GM is the world’s largest automaker that has remained the industry leader for the past 77 years. It employs more than 250,000 people and manufactures in 35 countries. In 2007, more than 9 million vehicles were sold all around the world. The budget of GM is more than that of countries like New Zealand and Pakistan. Management Science books are filled with examples of GM, stating how big the company really is, how well it manages its operations, how efficiently it uses technology, how immaculate its supply chain is, how it cares for the employees, how well it creates economies of scale and so on. This is not just a company; it’s a legend in its own right. Why then are we hearing that General Motors is on the verge of bankruptcy? That doesn’t sound logical. Where did GM go wrong? What happened? Why is it asking for bailouts?
In 1990, GM introduced an electric car with zero emissions, which was marketed in the United States, in some regions. It was called E1. The response was not so good and the project was scrapped. The company was later criticized for abandoning E1.
In 2007, after the union strikes, contracts were signed with worker unions, providing product and employment guarantees. Such strikes not only resulted in lost production but also kept financial burden on the company. Half a million former employees get pensions and health care benefits from GM.
As the Japanese competitors, like Toyota and Honda, continued to produce compact and fuel efficient cars, GM remained committed to making larger vehicles that were not so fuel efficient. It kept changing names for newer models but that did not increase sales as the company had lost respect in consumers’ eyes. Japanese car manufacturers came up with new models while retaining old names to bank on their reputation. In 2004, GM started refurbishing its SUVs for introduction as new models in 2007. The fuel costs increased the same year and people started focusing on fuel efficient vehicles. This trend has continued till today. After the sharp rise in oil prices in 2008, consumers bought more of Japanese cars while sales of SUVs declined. In addition to the issue of fuel efficiency, Japanese competitors continued to offer more interesting and comfortable features in their cars, while GM failed to do so at the same pace. Japanese are also good at cutting costs during production which is another reason they survive even when prices are going down.
GM has a good supply chain and it is amazing to see how it manufactures and supplies cars the world over. However, the supply chain only provides what the manufacturer wants and it does not have control over the upstream market demand. The manufacturer in this case did not produce what it should have. In order to do that, GM had to re-structure and re-align the entire supply chain.
Although GM did introduce the world’s fist hybrid car in 2004, the company sold just 843 hybrid cars in the first quarter of 2008. On the other hand, Ford and Toyota sold 5,225 and 430,000 hybrid cars respectively. This shows that General Motors did not follow up with a good initiative that it had taken, just as it had scrapped the E1 project years back. In 2007, GM lost $50 billion and its stock value decreased by 76% in 2008. The talks of merger with Chrysler failed the same year. By December 2008, GM was almost out of cash and could not survive beyond 2009. The possibility of filing for Chapter 11 bankruptcy began emerging as the company asked the government for billions of dollars from the TARP (Troubled Assets Relief Program). On 19th December 2008, the government approved a $13 billion financing for GM and Chrysler while $4 billion could be provided later. The Detroit big three have to prove their viability by March 2009 before they can receive more cash.
In conclusion, GM failed to see the writing on the wall. This is a classic case of a manufacturer producing what it deems to be suitable for the consumers, rather than what consumers really want. The union contracts must have had negative impact on GM, unlike foreign competitors, but the situation got worse due to wrong product decisions. Past success cannot guarantee future accomplishment. In a fast changing competitive world, companies have to be flexible enough to change along with the changing global conditions, consumer tastes, competitor strategies and government regulations.
In 1990, GM introduced an electric car with zero emissions, which was marketed in the United States, in some regions. It was called E1. The response was not so good and the project was scrapped. The company was later criticized for abandoning E1.
In 2007, after the union strikes, contracts were signed with worker unions, providing product and employment guarantees. Such strikes not only resulted in lost production but also kept financial burden on the company. Half a million former employees get pensions and health care benefits from GM.
As the Japanese competitors, like Toyota and Honda, continued to produce compact and fuel efficient cars, GM remained committed to making larger vehicles that were not so fuel efficient. It kept changing names for newer models but that did not increase sales as the company had lost respect in consumers’ eyes. Japanese car manufacturers came up with new models while retaining old names to bank on their reputation. In 2004, GM started refurbishing its SUVs for introduction as new models in 2007. The fuel costs increased the same year and people started focusing on fuel efficient vehicles. This trend has continued till today. After the sharp rise in oil prices in 2008, consumers bought more of Japanese cars while sales of SUVs declined. In addition to the issue of fuel efficiency, Japanese competitors continued to offer more interesting and comfortable features in their cars, while GM failed to do so at the same pace. Japanese are also good at cutting costs during production which is another reason they survive even when prices are going down.
GM has a good supply chain and it is amazing to see how it manufactures and supplies cars the world over. However, the supply chain only provides what the manufacturer wants and it does not have control over the upstream market demand. The manufacturer in this case did not produce what it should have. In order to do that, GM had to re-structure and re-align the entire supply chain.
Although GM did introduce the world’s fist hybrid car in 2004, the company sold just 843 hybrid cars in the first quarter of 2008. On the other hand, Ford and Toyota sold 5,225 and 430,000 hybrid cars respectively. This shows that General Motors did not follow up with a good initiative that it had taken, just as it had scrapped the E1 project years back. In 2007, GM lost $50 billion and its stock value decreased by 76% in 2008. The talks of merger with Chrysler failed the same year. By December 2008, GM was almost out of cash and could not survive beyond 2009. The possibility of filing for Chapter 11 bankruptcy began emerging as the company asked the government for billions of dollars from the TARP (Troubled Assets Relief Program). On 19th December 2008, the government approved a $13 billion financing for GM and Chrysler while $4 billion could be provided later. The Detroit big three have to prove their viability by March 2009 before they can receive more cash.
In conclusion, GM failed to see the writing on the wall. This is a classic case of a manufacturer producing what it deems to be suitable for the consumers, rather than what consumers really want. The union contracts must have had negative impact on GM, unlike foreign competitors, but the situation got worse due to wrong product decisions. Past success cannot guarantee future accomplishment. In a fast changing competitive world, companies have to be flexible enough to change along with the changing global conditions, consumer tastes, competitor strategies and government regulations.
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