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The Tragedy that is General Motors

Prof. Peter Morici - 7/6/2006

The GM Board of Directors should listen to its managers and nix the alliance with Renault and Nissan proposed by shareholder Kirk Kerkorian. The tie-up promises to cut costs by pooling parts procurement and elements of vehicle design. These benefits are fantasy, and only thinly veil an attempt by Kerkorian to shake up GM’s inept management and Board of Directors.

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

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

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

Pooling parts purchases with Nissan and Renault won’t get GM lower prices. Already GM, the biggest automaker on the planet, has hammered many of its suppliers into bankruptcy.

GM doesn’t need more leverage to buy shoddy water pumps. It needs to pay less for labor so it can afford to purchase decent parts. Honda, which is much smaller than either GM or Toyota, has no problem buying quality parts at good prices. If Rick Wagoner or Kirk Kerkorian don’t believe that, they should go down to CarMax and drive a 2001 Honda Accord.

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

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

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

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

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

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

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

GM already has one great car guy. Vice Chairman for Product Development and Chairman for North American operations Robert Lutz deserves as much credit for rescuing Chrysler from bankruptcy as does Lee Iacocca. Yet, he can’t overcome GM’s culture of complacency.

Currently, Mr. Ghosn faces intensifying competition in Europe, and is encumbered by militant French unions and a 15 percent French government stake in Renault. These provide the same burdens to agility as the United Autoworkers and a Paleolithic Board of Directors do for GM. Mr. Ghosn should show us how he is going to resolve those issues at home before offering himself as savior to GM.

In the end, GM’s problem is a crisis of governance. GM won’t change until the Board is radically changed. How often does a Board of Directors, not found guilty of criminal actions, fire itself?

That is the tragedy that is General Motors.