Alliances: GM tries, tries again

GM's worldwide web
Major companies in GM's alliance
  • Adam Opel AG: Subsidiary is owned 100% by GM.
  • Saab Automobile AB: Subsidiary is owned 100% by GM.
  • Isuzu Motors Ltd.: GM owns 49% of shares.
  • Suzuki Motor Corp.: GM owns 20% of shares.
  • Fuji Heavy Industries (Subaru): GM owns 20% of shares.
  • Fiat Auto: GM owns 20% of shares. Notes: Fiat S.p.A. owns 5% of GM. GM continues to negotiate for purchase of Daewoo assets.

  • In 1988, General Motors began selling the Geo Tracker, a rebadged sport-utility from Suzuki Motor Corp.

    But as sales of small, cute-utes boomed in the past few years, GM missed the party. Saddled with a tired product, now badged the Chevrolet Tracker, it watched competitors such as Toyota Motor Corp., Honda Motor Co. Ltd. and Ford Motor Co. zoom past it.

    The Tracker's performance is one example of a nagging problem at GM: a legacy of missed opportunities with its various global partnerships.

    Yet, GM, pressed by ever-increasing competition and tighter margins, now is counting on partnerships with Fiat Auto, Suzuki, Subaru and Isuzu to give it a global competitive edge.

    Saying it has fresh resolve to make its partnerships work, GM wants to share components with affiliates to save money and develop vehicles that can capture significant chunks of global market share.

    Industry analysts acknowledge that GM's web of partner companies and subsidiaries gives it unprecedented scope. But to make it work, they say, GM must manage equally unprecedented complexity - which historically has hobbled the company. Although GM has centralized many of its operations in the past two years, it still is struggling with its decentralized past.

    For instance, working with its own subsidiary, Adam Opel AG, GM in the late 1990s produced two clunkers, the Saturn L series and the Cadillac Catera.

    Lackluster past

    In the past, GM's partner companies largely provided it with rebadged cars to meet fuel-economy goals, quick fixes for one-time product needs and subcompacts for developing markets.

    "It was pretty unsophisticated in the past, and I'm not sure it was done with a real holistic view," said Christopher Benko, director of management consulting services for PricewaterhouseCoopers. "There were a lot of one-offs."

    But, Benko added, GM's array of partner companies is "unmatched by anybody else" and represents an attempt to fashion a competitive asset: "They're really betting on this alliance strategy."

    The executive charged with overseeing the strategy work is Larry Burns, 50, GM's vice president in charge of planning and research and development.

    He talks with quiet intensity about the huge task, the sentences and paragraphs spilling out in orderly procession, giving a sense that the intellectual underpinnings, at least, of GM's alliance strategy are solid.

    Ambitious volume goal

    Burns unabashedly spelled out GM's hugely ambitious goal for the strategy: "I'd certainly like to see us and our partners up around 30 to 35 percent of the world's volume. That's a bit of a stretch goal, but if we play this growth hand right, it's possible."

    GM and its partners now have about 25 percent of global volume, with GM itself at about 15 percent, he said.

    If GM and its partners rose from 25 percent to 30 percent, that would be an increase of about 3 million vehicles. That's the annual production of 12 assembly plants - a tall order given the brutal competition for market share and the worldwide glut of production capacity.

    Benko said GM's aggressive stance takes some getting used to for anyone who sees only its market share losses in the United States.

    "From a global perspective, GM is a real potential powerhouse," he said. "Those of us who are used to watching them in North America are not accustomed to seeing this."

    But there are significant obstacles, not the least of which is GM's history of internal competition among car divisions, factories and departments.

    And GM tends to move ponderously. Take global small cars, for instance. Ford Motor Co. moved quickly to bring the European-designed Focus to U.S. showrooms. GM, meanwhile, still is two years away from fielding a European-designed replacement for the aging Chevrolet Cavalier, whose design dates back to 1994.

    GM's handling of Saab is another case in point. GM took a half interest in Saab in 1989 and bought the other half in 1999. GM has ambitious plans to expand the Saab lineup, but Saab still is limping along with just two sedans.

    Target: emerging markets

    Burns says the key elements of GM's global strategy are:

    n Low-cost expertise in fast-growing markets. GM do Brasil, Suzuki and Fiat have existing entry-car programs, Burns said. Efforts will focus in eight emerging markets: Brazil, Russia, India, China, Korea, Thailand, Mexico and Poland. GM and its partners now have 34 percent of the market in those countries; if GM acquires Daewoo, the share rises to 43 percent, Burns said.

    "Seventy percent of the world's growth is going to happen in those eight countries," he said. "If you've got an alliance network that's playing at 34 to 43 percent share, I think that gives us a pretty good advantage."

    n Quick savings on parts and powertrains. Burns said joint purchasing quickly produces savings in these areas. The GM-Fiat purchasing partnership already is exceeding projections in these areas, he said.

    The two companies expect to cut purchasing costs by $1.2 billion in 2005. By 2007, they expect to use eight families of gasoline engines, down from 14 today. Over the next six years, their merged powertrain operations are expected to save $1.4 billion.

    n Major savings on common platforms. This would push savings further but is more difficult because it butts up against the companies' different manufacturing processes and brand identities.

    "The companies that are going to win are the ones that can get the minimum number of architectures to have the maximum coverage of the marketplace and can have optimal alignment of your brands," Burns said. "This is not an easy undertaking."

    Fiat and GM, for example, are studying proposals to develop a joint platform for the Fiat Punto, Fiat Palio, Opel Corsa and Opel Agila.

    n Use of the network's clout to set industry standards and technology. If the allied companies act together, they could drive standards for alternative-fuel engines and the infrastructure to support them, for instance.

    n Multibrand factories to use excess capacity. "Automakers can't really afford to put a whole lot of new capital into these emerging markets and hope to make money," Burns said. "I think we're open to those opportunities."

    n Maintaining existing management of partner companies. Burns said that Subaru parent Fuji Heavy Industries Ltd., for example, has done an excellent job of engineering and positioning its vehicles: "So why would we want to take them over, put our leaders on top of it and screw it up?'

    Dodging cultural issues

    The last point may be crucial, according to Jim Hall, vice president for industry analysis at AutoPacific. With its noncontrolling stakes in companies such as Fiat, Suzuki and Fuji, GM doesn't have to deal with the cultural issues that bedeviled the DaimlerChrysler merger, he said.

    "GM's getting 80 percent of the positive aspects of an acquisition for 20 percent of the cost and without the problems of bringing a new company into your culture," said Hall, a former GM manager.

    Ashvin Chotai, head of Asian automotive analysis for DRI-WEFA, said having a range of partners allows GM to cherry-pick the best partners for vehicle projects, rather than have to merge an acquired company's entire product line into that of GM.

    "The approach GM has taken has been very much project by project, and each has to stand up on its own," Chotai said. "Just in terms of dollars, the size is relatively small. So if one or two don't work out, it isn't the end of the world."

    But the projects themselves remain difficult. Sometimes GM seems to have too many options, as when it reportedly considered dropping the Opel-created Delta small-car platform for a Fiat platform earlier this year.

    And Burns said that although GM wants to do multipartner projects, so far it is working one-to-one.

    "That's really where we're primarily focused right now, because you can't lose sight of the fact that, while we have a 20 percent ownership position in Fiat and we have a 20 percent ownership position in Suzuki, Fiat and Suzuki are bitter competitors," Burns said. "But it can get as sophisticated down the road as trying to manage this as an even broader network."

    Competition between partners also can make it hard to realize savings, such as in wary attempts to merge dealership call-center staffs between Fiat and Opel, he said. And sometimes alliance companies hesitate to share their best technology, requiring "horse-trading" to put together the best vehicle, Burns said.

    As for sharing parts, the company is reviewing opportunities with its partners, said Bo Andersson, GM executive in charge of worldwide purchasing.

    "We completed a budget review for Asia-Pacific, including the alliance partners for 2002, and we completed the Latin-America budget review for Latin America for 2002," he said. "Where we have been coming furthest is on typical commodity type of buys like tires, glass, catalytic converters, wheels, steel. So, typically on raw material products I think we're rather well integrated. And we're also flipping a little bit to say, who has the best leverage or who has the best approach."

    Hall, for one, is skeptical about how far GM can go in working with other companies to develop new vehicles: "I can't see GM designing Fiats or vice versa. Can't see it happening."

    Analysts also question whether GM will remain a patient limited partner permanently.

    "I would imagine it will be further developed with GM much more in control," PricewaterhouseCoopers' Benko said.

    But Burns said co-designing is benefiting both partners. He points to the Duramax diesel truck engine, which boosted GM's share of the light-truck diesel market in the United States from 2 percent to 20 percent.

    "We just didn't have the resources to develop that engine ourselves; may not have had the know-how," Burns said. "And Isuzu did."

    Financial burden

    Aside from the top-notch diesel engine provided by Isuzu, the company has been a financial burden for GM. For instance, GM posted a $133 million charge in the second quarter because of restructuring at Isuzu.

    The performance of GM's affiliates directly affects its bottom line. GM posts a share of profits or losses of an affiliate that matches GM's stake in the company.

    Last year, GM posted a loss of $319 million from its equity interests in its major automotive partners and other affiliates.

    GM doesn't reveal the profits or losses contributed by each partner. Analyst Chotai said he would not be surprised to see GM sell its stake in Isuzu in view of the company's losses. Isuzu provides expertise in commercial trucks, which is not a major GM priority, he said.

    "If someone such as Scania came along with a bid, I think GM would consider it," Chotai said.

    But Chotai credited GM with trying to make sense of its partnerships: "Some of the alliances have been there for some time, but they haven't had a coherent strategy until a couple of years ago."

    So GM deserves credit for shaping a more effective strategy. But making that strategy work is much tougher.

    You can reach Dave Guilford at dguilford@crain.com

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