbersome and static, limiting its ability to quickly react to market demands, competition, and other forces of business nature. At GM, a large problem historically has been the concentration of power to a small group of people. By contrast, Toyota has encouraged all of its workers and employees to make suggestions to improve and enhance its operations from the ground up.
GM has been making slow progress toward cleaning out the cobwebs, and new CEO Mary Barra is hoping to bring the same broom that she used in supply chains and product development to sweep out the dust from the company as a whole.
“We very much wanted to drive a new culture and make sure that we’re really engaging people, empowering them, and getting rid of that bureaucracy that can kind of creep into a company that’s a hundred years old,” Barra said in October. As a human resources manager, she eliminated 80 percent or so of the existing policies, substantially slashing the number of HR reports that had to be filed. It’s that kind of approach to the company as a whole that will make GM into a more efficient and dynamic unit in all aspects of its business.