GM's Plan for World Domination
Aug 10th 2011 7:37PM
Updated Aug 10th 2011 7:38PM
Wall Street may not have caught on yet, but things have been changing in a big way at General Motors (NYS: GM) - and there are more big changes to come.
GM held its annual Global Business Conference on Tuesday, hosting a select group of Wall Street analysts in Detroit for a day of presentations by senior GM managers. Your humble Fool wasn't among that select group, but I did get a copy of the slides and was able to listen in by phone.
And I'm glad I did. GM laid out part of its plan for the next few years, and it's both very interesting and very familiar.
A better idea worth stealing
It's clear that GM CEO Dan Akerson and his team have taken a page -- OK, more like several books, a copy machine, and a library card -- from Ford (NYS: F) , the local shining example of how to turn around a moribund automaker.
Lest you think I'm knocking the company for that, let me be really clear: That's a good thing. Ford's medicine, with some modifications, is exactly what is needed to cure what still ails post-bankruptcy GM. This sort of approach is what I was hoping for when I bought GM shares in the wake of the IPO last year, and it's why I've continued to be (mostly) optimistic about the company's future even when old boneheaded GM-think occasionally seemed to reassert itself.
The essential idea behind the "One Ford" plan that GM is riffing on is this: Reduce the number of products sold around the world and build them on the smallest possible number of "platforms," industry-speak for a set of common dimensions and parts that can be shared among different models to lower costs and streamline production. With fewer products to engineer from scratch, more money and resources can be lavished on the development of each.
That in turn results in better, more competitive products, which can be sold at higher prices with fewer of those margin-killing "cash back" incentive campaigns. And that means strong sales and greater margins. Add in strict cost controls and sound attention to business fundamentals, and the result is solid, sustainable profits.
That, more or less, is how companies like Toyota (NYS: GM) and Honda (NYS: HMC) have done business for decades. Ford has been working on its plan since 2006, and over the past few years, the fruits have been apparent -- a string of hit products and solid profits, despite a sluggish sales environment.
Maybe these guys know what they're doing after all
Back in January, when Akerson designated Mary Barra as GM's new product chief, I couldn't quite see what he had in mind. There was no doubt that Barra was a capable executive, someone said to have a knack for getting diverse groups to work well together, but her background in manufacturing and HR seemed to make her an odd choice to succeed retiring product visionary and Detroit icon Bob Lutz.
It turns out that Barra's role wasn't really to be the next Lutz, but rather to do the hard work of streamlining GM's global product portfolio -- and the maybe-even-harder work of fixing GM's messed-up product-development process once and for all.
Barra said yesterday that by 2018, the company will be building 90% of its vehicles -- total, around the world -- on just 14 "core architectures," or global platforms. GM today has about 30 different platforms, some of which are used only in a single region, and the latter account for quite a bit of volume. Only 31% of GM's current production is built on genuinely global platforms.
Rationalizing and globalizing those architectures will lower GM's engineering and production costs significantly and allow the company to spend more developing each, just as Ford is doing.
But it's the other part of Barra's mandate -- to fix the product development process -- that really got my attention during Tuesday's presentation.
How to make a quick billion dollars
GM's new-product process has for years been marked by what Barra calls "churn." These are practices like starting and stopping and restarting projects in response to economic conditions or management whims, making major changes very late in development, canceling projects after significant money has been spent, and making major changes in leadership or assigned staff mid-development. Anyone who has watched the company for years has seen plenty of this kind of thing. It's classic old-GM dysfunction.
New GM, on the other hand, estimates that this churn has cost the company a billion dollars annually. Barra's plan is to minimize churn from now on by stabilizing development plans and committing to what she and CFO Dan Ammann called a "straight line investment strategy." Simply put, that means that GM has committed to steady product investment even through economic downturns, something made possible by the company's $30-billion-plus cash hoard.
The upshot? Faster time to market, more efficient use of internal resources, and a huge cost savings that will be realized in "months, not years," Barra said yesterday.
The upshot: The right way forward
Barra's revamp is only one part of what GM presented yesterday, and I'll be writing more about other aspects in the coming days. But I highlight it here because it elegantly shows us where GM is headed -- and it's in the right direction.
The trick will be in the execution. It's one thing for GM managers to lay out a sensible plan and another thing entirely to get GM's cumbersome bureaucracy to play along. It'll take some time before we know how well this revamp is going to work out in practice, and continued skepticism may well be warranted.
But I'm thinking that I may have underestimated Dan Akerson. His tenure hasn't exactly been smooth, and his understanding of the nuances of the car business may still need some work. But in terms of fixing what has been for decades a very broken business, he might yet turn out to have been the right guy for the job.
- Add Ford to My Watchlist.
- Add General Motors to My Watchlist.
- Add Toyota to My Watchlist.
- Add Honda to My Watchlist.
Worried about the impact of higher energy prices? You're not alone -- but here's the good news: It's not too late to profit. In the new special report," 3 Stocks for $100 Oil ," expert Motley Fool analysts name three outstanding companies that should benefit handsomely from rising oil prices. The report is available free of charge for Fool readers -- and here's your chance to get instant access.
At the time this article was published Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.