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My plan to rescue General Motors
Solutions based on cost-cutting and layoffs won't work. My scheme to save GM starts with a focus on just one or two functions the struggling company does well.
By Jim Jubak
Can General Motors (GM, news, msgs) be saved? I sure hope so. Certainly, as I argued in my last column, "Globalization isn't what's killing GM," incompetent management and intransigent unions have played a big role in bringing the company to its knees. And I'm convinced that current turnaround plans that rely almost exclusively on cost-cutting and layoffs won't work.
But the challenge that has pushed General Motors to the brink of bankruptcy isn't unique to the car maker. Just about every one of the former gems of the U.S. industrial economy faces this same challenge. As I wrote in my last column, in a world where Northwest Airlines (NWACQ, news, msgs) can outsource its flight attendants, the hope that we in the U.S. can ride out the storm by hiding in the service economy is an empty illusion.
Today, I'm going to do my bit: I'm going to outline a plan to save General Motors -- and the other mature giants of our economy. I'm putting it out there for three reasons:
1) because a niggling but irritating minority of the e-mail received in response to my last column challenged me to fix GM -- and I love a challenge,
2) because I think putting out solutions is an antidote to the passive hopelessness that threatens our future, and
3) because putting together this solution led me to rethink the nature of the problem.
A problem, not the problem
Oh, you think you know the problem? That cheap labor in countries like China and India is undercutting U.S. wages and stealing U.S. jobs.
Nah. That's just the context, the global reality of the moment. The real problem is that these companies haven't found a way to adapt to this new world. They continue to do business in the old ways that worked so well 50 years ago.
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Once upon a time, U.S. industrial companies were designed to do everything themselves. Ford Motor (F, news, msgs) marked a high point of this kind of corporate structure: The car maker made its own steel, for example, in the great River Rouge plant. General Motors builds its own cars from its own designs and then finances the cars. Independently owned -- but company-affiliated -- dealers sell the cars. Until recently, car makers built their own parts, too. General Motors and Ford Motor didn't begin spinning off part makers Delphi (DPHIQ, news, msgs) and Visteon (VC, news, msgs), respectively, until 1999.
And once upon a time this structure worked well. By owning all parts of the process, these companies were able to make sure that all the raw materials and parts needed to mass produce cars were in the right place at the right time and of the right quality.
But nobody would dream of building a company this way if they were starting a car maker today. Look at how Chery Automobile, an eight-year-old Chinese car maker, proposes to enter the North American market with six models in 2007. It has hired Visionary Vehicles (of the United States) for sales and marketing; Pininfarina and Bertone (of Italy, the designers of Peugeot sports cars, Ferraris and Lamborghinis) for body design; and Lotus Engineering (of the United Kingdom), Mitsubishi Automotive Engineering (of Japan) and AVL (of Austria) for engines and drive trains. Most other parts will be farmed out to Chinese suppliers.
That gives the company a chance to focus on just two things -- logistics and final assembly -- and to put together a team of the world's best and world's cheapest overnight.
Building a car on the Dell model
Chery Automobile didn't discover this structure by itself. In fact, it's the very structure that current U.S. global success stories such as Dell (DELL, news, msgs) and Wal-Mart Stores (WMT, news, msgs) have perfected. Build your company around one or two functions -- and do those better than anybody else in the world -- and then build a logistical system that will let you buy the best quality product in the world (for your price point) at the lowest possible cost.
There are three reasons why this kind of business structure has emerged -- and emerged so successfully -- right now.
- First, the globalization of the world economy has created a worldwide supermarket of suppliers competing on cost and quality.
- Second, the Internet enables companies to efficiently shop, transfer, track and schedule raw materials and subassemblies.
- And, third, maturing markets for products ranging from PCs to cars have shifted the goal of manufacturing from producing huge runs of identical products to producing lots of smaller batches of individualized niche products. Dell "manufactures" each PC to customer order, for example.
The vertical mass-production model that GM and many other U.S. manufacturers still follow doesn't fit this world very well. (For more on what's not-so-catchily called "de-verticalization," see a report available on the public side of the Bernstein Investment Research and Management Web site, titled "The New Industrial Revolution: De-verticalizaton on a Global Scale.")
A man with a plan
With that as background, here's my plan to save General Motors. I don't claim originality here. In fact, I've tried to steal as many ideas as possible from successful manufacturers on the theory that such theft is a good way to make sure the ideas work in the real world.
Put workers and management in the same compensation boat. No more cuts from $25 an hour to $12.50 an hour for workers and $488 million in "retention" bonuses for management, as Delphi's bankruptcy plan proposes. If a company pulls off a successful turnaround, everyone who contributed should share in the rewards. It's ludicrous to give managers stock and options as a reward and believe that workers should be satisfied because they still have a job. And don't stop once the immediate danger has passed. Adopt steelmaker Nucor's (NUE, news, msgs) model that collapses the distance between what workers make and managers make. Put everyone on a relatively modest base-compensation plan. Then reward everybody with big bonuses -- at Nucor, they range from 80% to 150% of base compensation -- when the company has a good or great year.
Figure out what one or two things General Motors can do really well -- a la Dell -- and build the company around those functions. This won't be easy, because right now it's not clear that the car maker does anything well when judged against the global competition. But I suspect that there are areas of excellence inside the company that aren't apparent to outsiders (and perhaps to insiders). Discover these areas of excellence by breaking the company up into relatively small functional units -- a factory, an engineering unit, and so on -- and then put them in head-to-head competition on real contracts with outside firms that perform the same tasks on an outsource basis. Some players in the auto industry do this on a limited basis now. Magna Steyr, the Austrian car-building unit of Magna International (MGA, news, msgs), builds cars for DaimlerChrysler (DCX, news, msgs) that include the Chrysler 300.
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