GM’s head of product development Bob Lutz was at the London Motor Show this week to participate in the launch of the Vauxhall/Opel Insignia. just-auto’s editor Dave Leggett caught up with him and heard the Lutz prognosis on GM’s troubles across the Atlantic.
These are tough times for all vehicle manufacturers but particularly tough for a company like GM that is having to adjust to rapidly changing market conditions while also in the throes of restructuring operations. As consumers in the US vote with their wallets for smaller and more fuel-efficient vehicles, GM is having to work harder to simply stay afloat. Last week GM had to make yet another cost-cutting adjustment and find more cash to allay fears that a financial crisis could bite as the outlook for sales worsens in the US.
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“We faced reality last week when we announced the measures to increase short-term liquidity and to be sure that we have enough money to finance our very ambitious new product programmes,” said Lutz.
‘I think we’re going to be okay,” he added.
“But obviously if we have a situation of global economic meltdown, then we’re into uncharted waters and who the heck knows what’s next? I suspect then we would see the restructuring of the whole industrialised world, but let’s assume it doesn’t come to that… ”
“We’re taking the right measures to get ourselves through this.”
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By GlobalDataWith oil where it is does GM’s seasoned campaigner see parallels with the oil shocks of the 1970s?
“The 1973 oil shock was only an oil shock and once the embargo was over things returned to normal. 1979 was also an oil shock. What’s different this time is that the oil shock is overlaid by an economic environment that was already very weak due to the sub-prime mortgage meltdown which took hundreds of billions of dollars out of the global economy and destroyed ‘apparent wealth’ – obviously it was wealth that was not there in the first place.
“A lot of people are feeling much poorer now and overall demand is off – certainly in the Western European countries, the US and Canada, though things are still going well in Russia, India, China and Brazil and the emerging markets.
“We’re facing a slowdown due to three factors. There are a lot of new government regulatory initiatives on CO2 in Europe and miles per gallon and fuel economy in the United States. Those have been somewhat disruptive of people’s product programs because they force you to produce vehicles that the public does not necessarily want. That is one area where the increase in petroleum prices helps because now people tend to want the same kind of vehicles that the government regulators are trying to force…
“But nevertheless the drive for lower fuel consumption and adopting the technologies to achieve that and lower CO2 has put a lot of stress on the global automotive industry.
“And then on top of that stress comes the stress of $130 a barrel oil and all of that is in an economic environment of already dampened demand and a very poor credit environment on the back of the sub-prime mortgage meltdown. So those three factors are all acting at once and we’ve never had that before.”
Will the US Big Three survive this combined onslaught of nasty negatives?
“Oh yeah. I can’t speak for the others but in the case of General Motors I am very confident. We have a rough spot to get through in terms of liquidity…
“Part of the problem is that we suddenly have a glut in terms of the kinds of vehicles that were in demand until about a year ago – large SUVs and pickups – and we don’t have sufficient production capacity for vehicles like the Chevrolet Cobalt, Chevrolet Malibu, Saturn Aura, Pontiac G6, Chevrolet HHR, all of which are selling as fast as we can build them.
“The US press is full of pontifical analysts on television saying that the real problem with General Motors is that they are just not producing the vehicles that the American public wants. That’s a complete fiction. We are producing the vehicles that the American public wants, we just can’t produce enough of them because of the sudden swing in demand where all of a sudden everyone wants small passenger cars and a year ago everybody wanted big V8 trucks.
“We can’t turn on a dime like that, but we’ll get past that and our future product programmes are all in the pipeline and continue unabated.”
Won’t the cutbacks just announced on capital spending at GM impact product development budgets?
“No, that won’t affect product. It affects mainly internal working capital because we tell ourselves that with lower production numbers and lower overall demand our work and process inventory should go down too. We plan to get about $2bn worldwide through reduction in working capital. And then significant amounts will come from reducing discretionary spending on new plants, new equipment, new distribution warehouses, new roofs on everything – we just tell ourselves, hey, patch the roof.
“Believe me, we do a lot of spending annually that we can defer for a while and that doesn’t touch the product programs.
“And in sales and marketing we are going to cut a lot of ….not advertising because you need that to sell the new vehicles…but promotional budgets and participation in racing, for instance, will be dialled down considerably.
“When you add all that up it’s about $10bn that we’re generating internally and there’s another $5bn that we are targeting from what we call ‘sale of non-core assets’. We know what those are but we’re not defining it for general consumption at this point.”
What about Hummer?
“We have said that all options are open and that includes sale or cooperation …”
And Lutz then makes it crystal clear that he is not at liberty to talk about whether there is any interest yet from prospective buyers. It may be a brand that looks a little out of step with the times, but it is an off-the-shelf brand and Hummer sales are moving along nicely in certain parts (Russians with cash to flash like them).
But let’s get back to small cars. As GM sets about the task of adjusting its product portfolio and manufacturing footprint in North America to better align to the changed priorities of it customers there, a potentially uncomfortable financial fulcrum comes into stark view. There were big margins for GM on those big trucks that have suddenly gone out of fashion. Small cars in the US sell at low prices and thin margins. So GM is having to contend with that additional gravitational pull on North American profitability.
How can GM make money on small cars in North America? It certainly won’t be a walk in the park, but Lutz sees market forces coming to GM’s aid.
“In Europe it is not unusual for a VW Golf or Opel Astra to cost 29,000 euros. Those are dream prices for that class of car in the United States. That same car in the US will sell for around $15,000.
“And that’s because of our very low fuel prices. That meant that nobody wanted small cars – it was a small segment of the market and for people who had an affordability problem, but there was no real demand.
“Demand was all at the high end for things like full-size SUVs, large crossovers, V6, V8 engines etc.
“Now that demand is switching we are already seeing a rise in profitability in small cars in that our small cars are all sold out. The first thing we do is eliminate incentives and then we start raising prices.
“And also, surprise, surprise, as we’re lowering the prices on the full-size trucks and putting incentives on them, we’re making less money on the stuff we used to make money on and we’re starting to make money on the vehicles that we never thought we would make money on.
“When gasoline goes up to $5 a gallon, demand for small cars will go up some more and demand for trucks will go down further. It all balances out.”
Will it all balance out for GM? As GM deservedly celebrates its centenary, the backdrop to its operations in 2008 sees some very big challenges ahead. The biggest challenges are at home where GM has to successfully rebalance its product offering, reset its manufacturing footprint and make some money in the process. And there’s also the small matter of getting the Volt right. The next three years are shaping up to be among the most decisive in the General’s long history.
Dave Leggett
See also:
LONDON SHOW: GM committed to “onslaught of new products” – Lutz
LONDON SHOW: GM’s product chief likes his EVs
LONDON SHOW: Bob Lutz cool on US diesels
