'Big and global' is the direction the automotive industry is heading, says Rick Wagoner, General Motors CEO. To compete in that business environment, automakers have to consider acquiring other automakers or forming alliances, Wagoner told engineering executives in a speech Jan. 30 promoting the SAE World Congress. Wagoner's address discussed why GM prefers alliances. Edited excerpts follow.
I recall that I spoke at this breakfast six years ago. I went back and looked at what I talked about at that event. The topic of that year's World Congress was 'Engineering for value.' It was fascinating to see what was the hot button, where I spent a lot of my comments.
The hot topic at that point was, believe it or not, automotive affordability. We'd just come out of the Detroit auto show and the press had been hounding all of us on the fact that the average price of vehicles had now exceeded $20,000. They said this is a horrible thing and industry sales were going to crater forever and we were all buck mongers - even though we weren't making any money.
At that time new vehicle prices were rising faster than most Americans' income.
The purchase of an average-priced new vehicle at that point required 29.6 weeks of median family income. So basically it took more than half your income to buy a vehicle.
Well, I think today that we have absolutely fixed that problem. In fact right now it requires 23.2 weeks of median family income to buy the average-priced new vehicle. That's down 22 percent in six years. I think that's absolutely amazing.
And perhaps the work that was done at that Congress, with so many engineers who attended talking about engineering for value, had a role in the industry's ability to respond to what was then viewed as a very big challenge for us all.
Probably not unrelated to all that, in January 1995 we were just coming off of industry sales of 15 million units in 1994, and we were beginning a year where sales would hit 15.1 million units. And the strangest thing was, believe it or not, we all felt pretty good about that.
Today, we just wrapped up another all-time sales record here in the U.S. - 17.8 million units (including medium and heavy trucks) - and we feel bad about it because we're talking about industry sales shrinking this year to something between 16 million and 16.5 million units. So what a difference five or six years make.
But to be fair, what we all need to recognize is that the rules of the game we're in constantly change. And if we offer the customer more value and the customer gets used that, we can't just all of a sudden say, 'OK, we've reduced prices enough, provided enough value, now we can start raising prices.' I don't think we can do that.
But we have to recognize we have made progress in recent years. Too often we lose sight of that in all the talk about the problems were facing in the next three or six or nine months.
So I think it's appropriate to step back and say, 'OK, we've come a long way, and now there seems to be a little bit of a breather in the marketplace, so we can gather our strength and think about what should be our next big push forward in auto industry efficiency, and in our competitiveness, so we can continue to offer our customers more and more value, and keep industry sales robust.'
Personally, I think a large part of the answer lies in the theme for this year's SAE World Congress, 'Succeeding in the Alliance Game.'
Let me start by noting that this phenomenon of consolidation and alliances really isn't unique to the auto sector right now. Basically, many sectors around the globe, especially in relatively mature businesses like pharmaceuticals and finance, are seeing this trend to fight the competitive pressures through size and scale.
The auto industry is probably the most public example of this. We're consolidating faster in the last several years than at any time since the 1920s - and of course this time it's on a global scale and it's affecting OEMs as well as suppliers.
3 key factors
From my perspective, at least three major factors are driving the consolidation move.
First is the desire and need for everybody to want to have a global sales footprint both to make sure you're in the markets with the growth opportunities and to protect you from the ups and downs of the economy in a particular market.
Second is the growing recognition that the companies need multibrand strategies to more effectively address customer needs in a world that is no longer 'one size fits all.'
Third, and increasingly important, is the need for economies of scale - and that in the auto business is true in virtually everything we do.
A great example is research and development. My favorite one to think about there is the researching for breakthroughs in things like fuel cells. If you have to spend, over a certain time period, a million dollars to do that and you can amortize it over 10 million units sold per year, you're going to have a significant cost advantage over your competitor who has to do essentially the same research and only sells 1 million units per year.
So that has led to more and more people recognizing that consolidation makes sense.
I think it basically ended a lot of the traditional debate in the auto industry about whether it is better to be small and local or big and global.
There's no question that big and global is the way our industry is going. Some companies certainly are opting to go it alone, but I think the vast majority of players are choosing up with one or more partners and linking up in different kinds of ways, but nonetheless linking up. I think that's true for suppliers as well as automakers.
So some are buying, some are allying, and there's no real way to know at this point which strategy is going to work better.
GM favors alliances
At GM, we're going with more of an alliance approach. Let me tell you a little about why we've chosen to go this route and what we think the advantages are for us and our partners.
We have a rather long history in the alliance approach, although we didn't always think about it in the same way.
Beginning in the early 1970s we undertook a number of steady, long-term relationships, starting with Isuzu in 1971, Suzuki in 1981 and Saab in 1990. I guess the rule back then was one alliance every decade whether you needed it or not.
I'll be the first to admit that we didn't do everything perfectly in those relationships - and we still don't - but we learned a lot along the way.
I think the long-term success, in general, of these partnerships eventually led us to conclude that an alliance approach is a good way to go in the industry's recent consolidation push.
So in the last two years or so - against the background of tremendous industry consolidation - we've picked up the pace ourselves.
We increased our equity holdings in Isuzu to 49 percent and in Suzuki to 20 percent. We took a 20 percent equity stake in Fuji Heavy Industries and its Subaru brand. And we established a strategic industrial alliance with Fiat Auto, which involved our taking a 20 percent equity stake in Fiat Auto, and the Fiat holding company taking a 5-percent stake in GM.
Why do we think this makes sense? A couple of different reasons.
As a headline, we can say that alliances are a key part of making GM more global and faster, which we think are critical ingredients for success in any auto company strategy.
But permit me to give you a few specific reasons where we see key benefits in alliances.
First of all, they help us grow our presence where we're underrepresented.
A good example is the Chevrolet YGM-1, a new small car developed jointly by GM and Suzuki and scheduled to be launched in Japan later this year.
The YGM-1 will be the first GM vehicle produced in Japan since 1939. More importantly, it is just one of many new vehicles that GM will develop with our alliance partners specifically focused on the Asian region. We couldn't have done that without our alliance with Suzuki.
Here in the U.S., GM's alliance with Isuzu resulted in the Duramax Diesel 6600 V-8 engine.
The heavy-duty pickup segment is one we've not been playing in seriously in the U.S., and thanks to our alliance with Isuzu we'll be able to do that with the right kind of diesel engine now.
Second, alliances can help us get more products to our markets faster than we can on our own.
In Europe, a great example is the Opel/Vauxhall Agila, co-developed with Suzuki and introduced last year.
With this product Opel and Vauxhall were able to leverage Suzuki's expertise in mini cars to accelerate their entry into the growing European microvan market much faster than they could have on their own.
Third, alliances can help us with products we need to satisfy local market needs.
Smart use of capital
Finally, there's a very practical reason for GM's alliance approach. Alliances are more capital efficient.
They provide many of the benefits of mergers and acquisitions without the capital commitment from one side or the other.
This allows us to focus more of our financial resources on what is certainly one of the biggest benefits of alliances - the creation of innovative products and services.
Alliances are not always the easy way to go.
Whether we're talking suppliers or OEMs, they require a lot of work up front to reach win-win solutions, which are sometimes harder to reach than full buyouts.
In a good alliance, both partners are focused more on realizing value and benefit for their customers and shareholders and much less on which culture is winning.
Alliances are working for GM, and for many of you, but they're not a panacea in every case. We've had our own problems, for example, a prior alliance with Daewoo in Korea in the early '90s was not successful.