gm final paper

8/2/2019 GM Final Paper

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Table of Contents

Executive Summary ...........................................................................................................................2

The Strategic Issue Facing GM: Avoiding Bankruptcy .................................................................3

Gross Domestic product ..................................................................................................................3

Inflation Rate ...................................................................................................................................3

Unemployment Rate ........................................................................................................................4

The Auto Industry Today ...................................................................................................................4

Threat of Rivalry .............................................................................................................................4

Threat of suppliers ..........................................................................................................................5

Threat of Substitutes .......................................................................................................................5Threat of Buyers ..............................................................................................................................6

Threat of Entry ................................................................................................................................6

Weakness of Internal Cost Structures .............................................................................................6

Executive SummaryGeneral Motors (GM) is one of the big three auto makers of the world (GM, Ford, and

Chrysler) and has historically been the largest and most successful. They have built some of the

most famous and classic vehicles on the road which have portrayed messages of both modesty and

display of class for a market of consumers who range from working class to music superstar; as

Alfred P. Sloan, CEO of the 1920s put it, GM makes “a car for every purse and purpose.”

In recent years however, GM has taken an unexpected turn for the worse due to the

changing economic climate that is affecting the world. Many economists argue that the US has

been pushed into a recession that had started with the housing crisis of 2008. From this crisis

stemmed a major banking crisis that has lead to financial institutions implementing tighter lending

guidelines for business and personal consumers. This has greatly affected GM since the company,

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along with many other auto making companies, rely so heavily on short term returns to fund such a

complicated value chain and large portfolio of brands.

Of the auto making companies facing the turmoil of falling sales and crashing returns, GM

has no doubt been hit the hardest and is facing complete bankruptcy. The fact that GM has such a

large portfolio is working directly against their success because of the fact that they are spreadcompletely too thin; by being unable to focus on the core products vital to the company’s success,

GM is forced to spread money it does not have around to failing brands which are only driving the

company further into debt. Even with initial governmental funding, GM is still unable to find a

remedy for its failing success.

GM has historically built brands around the assumption that they will be consumed

whether or not they are built around consumer tastes. This lack of versatility and inability to

explore long term consumer consumption has created a number of threats with which the company

is now faced. Rising gas prices has shifted the majority of consumer tastes to energy and fuel

efficient options which GM has not sufficiently adopted, rather just the opposite since they focusmore on their pick up and SUV products which are extremely wasteful and fuel inefficient. In light

of this, GM is losing business to competitors who have extensively explored and who have begun

to master the production of fuel efficient vehicles.

President Obama is unwilling to serve the option of governmental aid to GM without a

serious and foreseeable restructuring; lending money without this strict restructuring plan is seen

as undeserved and wasteful. GM is faced with mass downsizing to more efficiently designate

funds which will help bring the company up from what is now a major failure. Although many

options and tactical decisions have been discussed, GM has until June 1 st to present a clearly

defined and finite decision for restructuring.

Company History

General Motors was founded in 1908 originally as a holding company for Buick. The firm

slowly began to take over Buick and bought out other model lines such as Pontiac, Cadillac, and

Oldsmobile. With help from these many different car lines, GM managed to dominate the US auto

market throughout the 20th century and was unrivaled in market share by any other company (“GM

Corporate Information”). GM’s market share peaked in the 1960s where they held 48.3% of the

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overall US market share. This total began to decline in the 1970s and continued to present day,

due to greater international competition, mainly coming from the Japanese companies of Toyota

and Honda. These companies provided a new style and design of a car. They strayed from the

traditional American muscle cars, which were bulky and had poor gas mileage, to sleeker designs

with better quality and efficiency (“General Motors Corporation” NYT ).

A Snapshot of General Motors Today

The General Motors Company today is in a state of complete turmoil, “surviving on

Federal loans” until it either “restructure[s] its debt or face[s] bankruptcy reorganization” come the

first of June (Detroit Free Press). According to Yahoo! Finance, the company most recently traded

its stock at an abysmal $1.09 on May 15, 2009, the lowest of the major players traded publically,

trailing behind Ford Motor Company’s $5.49. (See Graph A for GM-F 3M Stock Prices)

GM’s failure has been a long time in the making. In an advertisement issued by the

company in December of 2008 which was published in AutoNews, the corporation admitted to its

poor choices over the years: neglecting quality, creating unrealistic compensation plans,

overlooking changing consumer tastes, and focusing its product lines too heavily on trucks and

SUVs, to name a few (Stoll). And while the ad continues on to say that GM is changing its ways,

producing a hearty lineup of cars, crossovers and hybrids, its reaction may be too little, too late.

What had changed for GM since its almost half-century ago all-time-high market share was

its lack of innovation over the years. “’Until the 1960s, innovation was part of G.M.’s DNA,’ said

John Casesa, a veteran industry analyst with the Casesa Shapiro Group. ‘Now, it’s a matter of

trying to play catch-up’ (“GM Corp”).” The problem that GM faces is, not only is the company

slow to pick up on consumer trends, it often fails to adapt to these demands all together. With gas

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guzzlers like the Hummer and 12 MPG Cadillac Escalade in its lineup, neglecting the production

of hybrids and fuel efficient cars leaves GM hard pressed to see increases in its market share

(Sanger). GM’s path of poor choices has led the company to where it stands today: overhauling

the entire company and praying for survival.

The Strategic Issue Facing GM: Avoiding BankruptcyWith GM’s recent talks of restructuring, downsizing, and the possibility of bankruptcy

looming around the corner, the days of being on top in the auto world are beginning to sound like a

myth of the past. In GM’s 100 year history, the company has gone from being an automotive

powerhouse, grabbing up more than half of the US auto market in the 1960s, to now hanging on by

the mercy of the US and Canadian governments, begging for financing and hoping to avoid filing

for bankruptcy (“GM Corp”). As it stands now, GM’s main concern is simply staying afloat. The

company is facing questions like how many plants to close, how many jobs to cut, and what brands

to do away with from the portfolio (Sanger). The question that remains to be seen, however, is

whether or not the company can pull itself out of the mess in time to satisfy President Obama’s

June 1st restructuring deadline and dodge a Chapter 11 filing. GM’s dismal future outlook is

deeply embedded in the current economy.

The Economy Today

History of the recession

The current economic crisis in the United States has been debated time and again. While

some economists argue that the US recently entered into a recession, other economists state that

the US has been in a recession and that it initially started with the housing crisis of 2008. The

National Bureau of Economic Research declared that the current 2008 – 2009 recession officially

began December 2007. Their analysis was based on a number of factors, which includes the

dramatic decline in layoffs, a sharp decline in consumer spending, a credit crisis that has not been

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alleviated by the massive government rescue plan, and increasing foreclosures that continue to put

downward pressure on home values in communities. Agreed by most economists, the prominent

reason for the 2008 - 2009 recession stems from the United States housing bubble and the

subprime mortgage crisis which led to the banking crisis.

Subprime loans are loans that are given by financial institutions to borrowers who do not

meet the standard financial requirements to qualify for and obtain mortgage loans under normal

underwriting standards. Unfortunately this large scale, irresponsible lending produced the

subprime mortgage crisis. This crisis was initiated by the Federal Reserves’ decision to lower

interest rates following the bursting of the dot-com bubble and the government’s decision to relax

regulations on underwriting standards in an attempt to increase home ownership, particularly

among minorities and the less affluent (Liebowitz, 2008, p. 34). To profit from the lowering of

underwriting standards, financial institutions jumped at the chance to give mortgage loans to

borrowers without an appropriate background check to verify that the borrowers could financially

afford the mortgage payments. In fact, to expand markets and profits, financial institutions

aggressively marketed a host of mortgage and consumer credit products to non-traditional

homeowners (Beitel, 2008, p. 31). Financial institutions were offering borrowers an adjustable rate

mortgage (ARM) instead of a traditional 30-years conventional mortgage. Some borrowers were

given the option of interest-only ARMs for a stated period of time ( i.e. a seven year interest only

ARM ). After the seven years, borrowers had to pay the principle and interest on the loan. The

problem with this contract was that many borrowers’ incomes did not increase in proportion with

the increase in their mortgage payment. This meant that unfortunately some borrowers were forced

to default on their loans. Due to these foreseeable conditions and the loan default of so many

borrowers, massive foreclosures have occurred in the United Stated and serve as the chief

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contributor to the current 2008 – 2009 recession. This has led to financial institutions

implementing tighter lending guidelines for business and personal consumers. Since certain

industries such as the auto industry rely heavily on short term and long term borrowing, these

tightened guidelines have negatively affected the auto industry.

Economic Climate

Stimulus Package

The $787 billion American Recovery and Reinvestment Act was approved by Congress and

signed by the President in February of 2009; the purpose of this physical stimulus package is an

attempt to revive the United States 2008 – 2009 recessional economy from the exponential

increase in job loss, falling GPD, and unstable capital market. The package contains provisions for

short term and long term goals. Some of the short term goals include standardizing the economy,

creating and saving jobs, reducing taxes and spending money on programs and projects. The long

term implications include creating innovative approaches to the infrastructure, rejuvenating the

healthcare, education and energy sectors, and to make a positive impact on the economy as a whole

(PWC, 2009). The stimulus package provides tax benefits for individuals as well as the business

sector. The stimulus money is broken down as various sectors; there is a $3.7 billion home buyer

credit funds set an aside to help generate home purchase. Under the home buyer credit plan, first

time home buyers will be eligible to obtain a nonrefundable $8,000 tax credit as long as they stay

in their home for more than three years. To help stimulate the auto industry, $2.5 billion will be

used to make sales tax paid on new car purchases tax deductible; new car buyers will be able to

deduct sales or excise taxes, an above the line deduction (USA TODAY 2009). The package covers

numerous other spending credits to help stimulate the environment. The million dollar question for

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most is when we will begin to see the results of the $787 billion package. Opinion varies to this

question, some analysts predicts fourth quarter of 2009, other say 2010.

Gross Domestic product

The United States current Gross Domestic Product (GDP) growth rate is (6.29), lower than

the forecasted GDP of 4.7% (Financial Forecast Center 2009). According to the Bureau of

Economic Analysis the decrease in GPD was due to the decline in exports, private inventory

investments, equipment and software, nonresidential structures and residential fixed investments.

The private inventories investment declined in the first quarter over $137 billion. Consumer

spending was up 2.2% as consumer responded to the lower prices of goods and services (Wachovia

Economic Group, 2009).

Inflation Rate

According to the Bureau of Labor Statistics, America’s inflation rate has had relatively

steady changes until 2009. In 2007 the inflation rate was 2.8%, a slight decrease from previous

year; but in 2008, it increased to 3.8%, which decreased the purchasing power of the US dollar. As

of March of 2009 the US inflation rate is (-0.45), this deflation rate indicates a dramatic decrease

in the prices of goods and services due to our current domestic as well as global recession.

Unemployment Rate

The US unemployment rate has been dramatically increasing since December of 2007. According

to the Bureau of Labor Statistics, in April of 2009 there were (-539,000) jobs lost; less than what

was forecasted. The unemployment rate has risen from 8.5 to 8.9 percent. Since the beginning of

the recession the US economy has lost 5.7 million jobs, bringing the unemployment total to 13.7

million.

The Auto Industry Today

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The US auto industry as a whole is an extremely competitive market place. Each

automotive company is fighting for the largest market share of the world’s number one automotive

market. The US’s own Big 3, which includes GM, Ford, and Chrysler (GM – Blue / Ford – Yellow

/ Chrysler – Black) have been losing the fight to keep a dominant hold over the domestic auto

market. Prior to 1985, the Big 3 controlled a vast majority of the US market share, approximately

around 80%, but since then they have seen their share decline to below 43%. As shown in the

chart listed to the left (Chart 1), the main competitors come from Japan and Europe, more

specifically the companies of Honda and Toyota (Honda - Green / Toyota - Red). These importers

are gaining market share because they seem to produce more dependable and more efficient cars.

Consumer Report listed the top 3 most reliable cars in these 6 separate categories which

include, Family cars, Large cars, Small cars, Minivans, Small SUVs and Midsized SUVs. Of the

18 cars listed, 14 were Japanese engineered, and of those 14 cars, 12 were made by: Toyota,

Honda, or Nissan. Overall Japanese firms account for 78% of the most reliable automobiles while

the US automakers account for only 22%.

However, in the past few years with the housing bubble bursting and the economic

contraction that followed, auto sales as a whole have been declining rapidly, due heavily to credit

markets freezing and the steep drop in consumer spending. This tightening up of American money

has greatly impacted the major players in the US automotive market, causing a dramatic decrease

in sales from the year before. GM sales are down 33.1% from April 2008, Ford’s are down 31.3%,

Chrysler 48.1%, Toyota 41.9%, and Honda is down 25.3%. This drop in overall sales is staggering

for the 5 largest market share leaders in the US, and it is having a more devastating effect on the

American car companies than the international firms. (Sales figures - Wall Street Journal)

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The US automotive market as a whole can be considered a mature industry structure.

Single-company and industry growth have been slowing, due to the economic contraction as well

as the lack of large new markets. International competition has been growing since the 1970s and

the international firms have become major players in the industry. These new international

competitors have eaten away at the dominant market share that the Big 3 once held. Toyota and

Honda have been taking advantage of this mature industry structure and have been creating new

lines, such as the fuel-efficient hybrid models. The hybrid model cars were introduced in 2001,

which was the perfect time for this new technology to be unveiled. Gas prices across the US were

spiking and the cost of fuel became a major concern for the American consumer (Chart 2). The

combination of low pricing and fuel efficiency began to drive US automotive buyers toward the

international companies and away from the old tradition of owning and driving large SUVs.

The Big 3 lagged behind the international companies when creating fuel-efficient cars and

did not release one until 2004. The Big 3 are working on refining their products, however they are

still lagging behind the international firms. For years the consensus has been that Japanese

automakers build quality cars while the US automakers build unreliable cars that will break down

quickly. Over the past few years, the Big 3 have begun to increase the dependability of their cars,

which is shown by higher rankings from Consumer Reports Magazine.

GM’s Strategy

General Motors’ strategy from the beginning was to be a product differentiator, and with

the Detroit based company (until recent restructuring) spread over 13 brands worldwide, GM has a

highly diversified product mix (GM Vehicles). The company’s slew of brands was no accident,

for, as GM’s CEO of the 1920s Alfred P. Sloan put it, GM makes “a car ‘for every purse and

purpose’.” The company’s strategy proved to be successful for most of the 20th century, as it was

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the largest car maker in the world from 1931 up until 2008 (“GM Corp.”). And with 13 brands,

countless car models, plants in 34 countries and sales to 140 countries, it’s no wonder the giant

reigned supreme for so long (“About GM”)(Bensinger). “GM’s strategy of just a year ago” Bill

Vlasic of The New York Times explains, “was waging a spirited battle with Toyota for the title of

world’s largest automaker (Vlasic).”

This strategy, which brought the company great success for a major part of its existence, is

no longer working for the Detroit automaker. With increased foreign competition, the disregard for

changing consumer trends, and a portfolio spread too thinly, GM’s vision to be the world’s largest

car producer is no longer a viable goal. The main problem in GM’s decisions over the years was

its overly extensive lineup. With such a large and diverse portfolio, GM couldn’t give each brand

the attention it needed. As New York Times writer Micheline Maynard explains:

The more brands a carmaker has, the more it must spread money around to developvehicles and market them. As a result, “every brand suffers,” said A. Andrew Shapiro, amanaging partner with the Casesa Shapiro Group. “No particular brand or brands canachieve the share of voice that they need” (Maynard).

Historically, GM had used its brands as a competitive advantage over Ford, the company whose

opening lineup featured a monochromatic mix of all black vehicles. And in part, this was GM’s

solution to a lot of its competitor’s advances. Rather than fix what wasn’t working, GM simply

added more brands. To compete with foreign entrants Toyota and Honda in the 90s, GM

introduced Saturn, a decision which cost them $5 billion. But according to BusinessWeek , upon

building its Saturn brand, GM consequently put Oldsmobile on the back burner (Welch). And as

priorities shifted again, rather than nurture its new Saturn brand which may have had a fighting

chance, GM started focusing on its other lines instead, waiting five years before adding new cars to

Saturn’s mix (Maynard). Its game of favorites lasted for years: invest in Oldsmobile, disregard

Saturn; build up Cadillac and Buick, forget about Pontiac and Saab (Welch).

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The company’s strategy to juggle its brands clearly proved to be an unsuccessful means of

portfolio management. Whether the company would have changed its ways if it weren’t for the

insistence of the Obama administration is hard to say. Regardless, the company appears to be

moving in the right direction. GM’s North American Vice President Mark LaNeve explains that

“‘over time, the strategy is to focus [GM’s] resources on the core brands…It's clear that we can't

afford the kind of product and marketing investment that eight brands need.’ (Welch)."

Understanding the threats that affect General Motors provides a clearer picture of the company’s

failed strategy.

Threats Affecting GM

Threat of Rivalry

The threat of rivalry on the industry level is intense and highly competitive. General

Motors is a member of the Big Three (GM, Ford and Chrysler) and is one of the top four

automakers when including Toyota. These four industry leaders are estimated to make up 62.4%

of the market in 2009 (IBIS World, pg. 9). And being that the market shares of these leading

automakers are nearly equal (as shown below), the fight for market share is fierce.

*IBIS World Car & Automobile Manufacturing in the US, page 24

Competition is also high amongst GM’s diverse portfolio of brands. With GM parenting

eight unique US companies—of which only four will survive the new restructuring of the company

—the firm faces eight different sets of competitors: one set for each brand (Roy). The degree of

competitiveness varies for each brand and depends on the type of product being offered. Direct

competition for each brand from rival products aimed at the same target market poses a greater

threat than indirect competition from products aimed at a different target market. Therefore

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focusing on direct competitors can allow General Motors to better protect against the threat of

rivals.

The companies under the GM umbrella need not only worry about domestic competition

but also about foreign competitors in the home market in addition to the rivals of their foreign

interests. For this reason, it is clear that one of the biggest threats to General Motors is the threat of

rivalry. When compared to Japanese automakers, GM has higher costs of production, partially due

to greater labor costs (IBISWorld Car & Auto, pg. 25). High costs of production threaten GM

because it becomes more difficult to offer competitive prices.

Additionally, the brand image associated with the GM family (and the other American

brands, for that matter) is not one that embodies the highest quality products on the market. The

confidence in the brand is also fading as the danger of potential bankruptcy looms in GM’s future.

This can definitely sway consumers to purchase from rival firms, as well. Furthermore, GM’s lack

of innovation in employing new technologies, such as hybrid technology, or adapting to market

trends can make rivals seem more appealing.

The threat of rivals presents the greatest challenge that the GM brands have to face. There

are a number of reasons behind this fact, only some of which are listed above. Competing firms

attack from every angle and will take every opportunity that arises in hopes of becoming the

market share leader. However, GM’s product differentiation strategy does offer some protection

from the threat of rivals in that it develops specialized market niches. This helps to mitigate the

threats from rivals because GM aims to offer brands that are significantly different from

competitive products so that no other company competes directly. This strategy is only successful

when enough resources are devoted to each brand.

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Threat of suppliers

The supply chain in the automotive industry weaves a tangled web of intricate relationships

among suppliers and producers. In the three-tiered supply system used by General Motors and

many other automotive companies, the direct suppliers, or first-tier suppliers, distribute products

straight to GM. These first-tier suppliers rely on the second-tier suppliers for their parts for

production and the second-tier, in turn, relies on supplies from the third tier for necessary parts for

production (Beene). This complex relationship among the different suppliers and the automotive

firms indicates a heavy reliance on each link of the value chain.

These relationships often lead to smoother operations, as goods travel up the value chain to

reach the final production facilities to be made into finished products. During times of economic

struggles like those being faced today, however, this interdependency can spell disaster for a

number of firms in the supply chain. All three tiers of suppliers suffered a severe blow when

Chrysler recently filed for Chapter 11 Bankruptcy and GM announced that it would be halting

production at 13 plants in the U.S. between May and July (Krisher ). With this extreme drop in the

production of new vehicles, many suppliers have lost a major source of sales and now face

bankruptcy themselves.

The stressful conditions within the economy already caused automotive suppliers’ revenues

and bottom-lines to decrease, but this lowered demand for auto parts has proven to be too much to

handle as many firms began working below their break-even point. A noteworthy reason that

suppliers are so hurt by the decrease in orders from auto companies is because this increases their

cost of capital. Suppliers use the projected orders from automotive companies as collateral to

receive the necessary capital to continue production (Gopwani). With so few orders being received,

these already struggling auto supply firms are being forced into bankruptcy. Although the

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government recently provided direct automotive suppliers with $5 billion in aid, second- and third-

tier suppliers are still struggling to survive while hoping for the payments to trickle down the line

(Beene).

So what does this mean for GM? It means that despite its efforts to reduce costs and

inventory by temporarily halting production, GM may not be able to finally resume production in

the future because of the devastating effects that decreased production will have on its supply

chain. Additionally, many of the tight-knit relationships between General Motors and its suppliers

will be harmed in the process which could lead to higher supply costs. With fewer suppliers

available after the shakeout, suppliers will have more bargaining power over the auto companies,

also leading to higher costs for supplies. Overall, the biggest threat of suppliers comes from the

interconnectedness of not only General Motors and the three tiers of suppliers, but also among

other automotive firms in the industry.

Economic Threats

Within the last few years, GM’s poor performance has manifested as a result of a global

economic downturn. In light of high gas prices and the recession heard around the world, GM was

greatly affected by money conscious consumers moving towards smaller, more fuel-efficient cars.

As a Washington Post article reiterates from just one year ago:

Pickup sales have been falling for months because of the slowdown in housing

construction. The trend away from SUVs began several years ago as baby boomers aged

and roomy but more fuel-efficient crossover vehicles gave consumers more choice. But

automakers said gas prices are accelerating the trend (Durban).

According to The New York Times, in April of last year, one out of every five cars purchased was

either a compact or subcompact car, compared to only one in eight when SUVs were in high

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demand ten years ago (Vlasic). And for a company like GM whose lineup is dominated by larger

vehicles, the fall in sales of SUVs and pickups severely impacted the company’s bottom line, with

a sales drop of 27% in the summer of 2008 when gas prices were largely inflated (Bensinger). In

the following year, the trend of lost sales continued with 379,000 fewer GM vehicles on the road

(Marr).

The company’s new plan for success needs to keep up with the changing times and its

competitors’ abilities to satisfy changing demand. With companies like Toyota producing smaller,

more fuel efficient vehicles, GM needs to be doing the same to remain an active player (Marr).

Threat of Substitutes

Rising fuel prices and decreasing purchasing power causes commuters to reconsider their

transportation options. Although automobiles still tend to be the preferred method of transportation

in many areas, the threat of substitutes is increasing due to the current economic environment

(California Green Solutions). Substitutes for standard automobiles include bicycles, walking,

public transportation such as bus and train services, and even energy-efficient vehicles including

hybrid and electric automobiles. The Green Movement is another reason behind the recent shift

towards substitutes for cars and trucks.

A number of conditions have contributed to a higher threat of substitutes for the automotive

industry and General Motors, in particular. Increased fuel prices and insufficient fuel-mileage are a

major source of consumer discontent with automobiles as they have led to higher operating costs

associated with the vehicles. Even with the gas prices falling in 2008 and 2009, car and truck

purchases, especially, have continued to decrease whereas public transportation usage is at 5 year

high high (IBISWorld Public Transportation).

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Public Transportation Revenue Public Transportation Revenue Growth

Rate

Furthermore, as consumers’ disposable income decreases, they become less likely to make

discretionary purchases. With less money and wavering confidence in the market, people are more

hesitant to drop large sums of money on automobiles when there are so many other transportation

options available including public transportation, carpooling, cycling and walking.

Additionally, in today’s world of increased awareness of global warming and its causes, the

Green Movement is not just a hippy philosophy anymore. More and more people are doing their

part to reduce their carbon footprint and this includes decreasing the amount of emissions

contributed from automobiles. For this reason, Earth-conscious and budget-savvy consumers are

looking to hybrid and electric vehicles and other ‘greener’ transportation methods. Fuel-inefficient

cars and trucks seem particularly unattractive to modern consumers who are now exploring new

technological options like hybrids or the tried-and-true means of transport such as cycling and

walking.

The threat of substitutes can be seen as both a challenge and an opportunity for General

Motors. Public transportation, cycling and walking provide a growing threat of substitutes. While

automakers are unlikely to begin competing in these markets, the hybrid market is primed for

growth. General Motors can reduce the threat of substitutes from hybrid and electric cars by further

penetrating this market while it is still relatively young.

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Threat of Buyers

General Motors operates with a large number of domestic dealers. The total number of

dealers in the U.S. is 6,200, but GM is aiming to close 2,600 of them under the new business plan

(Neill). With the restructured goals of decreasing cost and increasing profitability, GM has high

standards for their dealers. Only those with sufficient profitability and customer satisfaction, as

well as proper location and up-to-date facilities will continue to operate (Neill). Because there are

so many dealers, the buyer power appears to be rather low, especially now while GM is

downsizing.

Although there is a high quantity of automobile suppliers in the industry, most dealers

become specialized in selling only one firm’s vehicles. This drastically decreases any buyer power

the dealers may have had because significant switching costs associated with selling for another

company exist. Because of such high switching costs, dealers are forced to accept the prices that

the GM brands decide are appropriate (Neill).

The threat from buyers is not a significant one for GM, particularly when compared to

other threats the automaker faces. One of the only reasons buyers could pose a threat to GM is that

the dealers are often part of a bigger group or association of dealers, which could offer the buyers

strength in numbers. For the most part, however, the GM family of brands will not suffer severe

threat from their buyers.

As pertaining to the planned closing of GM’s dealerships, the company has found this

venture be extremely costly. The problem occurs when GM has to put itself in further debt to

make payments to the State Legislature to protect its dealers prior to closings.

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Colorado was one of the first states to protect the auto dealer in its relationship with the

manufacturer. Found in an article recently written by Jerry Kopel , the role of the dealer is

explained as:

“The sale and distribution of motor vehicles affects the public interest and confidence of the purchaser in the retail dealer from whom the

purchase is made and the expectancy that such dealer will remain inbusiness to provide service for the motor vehicle purchased.

“Proper motor vehicle service is important to highway safety and

(1) the manufacturers and distributors of motor vehicles have anobligation to the public

(a) not to terminate or refuse to continue their franchiseagreements with retail dealers

(b) unless the manufacturer or distributor has first established

(i) good cause for termination or noncontinuance of any such agreement,(ii) to the end that there shall be no diminution of locally available service.”

The term “good cause” in this article has been the cause for much

debate and in most cases where GM has closed its dealerships, it has been

easier and more cost intelligent to just pay “out of pocket for payments to the

bad franchiser” (Kopel) unless the good cause can be proven within thirty days,

which is a section added by Senator Chris Romer. Thirty days is often too short

a period to prove that the reason for closure has “good cause.”

Threat of Entry

The automotive industry is lucky when it comes to the level of threat faced from new

entrants, which is relatively low for several key reasons. Incumbent firms like General Motors

have a definite advantage over potential firms hoping to enter the industry. The major causes are

the high barriers to entry associated with the automotive industry. For one, auto manufacturing is a

highly capital-intensive undertaking, which makes it difficult for new firms to start-up, let alone

compete. The efficient production capacity gained from economies of scale is also large and

therefore costly to establish (IBISWorld Car & Auto, pg. 16). Additionally, the automotive industry

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is fairly saturated, being a mature industry, and therefore in order to be successful a new entrant

would need to ensure its ability to capture a large enough market share to be profitable. This can

prove to be a less than feasible venture for entering firms.

The technology costs needed to partake in vital research and development processes adds

still another barrier to entry. In order to stay afloat in such a competitive industry, firms need

continual innovation to provide products that appeal to the desires and demands of choosy

consumers. New entrants rarely have the necessary capital to fund such extensive R&D

operations.

Additionally, there are extremely strict regulations imposed on the automotive industry by

the government. These laws must be adhered to if a firm wishes to avoid heavy fines or penalties,

and complying can increase the cost of production significantly enough that it often drives away

potential new entrants to the industry (IBISWorld Car & Auto, pg. 16). The ability to afford the

costs of imposed regulations also comes into play when firms look to go global. Existing firms

have access to the capital and the managerial experience and know-how necessary to expand into

international markets whereas, new entrants most likely lack both.

The threat from new entrants does not impose a significant threat to an incumbent firm like

General Motors. Its long history in the market and the strong relationships with buyers, suppliers

and consumers built over time will add yet another deterrent for new entrants. The costs of capital

needed for production, the costs of R&D needed to remain competitive, and the costs of

developing the network and knowledge needed to become successful offer the greatest safety belt

to protect GM from new entrants.

Weakness of Internal Cost Structures

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“GM is a benefit-paying organization masking itself as an auto dealer”, Donald Coxe

chairman of Coxe Advisors LLC. One of the major issues facing GM is their large liability

consisting of pension, retiree health care and other liabilities. As of the December 31, 2007

balance sheet, GM postretirement benefits other than pensions were $47,375 billion and pension

liability was $11,381 billion; the company’s total liability was $184,363 billion. For the past 15

years, GM’s annual average of pension and retiree healthcare cost has been $7 billion; however the

company plans to reduce this number to $1 billion by 2011(GM Annual Report). The Company

plan to drastically reduce some of these liabilities by eliminating over 100,000 retirees’ healthcare

insurance (USNEWS), reducing U.S. hourly employment from about 61,000 in 2008 to 40,000 in

2010, and leveling off at about 38,000 starting in 2011(GM.com). If GM files for bankruptcy, the

US government will be dumped with $13.5 billion dollars of unfunded pension, the largest of any

US company. If GM is able to alleviate majority of their pension and retiree healthcare liabilities,

they will have a greater chance of survival.

Government Intervention and the Restructuring of GM

As a result of the current economy, the state of the auto industry, the company’s failed

strategy and the threats facing it, GM is in need of major restructuring to turn itself into a viable

company for future success. The Federal Government decided to partake in the company’s

restructuring in the winter of 2008 when the Bush administration okayed a $17.4 billion loan to

both GM and Chrysler in hopes of buying time for a restructuring plan slated to fall into place in

March (McKinnon). However, in the changeover to the Obama administration, Obama recently

required a stricter, more feasible restructuring program, cutting off all funding unless serious

results were produced. GM was given until June 1, 2009 to cut costs and start producing a plan

which will aim GM for the green (Ruggeri).

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As it stands now, restructuring is the company’s highest priority. Its latest plan “calls for

trimming 47,000 jobs worldwide, closing more than a dozen plants in the United States,

eliminating four brands and shuttering 2,600 dealerships (Saner).” All said and done, GM will be

left with 34 plants, a fifth of what it boasted almost 40 years ago (Vlasic). Its lineup will focus on

its strongest brands, Chevrolet, Cadillac, Buick and GMC, while it will eliminate Saturn, Saab and

Hummer, and will scale back on Pontiac (Maynard). While General Motors is finalizing bids for its

Hummer brand, the Italian automaker, Fiat, is contemplating taking over the company’s European

brands Opel and Vauxhall ((2) Bunkley) and (Matlack).

In addition to making General Motors a much smaller company, the overall structure of

GM will see a drastic change in both its leadership and ownership. In March of this year, the

Obama administration requested that CEO Rick Wagoner step down from the company. Grounds

for his dismissal included the fact that his company had requested the highest amount of aid in

government bailout plans, at $26 billion, and the fact that he “is considered responsible for

increasing GM's focus on trucks and SUVs—at the expense of the hybrids and fuel efficient cars

that have become more popular in the last couple of years (Allen).” Wagoner, who had been CEO

for eight years and apart of GM for 30, was replaced on March 30th by Fritz Henderson (Bury).

General Motors’ ownership is also in the lineup for an overhaul. The US Government

plans to take a 55% majority stake in the company, in return for which, the government will pardon

the company’s $10 billion outstanding federal loan (Saner). General Motors also plans to offer its

“holders of $27 billion in unsecured debt 225 shares in G.M. stock for every $1,000 in debt

(Vlasic).” However, this exchange gives bondholders only 10% share in the company, with the

remainder left for the United Automobile Workers Union (Vlasic). Unfortunately bondholders

Page | 22

http://www.nytimes.com/2009/04/28/business/28auto.html

http://www.nytimes.com/2009/04/18/business/18auto.html?_r=2

http://www.nytimes.com/2009/04/28/business/28auto.html

http://www.nytimes.com/2009/04/18/business/18auto.html?_r=2



wanted nothing to do with the offer, regarding the proposal inadequate and politically favored. If

GM doesn’t come up with a solution by June 1st, it will be faced with bankruptcy.

GM’s Outlook/Recommendations

As shown throughout this report, General Motors faces a number of strategic issues that

demand the firm’s full attention and immediate action. The strategy that had gained the automaker

a wealth of success in the 20th century, “a car for every purse and purpose”, is no longer practical in

the current global marketplace in which it operates. GM’s lack of innovation and resistance to

change, in addition to the recent economic recession, led to the firm's present state of unpaid debts

and financial failures.

As the threat of bankruptcy is perhaps imminent, GM is scrambling to restructure its

company to prove to the Obama Administration, its shareholders, and the world that it can in fact

succeed. As it stands now, the company is downsizing, planning to focus on its four core brands,

and is eliminating unneeded costs at all possible steps. And while the company has until June 1st to

prove it is headed in the right direction, General Motors must continue with its new strategy;

keeping up-to-date with the latest technologies, listening to consumer demands, and producing cars

which meet the needs of today’s driver. The American public is eagerly counting down along side

GM as it awaits the results of its most recent restructuring plan. Whether the Detroit-born

automaker will ever reign again as the largest car manufacturer in the world is hard to predict, but

with the correct measures put into play, General Motors has a chance of saving its company with

the hopes of a brighter, more successful, and certainly more sustainable future.

Page | 23



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