The New GM – a first look

The New GM – a first look

By: Martin Kahl, Friday, June 05, 2009, AutomotiveWorld.com

It is perhaps fitting that GM has chosen to retain Detroit’s Renaissance Center as the headquarters for its rebirth as the New GM. The New GM is expected to emerge from the wreckage of the old company (which will remain in Chapter 11 bankruptcy proceedings for some significant time)  within 60 – 90 days, made up of only the most (potentially) profitable parts of the business. The company will have a smaller workforce, fewer plants and dealerships and a streamlined product offering from just four core brands in the US. To remain true to the philosophy of its founders, namely to “build where we sell”, GM has manufacturing operations on every continent. Crucially, although the bankruptcy filing covers only GM’s US operations, New GM will include the company’s operations in all other regions except Europe.

According to GM President and CEO Fritz Henderson, the “New GM [will be] dedicated to building the very best cars and trucks – highly fuel efficient, world-class quality, green technology development and with truly outstanding design. Above all, the New GM will be re-dedicated in its entirety to our customers.” Quite why this wasn’t the case with the old GM will no doubt become the subject of many books and academic theses to come.

Ownership
Under the terms of the Chapter 11 filing, the company’s new ownership structure will be as follows:

 

 *VEBA: Voluntary Employee Beneficiary Association

Leadership
It is not yet clear what changes, if any, will take place at the executive management level, and a full leadership team for the New GM is yet to be published. According to Fritz Henderson, “Leadership changes will be finalised in the next 60 days. There will be a 22% reduction in GM’s salaried workforce in North America from year-end 2008 to year-end 2009. The impact on executive leadership will be higher as the company takes levels out of the organisation and simplifies the decision-making process.”

The key personnel at this stage are:

  • Frederick “Fritz” A. Henderson – President and Chief Executive Officer
  • Thomas G. Stephens – GM Vice Chairman, Global Product Development
  • Ray Young – GM Executive Vice President and Chief Financial Officer
  • Kent Kresa – Chairman of the Board of Directors
  • Albert A. Koch – Chief Restructuring Officer

The selection of Al Koch is an interesting one. Koch, vice chairman and managing director of Alix Partners, has a reputation as a veteran turnaround specialist, and is credited with returning Kmart Corporation from bankruptcy to the stock market within 18 months. Koch’s role, and his experience, will undoubtedly be a crucial factor in GM’s plans to re-invent itself as the new company within the next 90 days or so.

It is not yet clear what changes, if any, will take place at the executive management level, and a full leadership team for the New GM is yet to be published. According to Fritz Henderson, “Leadership changes will be finalised in the next 60 days.

Manufacturing and job cuts
GM’s bankruptcy filing calls for a substantial reduction in the number of plants (stamping, powertrain and vehicle assembly) from 47 plants in 2008 to 34 by the end of 2010, and 33 by the end of 2012.

The planned cuts will see GM reduce salaried employment in North America by a “further” 5,100 salaried employees, 4,000 of which will go in the US alone. By 2010, the company expects to employ in the US approximately 40,000 hourly staff and around 23,000 salaried staff.

Plant closures – is this it?
The company has issued a list of 14 plants to be closed, as outlined in the table below:

 

Crucially, this list fails to tell the whole story. GM’s closure of four vehicle assembly plants is much less radical than it may appear, and, it could be argued, should have gone further. It is difficult to imagine that further closures will not occur. It should be remembered that, despite the closure of the 14 plants, GM agreed on the day of its Chapter 11 filing to contribute US$250m to Delphi’s own emergence from Chapter 11 and to buy back five Delphi plants: in Wyoming, Michigan; Grand Rapids, Lockport, New York; Rochester, New York; Kokomo, Indiana; and Delphi’s Saginaw-based Steering division.

Of the four US vehicle assembly plants slated for closure, two will be shuttered, and two will be idled (or as GM puts it, will be classified as Standby Capacity). The plants to be shuttered are Pontiac (Michigan) and Wilmington (Delaware); the plants to be given Standby Capacity classification are Orion (Michigan) and Spring Hill (Tennessee). These closures will reduce GM’s annual installed capacity in the US by 985,000 units, and help cut into the company’s NAFTA-region overcapacity of 2 million units. It is interesting to note that, whilst GM cuts capacity, Ford announced at the beginning of June that it is increasing its planned North American output by 10,000 units; incredibly, most of the output increase is expected to be allocated to pick-ups and small SUVs.

GM’s closure of four vehicle assembly plants is much less radical than it may appear, and, it could be argued, should have gone further. It is difficult to imagine that further closures will not occur.

At the post-Chapter 11 announcement press conference on 1 June 2009, Fritz Henderson confirmed that the company’s capacity in the US, based on two shifts at straight time, will be between 2 million and 2.5 million units. He even implied that the company could find itself short of capacity: “Being short of capacity is not my worry because we can operate three shifts and reach significantly higher levels of demand if required.” GM says it will return its vehicle assembly plants to full capacity utilization by the end of 2011. This is surprisingly optimistic, given that in 2008, GM’s overcapacity in the NAFTA region was around 40% higher than in 2007.

The table below outlines the vehicle assembly plant closure plans, and provides some insight into the activities of those plants.

 

GM’s new small car plant for the US – confirmed in May 2009
At the end of May 2009, GM confirmed plans to build a new small car for the US at a retooled, 160,000upa plant, and according to Fritz Henderson, the New GM aims “to do so profitably”. The plant’s location is still to be confirmed and details of the model have yet to be published. The plant will be a UAW-GM plant and will use metal stampings sourced from a UAW-GM stamping plant.

Given the investment already made at Spring Hill, it appears likely to be chosen as the location for this venture; GM has made it clear that the plant will be one that is on standby capacity status. Interestingly, Spring Hill has an annual capacity of 300,000upa, meaning that the forecast capacity of 160,000upa for the project could be increased, or an additional vehicle added, should the opportunity arise. Interestingly, the relatively vague information published by GM about this venture does not state specifically that the small car will be built at a rate of 160,000 units, but that that will be the plant’s capacity.

Rather than being a strategic move to compete with the likes of the North American-built Ford Fiesta, this venture is likely to be construed by some as a purely political attempt to placate the UAW and allay fears that the company may import small cars from China rather than build them locally.

GM’s North American manufacturing joint ventures – what does the future hold for NUMMI and CAMI?
A large question mark hangs over the future of GM’s 25-year old Californian joint venture with Toyota, New United Motor Manufacturing Inc (NUMMI). The operation builds the Pontiac Vibe, and the Toyota Tacoma and Corolla. The confirmation that the Pontiac brand will be wound down by the end of 2010 leaves GM’s role in the joint venture at best unclear; it is difficult to see the plant, and the joint venture, being of any relevance to a lean New GM.

A large question mark hangs over the future of GM’s 25-year old Californian joint venture with Toyota, New United Motor Manufacturing Inc (NUMMI).

As noted elsewhere, GM’s Chapter 11 filing covers only the US plants. However, with the fate of the Pontiac brand now sealed, AutomotiveWorld.com has questioned the GM-Suzuki joint venture, CAMI, about its plans for the future. In May 2009, CAMI halted production of Suzuki brand models for an indefinite period, following a warning from Suzuki in late 2008 that such a halt was likely. In exclusive comments to AutomotiveWorld.com, a CAMI spokesperson noted: “We have completed production of the Pontiac Torrent (13 May 2009) and the 2009 [Chevrolet] Equinox (19 May 2009). Production of the 2010 Equinox began on 25 May 2009. Suzuki XL7 production is still on hiatus.” The plant at Ingersoll is due to begin production of the GMC Terrain in August 2009; however, with only one model currently being built at the plant, the lack of current activity on Suzuki’s part, and GM’s need to reduce capacity and cut costs, it is not unreasonable to question the long-term future of this venture.

The nameplate cull and the focus on four core brands
The company has made much of emerging as the lean New GM operating ‘four core brands’, namely GMC, Chevrolet, Cadillac and Buick.

Slimming down the number of brands operated by GM is hardly a great revelation or an unexpected strategic move; it is another decision made in conjunction with the Chapter 11 filing which many would argue should have been made years earlier. Analysts have for years criticised GM’s unwieldy multiple brand constellation and underlined the company’s need to focus attention on a smaller number of brands. Little of what has been said since the bankruptcy filing is new, with the futures of Pontiac, Saturn and Hummer having been in the balance for many months. However, the Chapter 11 filing brought confirmation that the Pontiac brand will be phased out by the end of 2010. GM has confirmed that a buyer for Hummer has been found (Sichuan Tengzhong Heavy Industrial Machinery Co., Ltd, or Tengzhong) and a sale has been agreed. The terms of the deal reportedly call for GM to continue building the H3 and H3T on a contract basis at its plant in Shreveport until at least 2010. The likelihood of GM finding a buyer for Saturn has appeared slim at best and it seemed likely the brand was likely to go the way of Oldsmobile and Plymouth before it. However, the new memorandum of understanding signed between the Penske Automotive Group and GM now paves the way for the sale of the brand, with GM continuing contract manufacturing of the Aura, Vue and Outlook models, at least in the near term.

In 2010, the four-brand New GM will have a US product portfolio of 34 models, a 29% drop from the 48 models offered in 2008.

Analysts have for years criticised GM’s unwieldy multiple brand constellation and underlined the company’s need to focus attention on a smaller number of brands.

Model launches unaffected for 2009 and 2010
New vehicle launches scheduled prior to the bankruptcy filing remain unaffected; under the New GM, the following North American vehicle launches will take place in 2009 and 2010.

  • Chevrolet Camaro
  • Buick LaCrosse
  • Cadillac SRX crossover and Cadillac CTS Sport Wagon
  • Chevrolet Equinox and GMC Terrain
  • Chevrolet Cruze
  • Chevrolet Volt

The New GM’s four brands’ likely models and manufacturing locations
The following table shows the four brands of the New GM, their likely model line-up and the manufacturing locations for each model.

 

Dealership network cuts
In addition to cuts to the manufacturing network, the workforce and the brand portfolio, GM will implement further cuts to its US dealer network, reducing the number of outlets from 6,246 to 3,605 by the end of 2010.

Global vehicle development operations to continue
GM has made it clear that vehicles which have global applications will continue to be developed on a global basis.

The New GM outside the US – business as usual?
Although the Chapter 11 filing relates only to GM’s US operations, some of the company’s key overseas regions have been quick to respond to the filing, and clarify their position now and in the New GM. The effects of GM’s restructuring already are felt much further afield. Below is a commentary on some of the company’s core markets outside the US:

Australia: Holden issued a statement saying that it will continue normal operations in Australia and New Zealand, and that it expects to be an important part of New GM.

China: Kevin Wale, President and Managing Director, GM China Group, reportedly told the Chinese media that GM operations in China would be unaffected by the US bankruptcy filing, and that plans for a new plant remained on track. According to a press release issued by GM China, all of GM’s businesses in China, which include eight joint ventures, continue to function as normal. GM’s business in China grew 33.8% in the first five months of 2009 compared with the same period last year, and the company’s sales results for May 2009 were up 50% year on year. Fritz Henderson outlined the importance of China for New GM as follows: “Our ownership interests and our ventures in China are a critical part of the New General Motors. Our business in China continues to grow at a very fast pace. Our emphasis on China is one of the critical parts of being successful as a global automaker. We’re excited about the next five years. We have a number of exciting Buicks, Chevrolets and Wuling vehicles being launched into the China market this year and next year.”

India: GM India said in a statement that its operations were not included in the US Chapter 11 filing, and that consequently, all GM India dealers, warranty and customer support services remained unaffected and continued to function as normal. The company plans to launch three new models in 2009, including the imminent launch of a new Chevrolet Spark. India will play a crucial role in the New GM. GM has two vehicle plants in India: Halol, Gujarat, in western India, and a new factory at Talegaon, Maharashtra; the two plants’ combined output capacity is 225,000upa. GM plans to make India an export hub for its mini-vehicles and intends to launch luxury models later; it has also confirmed a third powertrain facility for India.

Korea: GM Daewoo: The future of the GM Daewoo operation in Korea is something on which analysts will be keeping a close eye. GM Daewoo has been in negotiations with the Korea Development Bank (KDB) for several months over a huge emergency loan. KDB is understood to be holding off on any loan agreement until assurances have been given over the future role of GM Daewoo in the New GM. GM Daewoo has stated that it will be part of the New GM, but GM itself has remained surprisingly quiet on the specific future of GM Daewoo. It will be interesting to see how this plays out in the coming weeks and months.

South Africa: GM South Africa has issued a statement making it clear that the GMSA operations will be unaffected by the US bankruptcy court proceedings, and that its schedule for a new R250 million Pan-African Parts Distribution Centre also remains unaffected. Crucially, the terms of the sale of the Hummer brand to Tengzhong include consolidation of H3 assembly into a single location, namely Shreveport, with GMSA losing the CKD assembly contract.

Thailand: In Thailand, GM intends to proceed with local expansion plans, assuming it can secure the necessary bank loans. Despite a massive drop in output at its local plant (40,000upa forecast for 2009, compared with 104,000 units built in 2008), the Thai operation is confident that it can push through its plans to establish a local diesel engine plant and upgrade the existing assembly plant. Again, the confirmation of GM Thailand’s role in the New GM may be required before the banks are prepared to release the necessary funds.

Europe: This feature excludes commentary on the future of GM’s three European brands – Opel, Vauxhall and Saab. The future of Opel and Vauxhall is set to be played out under the Magna-led consortium funded by Russia’s Sberbank Rossii. Saab has been given a further 90-day extension to iron out the details of its sale to one of three interested parties.

GM Europe is now operated by Opel, and the company has received a MoU from the Magna-led consortium, and a first instalment of €300 million from the €1.5 billion bridge financing agreement with the German government. According to Henderson: “This series of actions isolates our European operations from the court-supervised process in the US. GM Europe will continue to operate as normal”. He added that the New GM will maintain a substantial (35%) minority stake in the Opel and Vauxhall businesses in Europe.

Questions that remain unanswered

  • How much freedom will New GM have? Will the US government really keep out of the day-to-day decision-making process and allow GM to be run at arm’s length?
  • What changes will take place at the executive leadership level?
  • When will New GM become profitable? Henderson waved aside this question in the Chapter 11 press conference, saying that the company was too focused on rebuilding to be able to state which quarter would see the company return to profitability.
  • Can New GM really succeed where GM failed?
  • Are the plant closures sufficient? Will further closures follow?
  • What will happen to the NUMMI and CAMI joint ventures?
  • What will the new small car for the US be, and where will it be built?
  • What effects will the Chapter 11 filing have on GM’s global operations during the company’s court supervised process?
  • How will the global operations of the New GM be affected by the company’s rebirth, and its ongoing struggle to become, and then to remain, profitable?
  • What does the future hold for GM Daewoo?

Glenn Brooks contributed to this feature

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