GM_Final_Paper by fanzhongqing

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									General Motors
and the Auto
Industry: A
Strategic Analysis
 Drexel University
                     Helena Boe, Diane Ketler,
 Management 450
                     Nicole O’Keefe, Andrew
        5/21/2009
                     Rubenstein, James Siverio




                                                 Page | 1
                                                         Table of Contents


Executive Summary ...................................................................................................................................... 3
A Snapshot of General Motors Today .......................................................................................................... 4
The Strategic Issue Facing GM: Avoiding Bankruptcy ................................................................................ 5
The Economy Today ..................................................................................................................................... 6
   History of the recession ............................................................................................................................ 6
Economic Climate......................................................................................................................................... 7
   Stimulus Package ...................................................................................................................................... 7
   Gross Domestic product ........................................................................................................................... 8
   Inflation Rate ............................................................................................................................................ 8
   Unemployment Rate .................................................................................................................................. 8
The Auto Industry Today .............................................................................................................................. 9
GM’s Strategy ............................................................................................................................................. 11
Threats Affecting GM ................................................................................................................................. 12
   Threat of Rivalry ..................................................................................................................................... 12
   Threat of suppliers .................................................................................................................................. 14
   Economic Threats ................................................................................................................................... 16
   Threat of Substitutes ............................................................................................................................... 17
   Threat of Buyers...................................................................................................................................... 18
   Threat of Entry ........................................................................................................................................ 20
Weakness of Internal Cost Structures ......................................................................................................... 21
Government Intervention and the Restructuring of GM ............................................................................. 22
GM’s Outlook/Recommendations .............................................................................................................. 23
Works Cited ................................................................................................................................................ 25




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Executive Summary
         General 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, 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 spread completely
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 focus more 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 1st to present a clearly defined and finite decision for
restructuring.




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         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 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)


  No more Federal bailouts (March
     th
  30 ): Obama rejects GM’s
  restructuring plan. GM has 60 days
  to revise its plan.




Graph A: http://finance.yahoo.com/echarts?s=F#chart19:symbol=f;range=3m;compare=gm;indicator=volume;charttype=line;
crosshair=on;ohlcvalues=0;logscale=on
                                                                                                          Page | 4
        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 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 Bankruptcy
        With 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



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(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 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-


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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 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


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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 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




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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
        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

 http://online.wsj.com/mdc/public/page/2_3022-autosales.html   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

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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)


        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



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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 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:

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        The more brands a carmaker has, the more it must spread money around to develop vehicles
        and market them. As a result, “every brand suffers,” said A. Andrew Shapiro, a managing
        partner with the Casesa Shapiro Group. “No particular brand or brands can achieve 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).

        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,

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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 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.

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        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.


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



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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 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.




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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 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
                                                  http://www.latimes.com/media/graphic/2008-06/39594343.gif

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).




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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).


Public Transportation Revenue                      Public Transportation Revenue Growth Rate




                   IBISWorld Industry Report: Public Transportation in the US, pg. 8



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        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.


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.



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          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.


          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 in business 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 an obligation to the public

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

                  (b) unless the manufacturer or distributor has first established
                          (i) good cause for termination or noncontinuance of any such


                                                                                                    Page | 19
                        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 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.




                                                                                                    Page | 20
        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
        “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).


                                                                                                   Page | 21
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).

        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



                                                                                                   Page | 22
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 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

                                                                                                  Page | 23
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 | 24
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