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GM turnaround?

From The Economist| February 14 , 2007 08:51 BJT

WHEN Rick Wagoner, the chairman of General Motors, walked onto the floor of Detroit's Cobo Hall in January 2006, only one question seemed to matter to the assembled throng attending the North American International Auto Show: how soon would the giant American carmaker go bust? A representative of Kirk Kerkorian, an entrepreneur who had just bought a 10% stake, said GM had to wake up or it would run out of cash in three years. Mr Kerkorian has since sold out, but he seems to have galvanised GM. At this year's show the subject of choice was the firm's nascent turnaround.

A year ago GM was making record losses, closing plants and slashing its workforce. It was struggling to sell cars at rock-bottom prices and faced having to pay out billions of dollars to prop up Delphi, its former parts unit. Meanwhile, its increasingly rampant Japanese rival, Toyota, was making plans to overtake GM as the world's biggest carmaker by 2008.

Many of these problems still haunt GM, but even its most vociferous critics can see signs of a revival. The company began this year's Detroit show with a lavish event attended by Hollywood celebrities. But the real star was the newly redesigned Camaro Convertible, marking a comeback for one of GM's most famous models. Along with the new Chevrolet Malibu, a complete remake of the type of saloon with which GM once dominated the market, it suggests that the firm is regaining its edge in design. Its new Chevrolet Silverado was named pick-up truck of the year, and when its Saturn Aura was chosen as best car, even the unit's unflappable general manager, Jill Lajdziak, was lost for words.

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The revival of the ailing Saturn division casts light on some of the changes. Saturn has consolidated its vehicle-development efforts with those of GM's European arm, Opel. More broadly, the carmaker's previously autonomous regional operations are now working together coherently, as Bob Lutz, GM's vice chairman and “car czar”, farms out duties. North America is developing the big pick-up trucks that dominate the local market and Europe will handle mainstream passenger cars. The car unit of South Korea's Daewoo, now a GM subsidiary, will work on entry-level models and Holden, an Australian subsidiary, will develop big saloons. If GM can make this approach work, it will achieve economies of scale that only Toyota can match, says David Cole, of the Centre for Automotive Research, a consultancy.

Like Toyota, GM is also standardising manufacturing practices around the globe. It has eliminated 30,000 jobs and reduced North American production capacity by 30%. According to Mr Cole, all of this has cut costs by the equivalent of about $2,000 a vehicle. Mr Wagoner says GM reached its target of trimming $9 billion from fixed costs by the end of 2006.

Still, problems remain. Toyota unveiled its largest-ever light truck in Detroit, and is thought to be planning several new American factories. So even as Toyota emphasises the green credentials of its Prius hybrid car, it is attacking the Silverado, one of GM's biggest money-makers. GM's response is to expand its own hybrid offerings, including the new Chevrolet Volt concept car (pictured). It is battery-driven and can be recharged from the mains or by an on-board three-cylinder engine that never directly drives the wheels.

GM is still struggling to get its core North American operations into profit. But for the first time in years it is heading in the right direction. There is a long way to go, but at least the threat of bankruptcy is receding in the rear-view mirror.

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