How to Revive GM
June 23rd, 2009 at 3:54pm
Even though it’s bankrupt and the price of its stock has collapsed, General Motors is worth a lot more money than most people realize. And if the company were to take a radically new approach to how it runs its business the payoff could be enormous.
GM’s market capitalization is at ridiculously low levels. The total value of its stock is presently less than half a billion dollars. But the company is really worth a lot more than that. When you add up the value of all the land, buildings, tools, machinery, equipment, patents, research labs, proving grounds and every other asset it has, GM is worth over $140 billion. There’s even more value in the know-how, knowledge and experience of its people.
But how do you unlock all that value?
I’m fascinated with the approach that Sergio Marchionne, Fiat’s CEO who is now running Chrysler, is taking to reorganize Chrysler’s management structure. Up to now the brand managers have been little more than glorified sales managers. But taking a page of how he turned Fiat around, Marchionne is naming a CEO for each brand and giving them full profit and loss (P&L) responsibility.
This is kind of like the way they did it in the glory days when Detroit’s automakers still dominated the global automotive industry. Back then the general manager of Chevrolet, for example, ran the division as if it were a stand-alone company. He’d be in charge of everything from design to engineering, manufacturing, sales and advertising.
Yes, there were a lot of duplicate resources and overlap with GM’s other divisions. But if you want to capture 50% of the market you have to tolerate a certain amount of inefficiency. GM was able to grab that much market share because every division had a crystal clear focus on what its brand stood for and the products it had to make. The division managers didn’t have to make compromises to satisfy the “greater good” of the corporation.
Why not revive this concept and apply it to the new GM? But with a couple of modern updates.
Certain corporate functions, such as Design, Engineering, and Manufacturing should remain as centralized corporate operations. But under this scheme they would be treated as their own separate business units, with their own P&L.
The different brands, brought back as separate divisions, would contract the work they need from the centralized corporate operations. Chevrolet for example, would contract with GM Design to design the cars and trucks it wanted. It would contract with GM Engineering to develop them and with GM Manufacturing to build them. The same would hold true for Cadillac, GMC and Buick.
This would provide tremendous transparency and accuracy as to the true cost of bringing new cars to market. The budgets of the centralized operations would be determined directly by what they could sell to the car divisions. The executives running these operations would treat them more like their own business. Decision-making would be pushed down much deeper into the organization and would be done far more quickly than today.
Once this system was in place and operating smoothly, the car divisions would publish their own annual reports. The next step would be to go public with their own IPO. Investors would be able to buy stock in whichever division looked best to them, and to ensure it shared in the wealth they generated GM would retain majority ownership in each of them. And of course investors could still buy stock in GM.
The company already did something like this when it owned Hughes Electronics and EDS. Investors could buy GM-H or GM-E stock.
By providing investors with a much clearer view inside the corporation they would be able to invest their money in the most profitable parts of the company. This would truly unlock the tremendous value that is currently trapped within General Motors.
One more thing. I’d spin off GM Powertrain, and convince Ford and Chrysler to sell off their powertrain operations to it. The new Powertrain Company would build engines and transmissions for all three, achieving massive economies of scale and providing each of them with much lower costs. And then I’d do an IPO with the new Powertrain Company, with GM, Ford and Chrysler collectively holding a majority share.
We live in a brave new world. What seemed impossible just a matter of months ago is completely within our grasp today. The auto industry is going through a violent restructuring, and whoever comes to grips with the new reality first is going to be way ahead of all the others.
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Comments (15)
June 23rd, 2009 at 7:25 pm
John, would the new divisions be able to contract out design and engineering to other firms like Porsche or Lotus or Giugiaro? Would each entity you envision be able to go to the capital markets to raise funds, based on its own credit?
It seems the tension between the brands and the corporation has been the critical balance at GM since Sloan found a neat solution. And it took a dynamic De Lorean to fix Chevrolet when it was too much for Cole. Just how many degrees of freedom to you want?
A difference today is that GM recognizes beancounters cannot design or engineer cars. And the government isn’t scaring the bejeezus out of the corporation due to antitrust. Let’s hope the politicians can restrain their need to help out their constituencies,and just let GM make cars!
June 23rd, 2009 at 11:44 pm
This is a good plan! Maybe Pontiac can be revived under it!
June 26th, 2009 at 1:55 pm
John, take this plan to B O & he,ll make you COO!
June 26th, 2009 at 2:29 pm
Hay John, I think if the president would read on what you wrote,he would probably put you incharge of GM and you would personaly have my vote as well as others on that!What do you got to loose?
June 26th, 2009 at 3:30 pm
It sounds like rearranged furniture at the old folks home to me.
June 28th, 2009 at 12:17 pm
Hi John,
Bringing back product character by way of distinct car divisions is worth investigating since we know that in recent years Chevrolet and Cadillac are the only real divisions left. The other GM brands seem like two dimensional nameplates.
However, it would never be a good idea to spin off the powertrain operations. To those of us who are knowledgeable about automobiles, distinct driveline and ALLIED COMPONENTS define the product in terms of performance, reliability and serviceability. Remember the Chevy engines in Oldsmobiles uproar? One of the advantages that put GM ahead the rest of the industry years ago was the assurance that every GM vehicle had an in house produced engine, a Hydramatic transmission along with a Delco starter and alternator, Packard Electric wiring, and a Rochester carburetor. These components were household names to anyone who could open the hood of their car and GM vehicles could be serviced easily and inexpensively by any repair shop.
Spinning off these important parts of the car has contributed to making GM vehicles as generic as hair dryers.
If you ask the Chevrolet enthusiasts about vehicle integrity they’ll tell you that nobody writes songs about Volvos!
June 29th, 2009 at 1:57 am
John,you are on the right track,only by focusing on each segment of the industry to make it a success in its own right will GM ever get back on track,the next step would be to judge itself in every individual aspect against the “best” manufacturers,ie you would be able to see where the inneficiencies are my bet is you will find it is in “design” and subsequently the “manufacture” having built assembly lines for ALMOST all the major automobile companies this is my opinion but in any event you have made the 1st sensible solution i have heard yet!!!
Best Regards
Mike Kirby
South Africa
June 29th, 2009 at 6:00 pm
If GM can get the gov’t. to pass the Nat’l. Healthcare Plan it could lift the burden off the company. I don’t think they can stick the gov’t. with the pension obligation (although they tried) but insist that the workers with the ‘transplants’ get a pension and after worklife healthcare this playing-field will become alot more even.
July 2nd, 2009 at 10:17 am
John –
That is the original GM business model dating back to the 20s. “GM Powertrain” ran as it’s own entity, and each division did “contract” them to do their next powertrain.. And each brand was run as it’s own entity, competing for limited, critical resources to get the job done. The only problem I see there, is that critical technology investments would be hard to justify on their own for one particular brand or model line, therefore, they wouldn’t get done, even through they might be customer critical… (take recent Chrysler as an example – each model had to carry the burden of technology improvements financially independently, such as MyGig. The first car line to use it pretty much paid for it, and it’s development was hampered. Some ideas developed for a vehicle line, that could progress corporate wide for all customers where not followed becuase they did not make fiscal sense for that model individually. The real question is, how do you justify who get’s priority on new tech? BMW is quite the opposite (and they do only have one brand so that helps)… and Audi is the same… Audi/Vw/Porsche share many core components across brands, and the Corporate parent VW, develops it then distributes it. However, Audi still has things they develop individually for their customers. The result is their base homework is done on say, core radio tech, and Audi can develop further. But the base is fantastic, because they can charge it to the corporate resources for development, and each model line can pay a *piece* of the cost, not the entire cost. Your idea would work great, it would just take some sorting our amongst brands to priortize, which gets back to central control again, and you just chased your tail… IDK, in the end, I am thinking a strong core nucleus is still critical for major tech development.
July 2nd, 2009 at 11:41 am
@ WF: What’s needed is central guidance, not central control. You need a delicate balance between decentralized brands and the centralized corporate groups. Decentralization will result in stronger brands.
As for the cost accounting of new technology, Detroit needs to take a page out of Toyota’s book. Once Toyota decides to intro a new technology, it determines what the volume will be for the next decade, then sets the piece cost based on that volume. That way the car program that intro’s the new tech doesn’t have to bear such an onerous piece cost.
July 2nd, 2009 at 1:29 pm
Very Good point. Detroit company’s tend to not distinguish between guidance and “control” and tend to be control heavy top down. Sounds like you are really advocating the notion of empowerment, which has proven to be the most successful management technique throughout history… You are absolutely right about the tech costs. LONG TERM is what I forgot to mention in the earlier post. Really getting the long vision and planning for it is a piece Detroit has been missing for decades. Let’s hope that the new management folks understand that shareholder value extends beyone the Model Year and Quarter. Could be an exciting time inside GM in the next few years. Thanks for the reply!
July 3rd, 2009 at 12:45 am
Great thoughts, John!
A couple comments …
1) You raise the issue of “centralization/decentralization”, you mentioned that tonight in AAH as well. (By the way, what book on automotive history are you reading that you mentioned on the show??).
I think that centralization/decentralization is a key question, but it’s not the whole story. In his book, Sloan devotes a LOT of space to this question … and I think kept adjusting and “tweaking” it as he went along. I believe that Sloan mentioned in his book that Purchasing was centralized, but then some 10 years later, he went back to decentralized Purchasing because it’s an issue of “balance” (or “out-of-balance”) and keeping it just right by keeping it somewhat in flux.
Over the last 20 years or so, beginning around the Jack Smith era, GM has seen a MASSIVE shift in power from the LINE organizations to the STAFF groups … but this is more complex than centralization/decentralization.
2) Beginning in the 70′s GM eliminated key “Line” organizations:
– got rid of Fisher Body
– blew up Divisional engineering activities with the formation of CPC/BOC (I still don’t think we’ve recovered from that)
– Eliminated the last vestiges of the Car Divisions with the move to the RenCen in 98
3) At the same time … tremendous power went to three staff activities: HR, IS&S and Purchasing.
4) Forget beating up on Finance … Finance at GM has ALWAYS been powerful, even back when GM had over 50% market share. Finance was an extremely effective counterbalance to Divisional guys going out of control, especially Sales guys (e.g. Bob Lund at Chevrolet). Financial has generally been staffed by some of GM’s brightest people, after the engineers (e.g. Ed Cole, Pete Estes, John Beltz, etc.)
5) I contend that today HR/IS&S/Purchasing are major problems at GM, but in large part because: “Where the hell are the “line” organizations??” (As you said in the wrap up in AAH tonight, Bo Anderson was only doing what Rick wanted him to do … same with Lopez … etc.)
6) I agree with your article, GM needs to establish (re-establish) some strong “line” orgranizations … but this is more than just a centralization/decentralization question however …
7) I’m not sure that what you suggest would really work with centralized Engineering and Manufacturing … because …
8) this means your new Car “Divisions” would essentially be only Sales and Marketing organizations. This has never seemed to work well in the past… e.g. a) the Bob Lund era at Chevrolet and b) Car Div Gen Mgrs generally came from Product Engineering.
9) Can GM put “Humptey-Dumptey” together again?? I hope so!! Stay tuned.
Jim
July 10th, 2009 at 12:55 pm
John, I like your ideas and after reading over the comments I believe you may be on to something. One point I would like to make from part of your article has to do with the value in the people who work there. As I’ve been one of those people for almost 25 years I can tell you from my own experience, GM, for the most part, craps all over it’s employees, both hourly & salaried. They invest huge amounts of money, time in training and investing in their people and then proceed to throw the value away by not utilizing the person’s training and skill. I can cite multiple examples of this for not only myself but others as well. Secondly, one of the things that worries me about the “New” GM is we still have many of the “Old” GM upper management that were arrogant and wouldn’t listen. Just because Wagner was ousted and Fritz is now in his place doesn’t mean we have fresh thinking. Far from it!! While we have a new Board (finally!!!) the old arrogance is still there, I see it everyday. You need to get fresh people in that come from the “real world” not from Finance or some other area of GM. Yes, automotive manufacturing background (no more Zarella’s or Smale’s) but peole who don’t have that GM mindset that “we don’t make mistakes because we’re perfect”. If they want this new ship to sail & not sink then they better change more than just the CEO & owners.
July 12th, 2009 at 6:20 pm
Map the process and you will see if you are improved.
July 31st, 2009 at 1:26 pm
Hi John,
GM needs this and a lot more new ideas!
The point seems to have several focused, lean and non-bureaucratic divisions that create value in their own unique way.
It is a reflection of modern America. Several small businesses offer more value and are more adjustable compared to one big organization.
This could lead to responsible growth, responsible projections and focus on the long term.
Rather than making brand centric P&L centers what about model centric P&L centers?
Marketplace would naturally kill poor models.