MB18209 – CORPORATE STRATEGY

A REPORT ON

“ GENERAL MOTORS
The Collapse of the US Auto Industry ”

submitted by

SUNDARAMEENA U

to the faculty incharge

Mr. Densingh Joshua Israel

( Department of Management )

MASTER OF BUSINESS ADMINISTRATION

In

SCHOOL OF MANAGEMENT

SRM Nagar, Kattangulathur, Kancheepuram District

FEB 2019
 GENERAL MOTORS
The Collapse of the US Auto Industry

Introduction

General Motors (G.M.), a United States based automaker with headquarters in

Detroit, Michigan, was founded in 1908 by Billy Durant. For most of the 20th
century, it dominated the American automotive industry as well as the American
economy. G.M. has brought remarkable innovations, provided millions of jobs,
and offered individuals and families the chance to experience the freedom of the
road. Furthermore, G.M. has been fairly successful in expanding its global
footprint through acquisitions and partnerships. G.M. employed over 200,000
people in every major region of the world to produce cars and trucks in 34
countries, sell and service these vehicles through the following brands: Buick,
Cadillac, Chevrolet, GMC, GM Daewoo, Holden, Opel, Vauxhall, Hummer.

However, its success in the past is not sufficient to help G.M., the world's largest
automaker, pass the toughest test ever. G.M.'s domestic market has been on a
steady decline over the past half-century. Furthermore, the recent global
economic crisis has accelerated the need for restructuring. Unfortunately, on June
1st 2009, G.M. entered US bankruptcy court to be filed bankrupt, which in turn
resulted in the end of a long and once-proud history of an iconic American
company.
In the light of an above issue, this case study aims to highlight the facts
surrounding collapse of G.M. during the global financial crisis. It attempts to
figure out how one of the world's largest and oldest automakers was brought down
during the crisis. In particular, the case study attempts to examine a number of
risk management issues prevalent in the case which contributed to the downfall.
Although a number of issues are present in the case, two important issues are
highlighted: strategic risks and financial risks. To support the analysis, facts from
articles in leading business journals, commentaries from leading industry
analysts, government agencies, and company reports and filings will be used.
Furthermore, an attempt will be made to assess the effectiveness of G.M.'s
management in dealing with the crisis in comparison to Augustine's crisis
management framework developed in 2000. The framework highlights six
important stages in managing a crisis: avoiding, preparing to manage the crisis,
recognising the crisis, containing the crisis, resolving the crisis and profiting from
the crisis. The case will highlight how General Motors faired in each of these
stages.

Case Study: G.M.: The Collapse of the US Auto Industry

The Facts:

A Slump Begins

The worsening economic and market conditions, including declines in real estate
and equity values, rising unemployment, tightened credit markets, volatile oil
prices, depressed consumer confidence and weak housing markets, have driven
vehicle sales to fall. Until September 2009 Vehicle sales in the United States
dropped by 44.7% on an annualized basis from their peak in 2007 (G.M. 2009).
Furthermore, sales globally declined by 13.2% on an annualized basis since their
peak in January 2008 (G.M. 2009). Being highly sensitive to sales volume, G.M.'s
business and financial results were materially adversely affected.

Seeking Help From Congress

In mid-September 2008, Rick Wagoner, G.M.'s chairman, and the heads of Ford
and Chrysler went to Washington to ask for $7.5 billion and the money was
approved in October (The New York Timess 2010). In November 2008, the heads
of the Big Three returned to Congress, asking for $25 billion in direct aid, but
Congress approved only $13.4 billion to Chrysler and G.M. and requested for
their restructuring plan to secure remaining loans (The New York Timess 2010).
In February 2009, even while cutting jobs, closing plants and reducing their brand
line-ups, G.M. announced a need $4.6 billion in loans within weeks, from the $18
billion it had already requested, and an additional $12 billion in financial support
in order to avoid bankruptcy, (The New York Timess 2010).

Filing for Bankruptcy

On 26th February 2009, G.M. announced that its cash reserves were down to $14
billion at the end of 2008 after losing $30.9 billion, or $53.32 a share, in 2008
and spending $19.2 billion of its cash reserves (The New York Timess 2010). Mr.
Wagoner met with President Obama's auto task force, and the company said that
it could not survive much longer without additional government loans (The New
York Timess 2010). On 10th July 2009, G.M. was filed bankrupt and its good
assets were sold to a new, government-owned company (The New York Timess
2010). In its bankruptcy petition, G.M. said it had $82.3 billion in assets and
$172.8 billion in debts (The New York Timess 2010).

The Risk Management Issues Present

G.M. faced a number of potential risks and uncertainties in connection with its
operations. However, in this case study strategic risks, financial risks, and
environmental/ external risks will only be discussed. Despite each risk being
described separately, correlation between them will be examined as they trigger
the applicability of other risks.

Environmental/ External Risk

Environmental/ external risks can be defined as events outside the control of

management that impact earnings of a firm.

An external risk facing G.M. is discussed below:

Volatile Oil Prices

An increase in oil prices has reduced the spending power of consumers and
caused a reduction in demand for all of their spending categories, including cars.
According to Westcott (2006), already with gasoline at around $2.35 a gallon in
the U.S., sales of some large SUVs declined by 50% or more. Furthermore, higher
oil prices caused monetary authorities to tighten credit conditions (Westcott
2006). This, in turn, weakens sales of durable goods, like automobiles. Since
G.M. highly depended on sales volume, it business and financial outcomes were
materially adversely affected.

Strategic Risk

Strategic risks can be defined as the risk of volatility in earnings of arising from
strategic decisions in relation to future uncertainties in the industry, competitive
and socio-economic environment. Three major strategic risks confronting G.M.
are discussed below.

Resting on past successes

Past success has misled G.M. over the dangers of misunderstanding the
American car market that it helped create. In other words, when customers began
demanding more fuel efficient vehicles, G.M. continued to rely primarily on their
ability to sell high-priced, fuel-inefficient minivans, sport-utility vehicles and
pickup trucks (Bates and Bagley 2009). This strategy made some sense when oil
prices were declining in the 1980s and 1990s. Yet, it was not sufficient to help
G.M. to survive when faced fuel crisis and financial crisis as customers stopped
demanding guzzling cars. Furthermore, orienting its production plans around
large vehicles caused G.M. to have little flexibility to shift production to smaller,
more fuel-efficient vehicles in the short run. Therefore, when the economic crisis
hit, it hit GM harder than other automakers.

Relying on short term strategies

To tackle with its financial problems, G.M. relied heavily on short term strategies.
For example, it decided to build more cars than the market demanded, and then
sold to rental car fleets (White 2009). Of course, this could help generate the cash
and increase market share, but when those cars were back to used car lots, they
competed with the new vehicles. This is because over supply of used card could
help drive down resale value even more, resulting in the reduction of the demand
of new cars. Consequently, to tackle this mistake, G.M. introduced easy credit,
zero percent financing (White 2009). Although could help increase its demand,
this strategy hurt G.M later when the house of cards began troubling. Last but not
least, G.M. plunged its GMAC financing operation aggressively into housing
market as it was hopeful to generate money from selling mortgages (White 2009).
Yet, GM didn't see how risky it was. Consequently, the crash in subprime
mortgages brought GMAC into bankruptcy.

Help then hurt

Management decision to sign on an agreement so-called "Treaty of Detroit"

became adverse conditions to G.M. Through a series of negotiations over years,
the United Auto Workers Union (UAW) and G.M. completed agreements that
provided lifetime benefits to its members (Bates and Bagley 2009). The legacy
costs of supporting the pension and healthcare costs added as much as $1,500
each vehicle produced (Bates and Bagley 2009). GM, which has been in business
in the United States for 100 years, has more than half a million union retirees and
dependents drawing health care benefits, but only about 60,000 active workers
(Eisenbrey 2009). According to White (2009), G.M. has spent $103 billion during
the past 15 years - about $7 billion a year- funding its pension and retiree
healthcare obligations. The foreign companies operating in the United States, on
the other hand, have virtually almost no retirees and have taken no responsibility
for their health insurance (Eisenbrey 2009). Therefore, these inflexible labour
contracts made G.M. difficult to adjust to changing market conditions as G.M.
faced difficulties to match the costs of global competitors.
Financial Risk

Financial risks can be defined as the risk to earnings of a firm resulting from
financial management of credit, liquidity and leverage, adequate capitalisation
and investor reactions. G.M.'s key financial risk is discussed below:

Chronic liquidity shortage

G.M. did not have much cash and even if it adds receivables to this, it accounts
payable and accrued expenses are many times higher than that figure. Its liquidity
shortage was resulted from huge expense, reduction in sales figure, and drop in
share prices. Over the past four decades, G.M.'s management has watched its
share of the U.S. market decline from the peak to the bottom without sufficient
solutions. On 26th February 2009, G.M. announced that its cash reserves were
down to $14 billion at the end of 2008 (The New York Times 2010). Although
$14 billion of cash may be enormous for some companies in comparison to their
liabilities, but not that huge for G.M. Deloitte & Touche, GM's auditors,
expressed that G.M. would possibly run out of cash, based on continued operating
losses, negative shareholders' equity and the inability to generate sufficient cash
flow (Simon and Reed 2009). Undoubtedly, with significantly low liquidity, G.M.
could not survive.

GM's Approaches to Addressing the Crisis & Results

Augustine's Six Stages of Crisis Management

Augustine (2000) has discussed six stages of effective crisis management:

avoiding the crisis, preparing to manage the crisis, recognising the crisis,
containing the crisis, resolving the crisis, and profiting from the crisis. This
section aims to compare and contrast how G.M. dealt with the risks facing its firm
and its effectiveness in managing the crisis, against the six stages.
Stage 1: Avoiding the Crisis: It is fair to say that G.M. did not take the necessary
steps to avoid the crisis. The management did not examine all possible scenarios
in relation to their strategic decisions. As can be seen from the case, for example,
the management did not really think about possible consequences of
mismanaging relationships with the UAW when they signed on "Treaty of
Detroit". The results became clear when G.M. collapsed. Furthermore, G.M. was
too slow to respond to shift in customer preferences since it did not examine what
would be the consequences of increasing oil prices.

Stage 2: Preparing to Manage the Crisis: It became clear during the crisis that
the management did not have an adequate plan in place to deal with this crisis.
For example, experiencing continual loss of capital for its Saturn unit as well as
drop in sales of other divisions in 1990s meant almost nothing to G.M. to
sufficiently improve its contingency plan or even change its business strategy.
They simply implemented reactive measures: trying to sell assets to any buyer in
order to raise capital and exit failing businesses as well as to close its production
plants which in turn led to the problems with the UAW (The New York Times
2010).

Stage 3: Recognising the Crisis: In fairness to G.M.'s CEOs, they inherited

almost all problems discussed above and they have been taking steps to improve,
but was not thinking boldly enough about the drastic actions required to fix them.
For instant, when G.M. stated losing market share to its foreign competitors, its
management lobbied Washington for limiting imports of foreign autos through
increased tariffs, instead of investing in competitive products (George 2008). In
addition, by the late 1980s, GM's chairman, Roger Smith, entered a joint venture
with Toyota to set up New United Motor Manufacturing, Inc., or NUMMI, in
order to learn lean production system from the Japanese. This was not a bad idea
but G.M. took too long to learn the lessons from this project (White 2009).
On the other hand, G.M.'s management underestimated the quality of Japanese
cars and their efficient manufacturing systems. Furthermore, the management did
not recognise that the oil shocks would impact financially to the company even
though American consumers started demanding Japanese cars. Instead, G.M.'s
management believed that the Japanese would be limited in a niche of small,
economy cars and that the damage could be contained, and as a result, G.M.
continued to depend on low fuel efficient cars (White 2009).

Stage 4: Containing the Crisis: It is clear that G.M. failed to contain the crisis.
This is firstly because it was very slow to respond to the demand of the market in
comparison to its competitors. A good illustration is that when U.S. consumers
began demanding more fuel efficient vehicles, Toyota introduced the Prius hybrid
car, whereas G.M. was far behind and about four years later it introduced its first
hybrid cars (Bates and Bagley 2009). Another mistake is that tough decisions
have not been made and made fast. For instant, G.M. still operated its small-car
division, Saturn - launched in 1985 as a response to Japanese completion -
although did not make a profit in those 21 years (John et al. 2006, cited in Emerald
2006). G.M. left it too late to exit a failing business or redirect resources from an
unsuccessful project. In addition, it is questioned why the management left the
point that funding its pension and retiree health-care obligations cost G.M. nearly
$7 billion a year on average until too late. It is fair to say that again because they
did not treat the situation like the emergency it was.
Due to the poor performance in the other stages of crisis management, it was no
surprise that G.M.'s ability to resolve the crisis quickly moved out of its hands.
Only it could do was to promote short term strategies such as zero percent
financing, selling its assets, closing its plants. Unfortunately, these actions could
not help. Later, G.M. management sought help from Congress. Again, due to
inadequate management decision, the money it got was not enough to help it pass
through the financial downturn period.

Stage6: Profiting from the Crisis: As making a profit from the crisis depends
on how successful the company deal with the previous five stages of crisis
management. Undoubtedly, New G.M. has an only important lesson not to follow
Old G.M.'s ways in dealing with risks and crises. Unlike G.M., there are other
automotive companies that are able to stay afloat long enough to survive the
crisis. These include its neighbour rivals, Ford, as well as its foreign competitors
whose their business depends on small, more efficient cars, like Toyota and
Honda. During the downturn of G.M., Toyota has surpassed GM as the world's
largest-volume automaker.

Conclusion

Lessons to be learnt from G.M.'s Bankruptcy

The G.M. case illustrates how an iconic company with a long history and an
excellent market position can collapse if fundamental problems are long
neglected. To avoid such failure, the following lessons should be kept in mind.
Be ready to adapt to changing economic environment.Since customers'
preference can change, companies should never assume that what worked in the
past will work again in the future. As can be seen from the case, GM's
complacency in the marketplace was a big reason for its eventual failure.
Complacency arises when companies misunderstand a measure for reality. Good
risk management would suggest looking deeper than the numbers, deeper than
the current measures in place and taking long term views rather than simply
focusing short-term strategies like G.M. did.
Furthermore, companies need continuous efforts to innovate and reform, not to
rest on past successes, and to be ready to adapt to a rapidly changing environment.
This can help companies to be attuned to customers' lives and stay keenly aware
of the competition. Failure to keep pace with the new standards of product
innovation can potentially hurt companies in long run.
Do not wait until it is too late.It is clear that when seeing something in the
company that need changing, tough decisions must be made and made fast, do
not wait until it is too late. The faster management response is the better
(Augustine 2000). Prior to the collapse, many had pointed out that G.M. was
confronting various problems. Yet a lack of action, executives tending to hang on
and ignoring clear signals that the company may be in trouble have brought G.M.
to bankruptcy. It is really true that executives need to understand how others will
perceive an issue and to challenge their own assumptions. In addition, they must
keep in mind that almost every employee even themselves can plunge an entire
corporation into a crisis through either misdeed or oversight (Augustine 2000).
For example, it would be better for G.M. to have sunk Saturn and found a better
use for a few billion dollars during those two decades. Although cancelling a
project or exiting a business may often be regarded as a sign of failure, such
moves are really crucial. This is because in this way companies can free up their
resources and improve their ability to embrace new market
opportunities.Contingency plan is required Effective crisis management
processes are crucial to the survival of firms in times of adverse economic
situations. As can be seen in the case of G.M., it is not possible to effectively
decide what to say or do during a crisis. If a well coordinated and thoroughly
researched crisis management plan for dealing with all levels of risk, including
catastrophic risk was in place, G.M. would still survive today.
In conclusion, this case study shows that new G.M. and other companies should
learn to prepare themselves promptly to manage risks and crises. Managements
should minimise their organisation's exposure to risk by clearly identifying
worse-case scenarios as much as possible and should prepare solutions for those
forecasted problems.