DETROIT -- General Motors has proved it can tighten its belt, but can it sell cars?
"We've made tremendous progress," CEO Rick Wagoner told a crowd outside GM's world headquarters here on Sept. 6, when he said that GM would extend the powertrain warranties on all vehicles.
Wagoner stopped short of donning a flight suit and declaring the end of "major combat operations." He cautioned the crowd of reporters and GM employees that the turnaround is "far from complete."
But the company has made progress.
After losing $10.6 billion in 2005, GM managed to cut annual costs by $9 billion in North America. But GM has slashed in the past and it wasn't enough. Beating the competition will take more than shrinkage. To complete its revival, GM needs to:
GM's financial crisis erupted in the first quarter of 2005, when declining sales of high-ticket trucks sent North American revenue spiraling down 12.8 percent to $25.38 billion, a $3.72 billion decline from the same quarter in 2004.
The shift in product mix exposed a key vulnerability: GM sorely needs a healthy top line to meet enormous fixed costs such as health care and pensions.
"The company has had a difficult time driving revenue growth, which is, long term, the best indicator in determining the health of the company," says John Casesa, managing partner of Casesa Shapiro Group LLC in New York.
In the second quarter of this year, global revenues climbed 12 percent to $54.4 billion. North America delivered a hefty 5.6 percent boost, to $28.5 billion.
The 36-month vehicle residual forecasts for GM brands are up from 2003 forecasts by 2 to more than 9 percentage points, according to Automotive Lease Guide in Santa Barbara, Calif. But GM's residuals overall remain well below those of the Honda, Nissan, Toyota, BMW, Mercedes-Benz and Audi brands.
A source close to GM says achieving parity with the Japanese on residuals is one of the top goals of the company's board of directors. Higher residuals mean a lower monthly payment and higher trade-in value for customers, allowing GM to avoid heavy incentives.
GM's move to extend its powertrain warranty to five years or 100,000 miles is gutsy.
The J.D. Power and Associates Vehicle Dependability Study, which measures problems reported over three years, ranks only two GM brands, Buick and Cadillac, above the industry average. Hummer and Saab are at the bottom.
"While GM has made strides in quality, production and efficiency, it hasn't translated to the consumer's mind," says Bob Schulz, director of Standard & Poor's rating services. "The extended warranty could help change that."
But GM must continue improving quality to impress customers attracted by the extended warranty and to avoid heavy warranty costs.
According to the Harbour Report, GM was using 90 percent of its production capacity in 2005. Ideally, the company needs to get to 100 percent.
GM's new global product development process emphasizing common platforms should help produce products more efficiently by allowing more vehicles to be built in the same plant, says Brett Hoselton, senior automotive analyst for KeyBanc Capital Markets in Cleveland.
GM's plans to close plants as part of its recovery also will help reduce excess capacity. But hot-selling vehicles are the ultimate solution.
GM stock has traded recently at about $33 per share. That's up from $18.90 in January. But in April 2000, GM's stock reached $93.62 per share.
No one expects GM to reach that price anytime soon. But those close to the automaker say it needs to get its share price on a trajectory to reach that level again.
GM's U.S. market share is at 24.7 percent through August. That's down from 26.9 percent a year ago. GM had a 28.6 percent share in 2002.
Although profitability is the ultimate sign of a company's health, analysts agree that share matters.
Says Hoselton: "Market share has a significant psychological impact on people, if nothing else."
You may e-mail Jamie LaReau at [email protected]