GM's cost-cutting effort wins it market muscle to squeeze Big 3 rivals

By DAVE GUILFORD
Automotive News

DETROIT - General Motors is winning in the marketplace because it has relentlessly cut costs. The savings at one quiet corner of the company show how.

GM tested 338 prototype dies in 1996. It spent tens of millions of dollars to do so, with large prototypes costing $150,000 apiece.

Now GM tests dies, which are used to stamp metal, with computer simulations. That means no more prototypes.

As Mark Stevens, general director of engineering for the metal fabricating division, puts it, "All that cost went to zero."

Multiply that process many times over, and you have the cost-cutting marathon that began when GM's board installed Jack Smith as president in 1992. Now, according to a study by securities firm UBS Warburg LLC, GM is the lowest cost producer among domestic automakers.

The change is staggering. Just a year ago, GM was still fixed in the industry's mind as a bloated giant.

GM's sustained effort to squeeze cost out of its suppliers, dealers and its own operations gives it new marketplace muscle, which it has used to hammer Ford Motor Co. and the Chrysler group.

But analysts caution that GM's advantage over domestic competitors won't last forever - and that it must further improve to compete with the import brands that keep grabbing U.S. market share.

The downsized GM now:

Can set pricing among the Big 3, playing aggressively with incentives.

Appears positioned to take market share from Ford and the Chrysler group.

Has cut its North American breakeven point by about 10 percent, to 4.9 million unit sales, since 1994.

Has narrowed the cost gap with Japanese and European competition, although GM trails its major import rivals.

GM has exploited its advantage since last fall, offering heavy incentives and leading the market in pricing. Ford and the Chrysler group have had to play catch-up, losing money while doing so.

GM also has won some respite from import brands' relentless market-share gains. GM's current advantage allows it to ensure that imports' market share gains come at the expense of Ford and Chrysler, rather than itself, in the view of analysts.

But analysts say GM must build on its current domestic advantage to compete effectively with Asian and European brands. Otherwise, it will still suffer long-term share losses.

"Sooner or later, GM will have to find a way to defend its share against the Japanese," says analyst John Casesa of Merrill Lynch. "But I think right now, GM is being appropriately opportunistic."

The UBS Warburg study focused on GM's advantage in variable costs - those that change with production levels, such as salaries and materials used directly in building vehicles. (See box to the right.)

GM has been able to tighten these costs to the point that it has an overall cost advantage, says Saul Rubin, co-author of UBS Warburg's study. That's true despite GM's continuing disadvantage in fixed costs - items such as pension liabilities and rent, which are not tied to production level.

In 2001, fixed costs were 37.3 percent of GM's revenues and 35.2 percent of Ford's revenues. Comparable numbers for the Chrysler group were not available.

The net effect is to lower GM's breakeven sales volume. CEO Rick Wagoner recently said that GM's North American breakeven point is about 4.9 million units, compared with 5.4 million on 1994. At the same time, GM has more leeway in driving down prices to gain volume.

GM has done a better job than Ford in controlling variable costs, according to the UBS study. GM's variable costs in 2001 were 60.8 percent of its revenues. Ford's were 65.1 percent, according to the study.

Rubin says he has begun studying the Chrysler group's variable costs, and his preliminary research supports the idea that GM is ahead of Chrysler.

"I'm pretty damn sure that Chrysler is in exactly the same situation that Ford is," Rubin says. "In fact, they may be slightly worse than Ford."

Study of Asian and European automakers' costs likely will show that GM is approaching world-class cost levels.

"My gut feeling is that what we'll find is that the gap between GM and Ford is bigger than the gap between GM and Honda," he says. "I've come to the feeling that GM has left the (domestic) competition behind and that they have to go after the real competition."

The cost difference translates into a significant advantage in the marketplace, industry consultant Maryann Keller says.

"It's actually a very interesting position that GM is in," she says. "The low-cost guy always gets the chance to dictate price."

GM began doing so with the 0 percent financing offered after Sept. 11. Ford and Chrysler criticized the move, and DaimlerChrysler CEO Juergen Schrempp called the incentives crazy. But both companies were forced to match the offer.

That pattern has held in subsequent rounds of incentives, and GM executives leave little doubt that they will continue to press their advantage.

GM leaders say the company's incentive strategy has boosted GM's overall market share last year, as well as its retail share and its percentage of college-educated buyers.

For example, GM says its share of U.S. retail sales rose 0.3 percentage points in 2001.

"The message here is that North America will continue with aggressive campaigns to protect and grow our share," says Gary Cowger, president of GM North America.

Rubin says GM is positioned to win the share from its domestic competitors. GM can keep up the pressure until Ford and Chrysler find it too painful to keep matching incentives and accept share losses, he says.

"There's a sort of war of attrition going on at present," Rubin says. "It's all up to Ford as to how it responds."

GM appears to be aiming for a domestic share of 29 percent to 30 percent this year, Rubin says, and will "basically price at whatever it takes to make that market share."

GM's cost cutting helps it in other ways, too. It allows GM to fund more vehicle launches. (See story, Page 30.) And, Keller notes, GM's aggressive marketing plays well among dealers.

"Today there is a sense among auto dealers that GM brands are probably brands that you want to own over the longer term," Keller says. "That is a subtle but very meaningful shift."

Still, Keller says, what GM really has is "a wonderful two-year opportunity."

"I congratulate them. I think they're doing exactly the right thing," she says. "But if they think that formula is going to work forever, they're sadly mistaken."

GM executives say they will continue pushing cost reduction. David Cole, director of the Center for Automotive Research in Ann Arbor, Mich., says GM's strongest gains have been in core operations.

"It's not glamour stuff," Cole says. "It's really at the fundamentals. That's where the big money is spent."

Some industry executives are skeptical that GM can continue to wring cost out of the system. "Now we're at a point where the fat has been cut out, and we're really butting heads seriously," says one supplier executive.

And last year's Harbour Report argued that many of the automakers' easiest cuts in manufacturing have been made: "The real test is going to come over the next 10 years, when automakers have to work harder to improve their production systems."

Cowger scoffed at the notion that few savings are left in manufacturing. As an example, he says that GM saved $250 million last year by reducing unscheduled overtime in plants and will save more this year. GM officials cited several other cost cuts for 2002:

A projected 10 percent of GM's 58,000 white-collar employees will accept early retirement.

GM will lop $1 billion off its capital spending, for a global total of $7.1 billion. With its tighter cost structure, GM can still carry out an ambitious product introduction schedule.

Factory productivity will continue to rise, building on past improvements. In the Harbour Report productivity study, scheduled to be released in late spring, GM anticipates a 4 percent to 5 percent reduction for 2001 in the hours of labor needed to assemble each vehicle. Harbour, in Troy, Mich., compares automakers' manufacturing costs.

GM has given suppliers targets for cost reductions this year. The targets vary from company to company.

Vice Chairman Robert Lutz is leading a crusade to remove standard equipment that many buyers view as marginal.

GM leaders are less forthcoming when asked how they will compete with European and Asian makers. In a recent research report, Rubin says import brands have taken 10 market share points from U.S. makers in the past five years. In March, the Big 3 lost 3.2 points of share compared to March 2001, falling to a combined 61.7 percent.

Because most major Asian and European automakers have a cost advantage against the Big 3, Rubin wrote, "In the next five years, it is quite possible they will take another 10 percentage points."

Also, leading import makers are gaining financial strength because they outdo GM in profits per vehicle. According to last year's Harbour Report, Toyota averaged $1,464 in worldwide pretax profit per vehicle in 2000. GM averaged $388.

CEO Rick Wagoner says GM has gained its current momentum through trucks but is re-emphasizing cars. Its improving productivity, quality and variable costs will enhance its competitiveness, he says.

GM has an advantage over imports in some of its classic nameplates, Wagoner says: "In some of the product areas, we have a tradition that we can leverage."

That strategy can be seen in plans to revive the hallowed Pontiac GTO with the Holden Monaro from Australia.

But Wagoner acknowledged that fixed costs still hamper GM. The weak yen also gives Japanese companies a cost advantage, he says. Still, Wagoner says, GM's goal is to "compete with every manufacturer and grow our share."

That points to the challenge facing GM. Despite the strides it has made in the past decade, GM needs still more product improvement and cost cutting to move the next level - beating the toughest import competitors.

That's all fine, well and good....but when are they going to make something that people want to buy and not just run of the mill sedans and front drivers? I want to see actions, not words.