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The tragedy that is General Motors

By Peter Morici
web posted July 17, 2006

The General Motors board of directors should listen to its managers and nix the alliance with Renault and Nissan proposed by mega-shareholder Kirk Kerkorian.

The alliance promises to cut costs by pooling parts procurement and elements of vehicle design. But these benefits are fantasy -- a thinly veiled attempt by Kerkorian to shake up GM's inept management and board.

GM has two essential problems. First, it pays about $40 an hour more per person for labor than do the North American arms of Toyota and Honda, and that margin well exceeds GM's unfunded obligations to retired workers. Second, GM has a legendarily heavy bureaucracy, which drives up product design, marketing, and administrative costs.

To compensate, GM uses cheaper materials and specs down components. Consequently, GM vehicles are less attractive, and their five-year reliability records lag behind vehicles sold by Toyota and Honda. Check out the cheesy interiors of recent Chevy offerings, and the reliability data published in Consumer Reports. Only a fool would pay as much for a GM product as for a product from Toyota or Honda.

Also to compensate for high costs and management missteps, GM leaves vehicles on the shelf longer than do its Japanese rivals, and often equips vehicles with older, less attractive technology. To further save cash, GM rebadges vehicles to sell under more than one nameplate. For example, offering Chevys and Subarus as Saabs has debased that once strong brand.

Pooling parts purchases with Nissan and Renault won't get GM lower prices. Already GM, the biggest automaker on the planet, has hammered many of its suppliers into bankruptcy. GM doesn't need more leverage to buy shoddy water pumps; it needs to pay less for labor, so that it can afford to buy decent parts.

Honda, much smaller than GM or Toyota, has no problem buying high-quality parts at good prices. If GM Chief Executive Rick Wagoner or mega-investor Kirk Kerkorian don't believe that, they should go down to CarMax and drive a 2001 Honda Accord.

Pooling design efforts with Renault and Nissan won't help. Both companies face problems similar to GM's. Renault has failed to sell cars in North America because it could not put attractive, durable products in the showroom. High labor costs are compelling the company to sell fewer cars in Europe, as Japanese nameplates take away customers.

Lacking fresh offerings, Nissan's North American sales are off 5.7 percent for the first half of this year. Meanwhile, Toyota and Honda sales are soaring.

Pooling design efforts with Renault and Nissan will only add to GM's costly bureaucracy and result in more futile rebadging. If Nissan can't sell as many Altimas as Toyota sells Camrys, because the Altima does not perform as well, marketing the Altima under the Chevy and Pontiac nameplates won't accomplish much, either.

If size would solve the "GM-makes-dull-cars problem," Mr. Kerkorian has an obligation to explain to shareholders why GM can't make cars as reliable and attractive as little Honda.

The real problem at GM is that CEO Rick Wagoner lacks the stomach to negotiate a realistic contract with the United Autoworkers and lacks the management skills to clean up GM's bureaucracy, or else his board won't let him. Either way, the problem is not the size of the company.

Enter Kirk Kerkorian with a plan to put Renault and Nissan CEO Carlos Ghosn in charge of a three-way alliance.

Mr. Ghosn is a talented executive, credited with turning around Nissan by severing many of its equity relationships with suppliers and dealers, and streamlining parts procurement. At GM, what can be done along those lines is either already accomplished or under way. Mr. Ghosn has no new magic.

GM already has one great car guy. Robertt Lutz, the vice chairman for product development and chairman for North American operations, deserves as much credit for rescuing Chrysler from bankruptcy as does Lee Iacocca. Yet he can't overcome GM's culture of complacency.

Mr. Ghosn faces intensifying competition in Europe, and is encumbered by militant French unions and a 15-percent French-government stake in Renault. These produce the same burdens on agility as the United Autoworkers and a paleolithic board do for GM. Mr. Ghosn should show us how he will resolve these issues at home before offering himself as savior to GM.

In the end, GM's problem is a crsis of governance. GM won't change until the board is radically changed. Yet how often does a board not found guilty of criminal actions fire itself?

That is the tragedy that is General Motors.

Peter Morici, an occasional contributor, is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.

 

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