GENERAL MOTORS

Business Cluster Professors

Prepared for:

Prepared by:
Team 7 Anthony Allio Joseph Allio Lauren Snitcher N i c h o l a i Larroque Gregory Armamdo

June 10, 2005

TABLE OF CONTENTS INTRODUCTION....................................................................... 3 REGION ANALYSIS..................................................................3

NORTH AMERICA- GMNA..................................................................................................................................3 EUROPE- GME .................................................................................................................................................4 LATIN AMERICA- GMLAAM.............................................................................................................................4 ASIA/PACIFIC - GMAP.......................................................................................................................................5

PORTERS FIVE FORCES............................................................6

RIVALRY............................................................................................................................................................6 BARRIERS TO ENTRY...........................................................................................................................................6 THREAT OF SUBSTITUTES......................................................................................................................................8 POWER OF SUPPLIERS...........................................................................................................................................8 POWER OF BUYERS..............................................................................................................................................9

COMPETITIVE ADVANTAGE....................................................10 INTERNAL ANALYSIS ............................................................11

INTERNAL STRENGTHS........................................................................................................................................11 GMACs Continued Earnings Growth....................................................................................................11 Marketing Strategy/Consolidation..........................................................................................................12 GM LAAM/ GM Asia Pacific...................................................................................................................12 INTERNAL WEAKNESSES.....................................................................................................................................13 Rising Health Care Costs........................................................................................................................13 Weak Product Mix ..................................................................................................................................13 Lack of Flexibility....................................................................................................................................13

STRATEGY............................................................................14 RETRENCHMENT STRATEGY: PRODUCT REDEVELOPMENT........14

OVERLAPPING MODELS.......................................................................................................................................14 REINVENTION....................................................................................................................................................15

APPENDIX............................................................................21

Introduction
General Motors is a company that has been around for over one century and has been an integral member of the automotive industry since its inception. To understand General Motors one must simply look at their business philosophy which guides them today, and is embodied in the companies culture: product excellence and customer focus, act as one company, and move with a sense of urgency. Throughout this analysis of General Motors we have provided an in depth look at these philosophies, while in the end developing a future strategy for General Motors to implement in restructuring the company. There are four markets GM operates in with regards to automotive sales: North America, Europe, Latin America, and Asia Pacific. After analyzing these four markets we have decided to focus most of our attention to the North American automotive segment due to the nature of sales and income in regards to its relative relationship to North America and the importance it has to GMs virtual success or failure.

Region Analysis
North America- GMNA Recently, GM announced a quarterly loss of $1.1 billion, which in turn reduced its bonds to junk status. There are many factors that are causing problems in the North American region, including the companys high fixed costs due to health care, pension, labor; and the lessening demand in the SUV market. Sales of GM SUVs decreased 24.6% for the first four months of 2005. In order to try and improve the sales of SUVs, GM has partnered with DaimlerChrysler to create a hybrid system for pickup trucks, SUVs, and luxury sedans (Talbot). In an effort to increase the overall condition of GMNA, Mark LaNeve, GMs new head of North American sales, has created a new marketing strategy. GMNA intends to cut prices, lessen the number of overlapping models, aggressively compete against foreign brands on the west and east coast markets and in high growth areas such as south Florida,

revive the overall image of Chevrolet with a new Cobalt compact car, and increase advertising on the coasts and in metropolitan areas (Hawkins). Europe- GME The overall condition of GME is less than favourable. From 1992-1997 Opel, GMs main European brand, led sales in Europe. But sales dropped dramatically by 2001 and GME launched its turnaround plan, Project Olympia, led by Carl Peter Forester, president of GME. Project Olympias goal was to restore profits by 2003 by reducing production capacity, adding flexibility to plants, increasing reliance on suppliers, and restructuring Opels distribution network (Ostle). Unfortunately, this goal was not met, and GME has not made a profit since 1999 (Slavnich). To change the direction of this struggling region, GME modified its management structure by appointing Frederich Henderson to chairman of GME in 2004. Hendersons goal is to cut overhead costs by $600 million in the next two years. In order to accomplish this goal, Henderson has cut jobs by 12,000 in Germany, moved production of SAAB automobiles to Germany (Slanvich, SAAB), cut ties with FIAT, and put SAABs plant in Sweden in charge of creating the new stereo and navigation systems (Lewin). To increase sales, GME is focusing on creating a reliable entry-level selection of Chevrolets, increasing the quality of Opel, as well as importing Cadillacs in order to compete in the luxury market with BMW and Mercedes (Welch). Latin America- GMLAAM In 1997, it seemed there was no help for General Motors Latin America (GMLAAM). Brazils economy collapsed, decreasing car sales from $3 million to $1.6 million in 2004. To increase profits, GMLAAM introduced a line-up of inexpensive, small cars including the Celta and Meriva. Today these cars are best sellers (Welch). Currently, Latin America is the region with the largest increase in net income to $27 million in 2004 from a loss of $104 million in 2003 (Stein). GMLAAM has also just celebrated its fifth consecutive quarter of profit. GMLAAM is expanding due to an increase in demand for Cadillacs, the partnership of GM with Korea, and new Chevrolet models. Kepston Darkes, Vice President of GMLAAM has plans to further increase GMLAAMs profits in 2005 in numerous ways including increasing brand recognition of Chevrolet and expanding the luxury division (Stein).

Asia/Pacific- GMAP GM anticipates that the global automotive market will increase by 16 million units before the year 2012, and believes that half of that growth will be in Asian countries such as China, India, South Korea, and Thailand. (Webster) For this reason, GM AP made this region an important part of their business plan. In order to enter the market successfully, GM made many investments in brands, plants, and production in Asia Pacific countries. Not only does GM AP hold a 21% stake in Fuji Heavy Industries and a 20% stake in Suzuki Motors, but also 12% in Isuzu Motors (Global). Currently, the Asia Pacific region creates $60 million in profit and has a market share of 10.4%. In the words of Chairman and Chief Executive Rick Wagoner, there are unprecedented new opportunities in the Asia Pacific region (Jones).

Porters Five Forces

Rivalry The rivalry within the automotive industry can be described as both healthy and destructive at times. Factors that affect the industry include: a competitive pricing environment and market share erosion. Intense competition has forced a dangerous pricing environment for all automakers. When one manufacturer offers incentives (such as rebated or discounted financing), the others generally follow suit or risk losing market share. One major factor in understanding the rivalry in the automobile industry is the competitive environment that lies within it. This rivalry can be seen in the declining market share of numerous companies throughout the world, but mainly in North America. Market share losses across the world, most recently in the US, suggest that the competitive environment is not getting easier. In fact, from 2004-2005 General Motors has lost almost 2 percentage points of market share in the automobile industry. This is occurring, while companies such as Toyota and Nissan are increasing their market share by 1-2 points. See Appendix (F). One main factor to consider when evaluating the threat of rivalry is the exit barriers, which exists in the automobile industry. All of the companies have invested heavily in the production of their respective products, which make it difficult to close down their manufacturing plants. Also, many regulations and contracts with unionized labor forces make it extremely difficult to lay off sizeable amounts of the labor workforce. Therefore, due to the increasing competitive nature of the automobile industry and decreasing threat of market share, along with the high exit barriers we have labeled the threat of rivalry as High. Barriers to Entry Within the automotive industry lie many barriers to entry, which can be difficult to overcome for smaller, less established companies. Some of these barriers to entry include: high capital costs, economies of scale, government regulation, and brand recognition. The largest entry barrier within the automotive sector is economies of scale. Also, high capital costs act as another considerable barrier to entry due to the sizeable amount of capital needed to run the day to day operations of the company.

One of the overwhelming statistics a company must consider when entering this market is the amount of capital needed to start the company and also the enormous costs needed to run the operation. In fact, General Motors over the previous ten years has had R&D costs annually over $400 million. However, even though this one factor is a distinct barrier to entry we still feel that overall the barriers to entry can be characterized as a low threat.

Threat of Substitutes In the past couple of years the threat of substitution of automobiles has increased significantly due to the increasing price of gasoline. Customers are beginning to consider fuel efficiency when selecting a vehicle. This can cause problems for the less fuel efficient automobiles such as Hummer. Many of these automobiles will soon be substituted by fuel efficient cars. This is exemplified by the decline in sales of SUVs by Ford and General Motors, and the increase in interest for hybrid vehicles such as the Toyota Prius.1 Other substitutes to the automobile include bus, metro, motorcycle, and train. In Europe and the US, the increase in gasoline prices has increased the use of these other forms of transportation. In Appendix (I) there is a breakdown of the problems occurring with oil and the rising gasoline prices. The threat of alternative automobiles is mostly being seen in the development of hybrid-electric vehicles. Since their entrance into the market, this type of vehicle has given way to new innovation and alternative forms of driving transportation. The need for this type of automobile was due to the overwhelming outcry over pollution from natural gas/diesel emissions. As a result, hybrid technology helps automakers meet stricter environmental standards in Europe and in North America.2 Currently, this threat can be characterized as moderate due to the in adequate choices that are available and small amount of demand for alternative automotive vehicles. Power of Suppliers The relationship between the suppliers and the automobile manufacturing industry has changed dramatically in the recent past. Manufacturers have begun to outsource the majority of parts used in the production process. In addition, they have also decreased the number of suppliers significantly. They have accomplished this by requiring the suppliers to produce major components of the automobile. For example, Lear and Johnson Controls have expanded to produce complete interiors.3 By reducing the number of suppliers, the automobile manufacturers have not only reduced costs, but have also created closer relationships with their suppliers. This change has also
1

Wards Dealer Business. What Could Happen If Fuel Hits $3 a Gallon.

http://search.epnet.com/login.aspx?direct=true&db=buh&an=16958878
2 3

Mergent Online Levy, Efraim. Industry Surveys: Autos & Auto Parts. Standard & Poors, 12.

had a significant affect on the suppliers. They are now expected to manage units requiring greater production expertise, manufacture more, and coordinate with the automobile manufacturers.4 It may seem that with a reduced number of suppliers the automobile manufacturers would lose all power, but they have not. In order to meet the demand of the manufacturers, the suppliers also reduced the number of automobile manufacturers they supply. Delphi Corp, the nations largest supplier to automobiles manufacturers, generates half of its sales from General Motors.5 This exemplifies the fact that automobile manufacturers still have power over the suppliers. Also although it may seem that the manufacturers are dependent on the suppliers, this is not especially true with the ever-growing global market. The choices of suppliers are endless. Considering the reduction in the number of suppliers, one would imagine that the power of the suppliers has increased, but unfortunately they are still at the mercy of the manufacturers, making the power of suppliers low. Power of Buyers The majority of automobiles are sold directly to franchised dealerships. And recently there has been an increasing trend of industry consolidation. This trend gives more power to the dealerships, because of their overall hold on the cars. However, in the end the manufacturers have the upper hand, because of their ability to set the prices for each automobile the dealership has. Other buyers of automobiles include the government and large companies. These companies usually order automobiles in large quantities. They commonly have more say over the price and production of the vehicle. Overall, after weighing all the aspects that are incorporated into the power of buyers we have rated it as low.

Firms Placement Relative to Competitors

General Motors placement atop the automotive industry since the1900s has begun to falter in recent years. Market share losses across the world, most recently in the US, suggest that the competitive environment is not getting easier. The Japanese automakers, especially Toyota, have taken away close to 3% of GMs previous market share.
Levy, Efraim. Industry Surveys: Autos & Auto Parts. Standard & Poors, 12. McCraken, Jeffery. Delphi announces larger-than-expected loss. Knight Rider Tribune Business News.
5 4

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Also, increased incentives offered by the Japanese automakers have drastically impacted GM and Fords sales. However, General Motors continues to maintain their hold on the industry. This is evident in the chart in Appendix (E) showing that GMs Chevy brand is second in unit sales for 2004. Compared with the rest of the industry, Toyota stands out amongst the crowd as the company to watch in future years. The boldness and magnitude of Toyotas vision has shocked the industry. Unlike its US competitors, which depend on financial operations to beef up profitability, Toyota derives its success from its core auto operations. Thus in 2003/04 Toyotas operating income margin from its car operations alone stood at 9.5%, compared with a feeble 0.5% for GM in 2004 and an even worse 0.1% for sickly Ford. (Economic) Daimler Chrysler and Ford are GMs other key competitors. They, like General Motors, are much too dependent on the US market and have experienced a decrease in sales in the recent past. In order to deal with these decreases, Ford aims at producing better and more fuel efficient cars, where as GM reduces the cost of its vehicles. Also, Daimler Chrysler dedicates a large part of its income to research and development in order to make safe and ecologic cars, while GM is inefficient in this department which has caused the suffering of their old fashioned brand. In Appendix (K) there is an outline of General Motors three main competitors: Toyota, Ford, and Daimler Chrysler. Even with decreasing market share and lowered profits, GM is slowly beginning to turn around their problems by improving their product mix, and growing their automotive segments within Latin America, Europe, and the Asia Pacific. Undoubtedly though, GM has a long road ahead if it wants to regain its market share and position within the automotive industry.

Competitive Advantage
A competitive advantage is a tool that every company strives for to increase market share and maintain industry dominance, however it can be one of the most difficult tasks for a company to hold. Unlike most companies General Motors strives to have that competitive advantage in the automotive market, however recently they have found that to keep this advantage they need to be creative in their company. The superior quality of their SUVs previously held the top position competitively for General Motors, but due to the recent decrease in

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demand for SUVs, GM is looking elsewhere for its competitive advantage. GM is currently relying on its strong brand recognition, vehicle safety recognition from OnStar, and financing services (GMAC) to carry the companys competitive advantage. GM has some of the most powerful range of brands in the automotive industry. GMs brands include: Chevrolet, Saturn, Saab, Buick, and Pontiac to name a few. This year Hummer won the JD Power and Associates award for most improved brand. With their strong brand recognition, GM maintains a loyal customer base and valuable reputation (General Motors). Safety is also important to General Motors. GM surpasses most automotive manufacturers whose focus on safety including seat belts, air bags, and crash tests, by offering OnStar exclusively in its vehicles. OnStars features include tracking stolen vehicles and automatically alerting the authorities after a crash. This option is the source for competitive advantage due to consumers interest in safety. Keith Lang, vice president of Tennyson Chevrolet, says "We have customers who come in and specifically buy vehicles because of OnStar. It's a huge safety feature" (LaReau). GMAC Financial Services offers automotive and commercial financing. This arm of General Motors provided close to 80% of GMs total earnings in 2004. GMAC is vital to the success of General Motors due to their financing capabilities in regards to the leasing arrangements provided by the local dealerships. GMAC is among the largest non-bank finance companies in the world, and their experience within the field of auto financing easily gives GM a competitive edge over their rivals.

Internal Analysis
Internal Strengths GMACs Continued Earnings Growth General Motors Acceptance Corporations (GMAC) performance is quite extraordinary, given the more difficult environment in which it operates (Eavis). GMAC is the largest sub-investment grade finance company with $315 billion in assets as of the first quarter 2005. Over the last few years GMs total earnings have come to rely on their financial subsidiary (GMAC) in order to provide a significant source of cash flow. In 2004 alone GMAC made up 79.6% of the total earnings for General Motors. See Appendix (C) GMs auto sales were also dependent on GMAC

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financing. In the first quarter, 54% of retail sales were funded by GMAC, compared with 41% in the year-earlier period (Eavis). Much of the success of GMAC comes in the form of borrowing, lending, and managing risk. GMACs financing operations were significantly down compared to the year before due to rising interest rates and stronger used car prices. The shining star within GMAC over the last year was their mortgage operations. This operation earned $385 million in the first quarter of 2005 due to the fact that US mortgage prices were down. Marketing Strategy/Consolidation GM has decided to limit its product portfolio and focus on (Chevrolet, Cadillac) as its full-line marquis. Saturn, Hummer and Saab would be positioned as smaller niche brands, and Pontiac, GMC and Buick would be combined into a complementary distribution channel that could account for at least 1.2 million cars and trucks annually (Howes). This move is a drastic shift from their previous marketing strategy which included offering an assortment of vehicles for every brand. This strategy was formulated in order to prevent the opportunity for overlapping products. Instead of producing too many average vehicles, GM will be able to focus on a line of great vehicles which will make the brand stand out. The Detroit News also stated that all three brands (Pontiac, Buick, and GMC) will be offered under a single dealership. This change was instituted to increase productivity and branding within each dealership. GM LAAM/ GM Asia Pacific GM's Latin America, Africa and Middle East region is surging. New Chevrolet models from GM Daewoo Auto & Technology Co., GM's Korean partnership, as well as an increase in demand for Cadillac, are leading GM's charge in the region.(Stein) Improving economic conditions within Latin America have resulted in improved growth for 2004. GMLAAM recorded their 5th consecutive quarter of profit and continue to gain market share within the regions of Argentina and South Africa. GMLAAM also had a 26% increase in vehicle unit sales for 2004 (GM Annual Report for 2004). GM Asia Pacific is slowly evolving into a region where increased market share and profits will begin to impact GMs total bottom line. The AsiaPacific automotive market has been the primary driver of global growth between 1999 and 2003, expanding by 9.7% since 1999, with increasing growth rates throughout the 1999-2003

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period.(http://search.epnet.com/login.aspx?direct=true&db=buh&an=14752151) In 2004 GM Asia Pacific recorded a record net income of $729 million. See Appendix (D) Internal Weaknesses Rising Health Care Costs In a recent SEC filing, General Motors said it remains burdened by a high fixed cost structure due to its large retiree base. Currently, for every GM employee there are 2.6 retirees. Along with this, GM spent 5.2 billion dollars on health care in 2004 for 1.1 million employees, retirees, and dependents throughout the U.S. (GM Annual Report 2004). For each benefit provided to employees in health care it adds about $1,4001,500 to the sticker price of each car and truck built in the U.S. Accordingly, GM is paying more per vehicle in health care costs than in steel. One major concern is the amount of financing that is leveraged on their balance sheet due to high fixed costs associated with health care. This concern could affect the condition of the company in the future. Weak Product Mix The bedrock principle, which GM built upon-offering a car to feed every market segment- has developed into a series of contrived brands, most with little identity, and overlapping products (Business Week). A major concern with their product mix is their inability to get a product out there that people want. They have focused a large majority of their product structure on trucks and sports utility vehicles, when gasoline prices have increased and consumer demand for these products has weakened. GM will spend 8 billion on new products this year, up from 7 billion last year. This seems like a good sign, but compared to Toyota who spent 15.3 billion they are far behind. GM officials said they will not eliminate any brands but will look at reducing the number of similar products offered by divisions. However, there are two major brands that have been pinpointed for elimination: Pontiac and Buick these are due to slow sales and weak consumer demand. See Appendix (E). Lack of Flexibility A key concern for the health of General Motors relies heavily on the amount of flexibility it can recoup in North America and Europe, mainly through Opel. GM has a high dependence on the North American market for sales, namely, they account for 60% of unit sales in 2004. Also, GM depends heavily on its financial subsidiary GMAC, which accounted for 79.6% of the companies profit in 2004. With these two segments

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accounting for a large portion of profit and sales within America it is reducing the capability of GM to branch out of its current structure. Opel is one of five automotive companies tied into GMs annual sales. In the European automotive market, Opel accounts for 80% of GMs European automotive sales. This reliance means that if Opel happens to experience any problems GMs overall sales and profits will be greatly affected. See Appendix (A) for a detailed list of GMs Strengths & Weaknesses.

Strategy
The automotive sector of General Motors is currently experiencing an extended period of decreased profitability and sales. In order to turn around the company as well as ensure future growth, we have proposed three strategies. The first strategy, a retrenchment strategy, focuses on product redevelopment, more specifically brand reinvention. The second approach to GMs redevelopment is a growth strategy, which overviews the option of expanding GM into emerging countries. Finally, the last strategy, a restructuring strategy, explains a way to increase profits in the long term by revising the current health care and pension plans. The main strategy we will focus on is the Retrenchment strategy, because it provides the greatest amount of near term and sustainable profitability; however the other two strategies are also analyzed in Appendix (J).

Retrenchment Strategy: Product Redevelopment

In order to turn around their current situation, General Motors must make significant changes to their current product mix. First, they must begin by reducing the number of overlapping vehicles across brands. Different brands should not take away customers from one another; rather they should take business away from the competition. Because this happens often in GMs case, it is time to cut and consolidate. Overlapping models Currently, General Motors has over 89 models. We suggest that they remove a number of these models. By doing this, GM will not only reduce the number of overlapping models, but will also concentrate their product mix to allow for future redevelopment. The chart in Appendix (M) shows their current collection as well as our suggested portfolio. Because it would take time to justify the reasons behind

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removing each model, we will concentrate on explaining a couple of our decisions. First, GM should remove its GMC Cargo Van and Passenger Van because the Chevrolet brand has the same two vans with only minor differences in the model. Secondly, due to the decrease in SUV sales, GMC should reduce the number of Envoy models from 5 to 3 and Yukon models from 4 to 2. Finally, Pontiac should remove their Montana Vans from their product line. Both of these vans have an out of date design and are not as profitable as the other vans in GMs product mix. In the past, GMs strategy included offering an assortment of vehicles for every brand. Recently, General Motors has decided to change their strategy by limiting its product portfolio by focusing on Chevrolet and Cadillac as its marquis brands, repositioning Saturn, Hummer, and Saab to niche brands, and combining Pontiac, Buick, and GMC into a complementary distribution channel (Howes). By making these changes, it seems that GM has taken a step in the right direction. Reinvention After reducing the number of overlapping automobiles, General Motors must focus their attention on their brands. Each brand should hold an identifiable position in the market; if it does not, there are two options: eliminate or reinvent it. Although many critics believe General Motors should eliminate a division, namely Pontiac or Buick, this does not seem to be the best option. Eliminating a brand is costly, for example, the cost for closing Oldsmobile totaled at $1 billion (Welch). Instead, General Motors should focus on reinventing its struggling brand names. Reinventing a brand is difficult and can be very risky. Fortunately, General Motors has already successfully reinvented its Cadillac division, giving them experience with this difficult procedure. To begin the process, GM must first ask itself the question, What does each brand stand for? By answering this question, GM can use the information they have gathered to associate an overall feeling to each brand. Then GM must conduct research to create a design that fits each brand. Cadillac invested $4 billion in research to develop a stark new design that reveled in its edges and sharp angles. (Greenberg) Once the product line is completed, GM must focus its attention on marketing the newly revamped product to its consumers. GM spent $220 million in 2002 and $100 million in 2001 on advertising the new Cadillac design (Greenberg).

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Chevrolet We suggest that GM begin its brand reinvention with Chevrolet and Buick. We chose Chevrolet because it is their number one brand and has an out of date design. They must begin by creating a good entry level vehicle that is comparable to Toyotas Corolla or Hondas Civic. Although GM has recently introduced the Cobalt, it is not doing the job. The Cobalt was supposed to replace the Cavalier and even with GMs projections, the Cobalt wont come close to matching the Cavaliers sales of 195,275 in 2004. (Welsh) For this reason, GM must head back to the drawing board and reinvent the Cobalt. In order to do this, GM must increase their costs in the Research and Development department. It is also important to focus on Chevrolets SUV line. GM must first reduce the number models. We suggest that Chevrolet halt production of the Trailblazer and Blazer. We chose these two models because they were the least profitable. Also GM should focus on the emerging interest in sport wagons. They recently introduced the Equinox, a sport wagon, with a sleek new design. Using this design, we suggest that GM reinvent their SUV line to resemble the Equinox. Buick In the past, GM has tried to decrease the median age of its Buick customers from its current 70 years of age. In the recent past, they felt as though they may have achieved this when they introduced their new LaCrosse in 2005. Unfortunately, the public did not agree. Even dealers were complaining, We needed a halo car to relaunch Buick, LaCrosse does not have breakthrough styling. (Halliday) Fortunately, they have created a car that may appeal to the younger audience that is due to come out in 2006, the Lucerne. In order to verify this, we polled 32 students. See Appendix (L). We were surprised by the unanimous vote for the Lucerne design. We suggest that Buick remove Century, LeSabre, Park Avenue, and Rainier from their product line. Then GM must, using the design of the Lucerne, improve the LaCrosse and create a new model. By doing this, Buick will start to attract a younger audience. Many critics refer to GMs automobiles as, outdated, poorly constructed, and wrapped in dull cookie-cutter styling. (Yates) As General Motors reinvented Cadillac, it is now time to reinvent their other brands. As stated above, this can be very risky as well as costly. Although GM was successful in reinventing Cadillac, there is a chance that they may not be as successful with other brands. Unfortunately, this is a risk GM

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must take in order to turn around its struggling company and begin future growth.

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WORKS CITIED Area Dealers See Brighter Future for GM Newspaper. Knight Ridder/Tribune Business News. May 8, 2000. Associated Press. Sintinel, Fort Wayne, Indiana. Knight Ridder/ Tribune News. Eavis, Peter. GMs Pumped-up Lending Arm Surprises Many. http://TheStreet.com. (May 23, 2005). Economist Intelligence Unit. Eb.eiu.com. (May 25, 2005). General Motors Annual Report 2004. General Motors Corporation SWOT Analysis. Company Report. April 2005. http://search.epnet.com/login.aspx? direct=true&db=buh&an=16895193. (May 25, 2005). Global Operations: Asia-Pacific Operations. General Motors. 2005. http://www.gm.com/company/corp_info/global_operations/asia_pa cific/. (May 24, 2005). GM Factory Workers in Baltimore are concerned about Future. Newspaper. Knight Ridder/Tribune Business News. May 9, 2005. GM Pulls out all the stops to sell its vehicles. Knight Ridder Business News. April 6, 2005. GM to Invest $3 Billion in China. World IT Report. June 24, 2004. http://search.epnet.com/login.aspx? direct=true&db=bug&an=13747080. (May 24, 2005). Halliday, Jean. Buick seeks baby boomers with new models. Automotive News. Vol. 79, Issue 6126, p 22. December 20, 2004. http://search.epnet.com/login.aspx? direct=true&db=buh&an=15509816. (June 6, 2005). Hawkins, Lee. Struggling GM Rolls Out a New Marketing Strategy. Wall Street Journal. May 23, 2005. http://proquest.umi.com/pqdweb? did=843300381&sid=1&Fmt=3&clientid=3920&RQT=309&VNam e=PQD. (May 24, 2005).

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Health Care May Not the Worst of GM Worries. Knight Ridder Business News. April 6, 2005. Hindo, Brian. Online Extra: GMs Ace in the Hole: Cash Business Week. Businessweek.com. (May 24, 2005). Howes, Daniel. Detroit Newspaper. Jones, Dow. GM CEO: Asia Pacific Important Part Of Business Plan. Morning Star. May 16, 2005. http://news.morningstar.com/news/DJ/M05/D16. (May 24, 2005). LaReau, Jamie. GM Employees Families Featured in Ads. Automotive News. Vol. 79, Issue 6145, p4. May 2, 2005. http://search.epnet.com/login.aspx? direct=true&db=bug&an=16989789. (May 25, 2005). Lewin, Tony. Saab will lead infotainment for GM Europe. Automotive News Europe. Vol. 19, Issue 8, p6. April 18, 2005. http://search.epnet.com/login.aspx? direct=true&db=bug&an=16914093. (May 23, 2005). Ostle, Dorothee. Opels Forster wins union support for Olympia turnaround. Automotive News Europe. Vol. 6, Issue 17, p1. August 27, 2001. http://search.epnet.com/login.aspx? direct=true&db=bug&an=5165491. (May 23, 2005). Slavnich, Dean. The Problem Solver. Automotive Engineer. Vol. 30, Issue 3, p22. March 2005. http://search.epnet.com/login.aspx? direct=true&db=bug&an=16959042. (May 23, 2005). Slavnich, Dean. Saab Plant Saved as Opel Winds Epsilon Project. Automotive Engineer. Vol. 3, Issue 3, p4. March 2005. http://search.epnet.com/login.aspx? direct=true&db=bug&an=16958897. (May 23, 2005). Stein, Jason. Latin America, Africa, Middle East reap biggest net income for GM. Automotive News. Vol. 79, Issue 6123, p16. November 29, 2004. http://search.epnet.com/login.aspx? direct=true&db=bug&an=15330975. (May 24, 2005). Talbot, David. Gass-Guzzling Hybrids. Technology Review. Vol. 108, Issue 4, p24. April 2005. http://search.epnet.com/login.aspx? direct=true&db=bug&an=16520982. (May 23, 2005).

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Taylor, Alex. GM Hits the Skids. Fortune. Volume 151, Issue 6, p55. http://www.fortune.com. (May 24, 2005). Webster, Sarah. GM alters strategy in Asia Pacific. The Detroit News. June 12, 2003. http://www.detnews.com/2003.autoinsider/0306/12/b01190819.htm. (May 24, 2005). Welch, David. Toughest Job Yet for This Mr. Fixit. Business Week. Issue 3908, p72. November 15, 2004. http://search.epnet.com/login.aspx? direct=true&db=bug&an=14962494. (May 23, 2005). Welsh, Jonathan. Drive Buys/ Trying Not to Be Cavalier. The Wall Street Journal. March 11, 2005. http://proquest.umi.com/pqdweb? did=806399881&sid=1&Fmt=3&clientId=3960&RQT=309&VName =PQD. (June 6, 2005). Why GMs plans wont work. Business Week. http://www.businessweek.com. (May 23, 2005). Yates, Brock. Whats Good for General Motors? The Wall Street Journal. May 24, 2005. http://proquest.umi.com/pqdweb? did=843811411&sid=1&Fmt=3&clientId=3960&RQT=309&VName =PQD. (June 6, 2005).

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Appendix

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Appendix A Internal Strengths & Weaknesses Strengths GMACs Continued Earnings Growth: GMAC has delivered growth in earnings for 10 straight years. Generating much needed cash flow and net income General Motors. Mortgage operation recorded record profit in Q1 of 2005 GMAC made up 79.6% of GMs total earnings Marketing Strategy/ Consolidation: GM has decided to limit its product portfolio and focus on (Chevrolet, Cadillac) as its full-line marquis while the other six are going to be focus brands with limited product line-up. This will be done to phase out overlapping products. Consolidation of distribution channels: Pontiac, Buick, and GMC will be offered in one dealership. This change was instituted to increase productivity and branding within each dealership. GM LAAM/ GM Asia Pacific: Fifth consecutive quarter of profit. Increased market share for Argentina and South Africa. Expanding growth in the Asia Pacific region especially China Product Pipeline: 25% of volume in 05 will come from new product developments Cadillac is red hot; it is the leading edge in product turnaround and had the largest sales year since 1990. Richard WagonerCEO of GM Product innovation in regards to fuel cell cars such as the hydrogen ski. Weaknesses Rising Healthcare Costs: GM spent 5.2 billion dollars on heath care in 2004 for 1.1. million employees, retirees, and dependents throughout the U.S.

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Older workforce within the company in need for heath care coverage. Heath care costs an estimated $1,400-$1,500 per vehicle

Weak Product Mix: Should focus on a set number of brands and not waste capital on ailing/non profit operations. GM will spend 8 billion on new products this year, up from 7 billion last year. Toyota spent approximately 15 billion on new products. Two major brands that have been pinpointed for elimination: Pontiac and Buick these are due to slow sales and weak consumer demand. Lack of Flexibility: GM has a dependence on the North American market for sales, namely, they account for 60% of unit sales in 2004. GM depends heavily on its financial subsidiary GMAC, which accounts for 79.6% of the companies profit in 2004. In the European automotive market, Opel accounts for 80% of GMs European automotive sales.

GMAC credit rating downgraded to Junk Status: This affects the future of GMAC as far as its lending capabilities are concerned. A bond such as GMACs, which obtained Junk Status results in the yield being higher and an increased risk of default. Also, it makes auto loans more expensive and raises borrowing costs to customers.

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Appendix B

25

Appendix C

26

Appendix D

27

Appendix E

28

Appendix F

GMLAM GMLAP GMNA 29 GME

Appendix G

2 0 0 4 V e h ic le U n it S a le s b y R e g io n
10% 8%

GM NA GME G M LA A M
22% 60%

G M LA P

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Appendix H
Poit b yA a s r f a ilit n ly is
6 0 5 0 4 0 3 0 2 0 1 0 0 O e tin M rg p ra g a in G s P fit ro s ro M rg a in E I D M rg BT A a in

20 00 9 2 8 1 6

20 01 5 ,7 2 6 1 3

20 02 5 ,2 2 ,8 4 1 2

20 03 6 ,7 2 ,4 6 1 5

20 04 6 ,8 2 ,4 5 1 4

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Appendix I - Steel: Steel typically accounts for about 5% of the manufacturers total vehicle production costs. The future trend is for steel prices to lower by the end of 2005. According to several analysts, AK steel, a large supplier to the automotive industry, said that it obtained double digit price hikes on two-thirds of its contracts. The primary result of high steel prices are due to shortages of raw materials due to heavy global demand in China. China is still the number one consumer of steel and with many manufacturing companies and GDP growth of about 7.0% it will continue to keep the steel prices at high levels. Another major factor are freight costs, import levels decreasing, and consolidation within the industry. - Oil/Gasoline: Oil prices are expected to rise in the short-run due to risks of supply disruptions caused by Iraqi elections and OPEC holding back production. After this rise, which we are currently in prices are projected to fall to the mid 30 levels according to several analysts. OPEC reduced its forecast for world oil demand growth in 2005 by 80,000 barrels per day. This estimate shows that OPEC is confident that the levels they currently have for the year are sufficient and appropriate for the coming year. Due to the increase in the price per barrel of oil, gasoline prices have risen 2.6% in the past year. The price of oil is an important barometer in measuring consumer confidence in the automotive industry- high price/oil means consumers are more likely to hold back on buying cars. - Currency: European automakers share prices have continued to slide in the 4th quarter of 2004 due to the Euros appreciation in value against the dollar, which eroded the value of export revenues. As the dollar continues to decline against most major currencies in 2005, one can expect multinational firms to benefit from increasing demand. This means that U. S. manufacturing mainly automotive companies who have sales globally can expect to see an increase in market share as products become more competitive. European exporters have suffered huge losses as the euro has continuously strengthened against the dollar in the previous 3 years. As this is occurring, the Yen is also weakening which is giving Japans automakers an unfair advantage over the field. From May 12, 2002, through December 2, 2004 the euro appreciated more than 45% from about .91 to nearly $1.33. As of June 7, 2005, 2005, the Euro was up against the dollar closing at $1.22. Thus showing a recovering

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dollar, this will in turn result in pressure being put on commodities to lessen their current high price levels.

Appendix J Growth Strategy: Expansion One of the biggest issues for GM is that sales are either decreasing or stagnated. To cope with this, GM should find new markets in order to increase its sales and ensure future growth. Today, emerging countries represent an important opportunity for growth because of the population increases and their ability to purchase more. That is why GM should change their direction of strategy: instead of investing in Europe, GM must specialize in a different market, that of the emerging countries. The graph in Appendix B shows the fact that in 2030 the number of vehicles in the developed countries will increase by two times. At the same time, the number of vehicles of the emerging countries will increase by 4 times more. As a consequence, there is an increased opportunity in entering the emerging countries. This evolution is confirmed by the fact that the population of these countries are asking for more and more consumption. Therefore, in China, a car culture is appearing replacing the bicycle. In this country, it is obvious that cars will become the dominant way of transportation. It is essential to point out that the demand is still quite poor, and the ability to purchase products is still less than in developed countries. So, GM must produce inexpensive cars for these countries in order to be successful. For example, Renault produced a specific car, the Logane, in Eastern Europe. This car is very cheap, 5,000, and did not have any options making it have the lowest price possible. This strategy should be followed by GM. These cars have targeted a huge part of the demand and allow a standardized production which reduces costs. Moreover, the cost of the production, facilities, and workforce is lower than in the developed countries. As a consequence, GM is bound to increase its sales. To manage this strategy, GM should be concentrated in the countries which have the biggest potential. They begin at first in Asia, (China,

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Taiwan, India), which is 53 % of the total of emerging countries; then Latin America (Brazil, Argentina) which make up 28%; and finally Eastern Europe which makes the majority of the rest of these emerging countries. Asia Because GM already has some firms in China, GM should extend its base into India. Not only is the cost of the workforce very low, but also the population is growing as well as demand and it is physically close to China. Toyota is the only other automaker that has taken a position in India. The others car brands in this country are held by national firms. That is why GM has the potential to grow in India. In order to open a firm in India, GM will have to invest $150 million as Toyota did. We must also point out that a substantial amount of money must be spent on communication, because GM is not very developed in India. Latin America In the region of Latin America, GM should open one factory in Mexico. In fact, we have not only chosen this country because its car production is very high, but due to the cost of the workforce being low and knowledge for car production. Brazil would not be a good choice because some firms as Renault, Fiat, and Peugeot have already created many factories. Also, the economy in Argentina is not stable enough. To begin production in this country, one factory will be sufficient at first because it is hard to evaluate the consumption and the demand in this country. The costs will total close to $700 million in this particular venture. These costs will allow GM to have a higher structure than Peugeot (which have invested $600 million) in this area and to follow Renault (which invested $1.2 billion). Eastern Europe In Eastern Europe GM will profit from the knowledge and the price of the workforce. In the same time, the demand is huge and firms already know a huge success. Two industries should be created: one in Romania, another in Slovakia. The cost of building a factory in each of these countries is close to $1.5 billion. To compare, PSA invested more than $1.4 billion in Czech Republic and Romania. It is necessary to invest more because GM is late to join this market, and it is necessary to reduce the gap in a market where the brand value of the cars is important. Nevertheless, following this strategy has its set backs. Indeed, it is important to be one of the first to enter into these countries. For instance, Renault and Fiat have taken an increased position in Brazil. To

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compete, the others brands have to make an important effort on communication to increase the brand value- and organization. Also, many brands are going to follow this strategy, so there is a risk of a price war. Also, these countries lack the necessary infrastructures needed to develop the numbers of the cars. That is why; some governments have taken measures to limit the number of cars into big cities like Beijing. It is important to underline that the policy and economic situation in some countries is not stable. That represents a risk for a firm which will invest a lot of money. Finally, it is necessary to put forward the fact that this strategy will not give profit in the short term because the demand is not developed enough and the purchasing power is still low. Despite the numerous setbacks involved in extending production to emerging countries, we feel that by using this strategy, GM will be able to compensate for the decrease of its sales in North America and Europe. Restructuring Strategy: Health Care and Pension Plan In September of 2003, General Motors embarked on labor negotiations with the UAW involving their latest contract. What resulted were concessions which have to this date, single handedly assured General Motors of annual profit losses, at least until the next round of negotiations begin. According to Business News Bank, General Motors spends more on Health care and pension plans per vehicle than on steel. Analysts estimate that combined these two non value added costs accumulate to $2,200/vehicle. Comparatively, Honda and Toyota spend approximately $100/vehicle. Recently, GM and the union have met to discuss their previous contract. Although the union was noncommittal in reopening its contract with the BIG Three, their willingness to discuss the industrys deepening financial distress was encouraging. In order for GM to improve for the future, the UAW must come back to the negotiation table and reevaluate their previous contract. General Motors has three major alternatives it can pursue in the restructuring of its Health Care and Pension plans: 1. Have UAW members covered under same H/C plan as non-union salaried workers. 2. Have Employees pay for a portion of their Health Care costs.

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3. Separate the 2 units and file Chapter 11 Bankruptcy, which will force the UAW to renegotiate their contracts. Tactic 1 At last months New York auto show Bob Lutz, GMs vice chairman for global product development, suggested union-represented hourly employees should share the same, less generous, health care benefits as salaried employees. Last year GMs 119,000 hourly workers paid 7% of their health care costs, while its 38,000 U.S. salaried workers footed about 27% of their costs (Garsten). When you compare this to the average employee in the U.S., you find that they pay 37%. Sean McAlinden, an economist and labor expert with the Center for Automotive Research, estimates GM would save as much as $1.4 billion annually if this occurred (Garsten). Tactic 2 The second restructuring tactic is for UAW members to pay a portion of their Health Care costs. This can be done by having a single, salaried worker pay $100 a month toward health costs, while hourly union workers pay no premium and only $5 co-pay on medical expenses. This particular tactic will save an estimated $1.2 billion a year. However, the concessions that need to be made can only be approved by the UAW through a renegotiation of its current contract. Otherwise, GM will have to wait for the next round of contract negotiations to resolve the rising health care crisis and pension problems. A positive sign though is that the negotiation talks that occurred with Chrysler Corp and their contract with the UAW recently. They negotiated a new Health Care agreement that requires around 35,000 Chrysler employees and retirees to start paying deductibles of between $100 and $1,000 for Health Care. Our best recommendation is for General Motors to follow the plan used by Chrysler in eliminating their Health Care cost structure already in affect. Tactic 3 The final option calls for General Motors to separate their Automotive and Financing segments, or even sell the entire financial subsidiary. However, we believe that selling GMAC in its entirety will be too challenging a task based on the complexity of GM and GMACs relationship. In addition, GMAC generates much needed earnings and cash flow for GM. Therefore, the only alternative left for General Motors would be to engage in further negotiations with the UAW members and ask for

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concessions. Unless something is done GMs healthcare bill is expected to climb from $5.3 billion to $5.6 billion this year, making it the USs biggest single healthcare provider (Simensen). GMs Chief Financial Officer, John Devine, said: Health care is a real drain on our profitability, and cash, and a big dent on the balance sheet. The issue is making us increasingly non-competitive. (Simensen) One way General Motors can force the UAW members back to the table is by threatening their workers with a refusal to pay for retiree healthcare and the elimination of its pension plan. This possibility, along with the rumors of filing for bankruptcy, has many of GMs 160,000 US workers and 440,000 pensioners worried about their future. Fred Spearing, a GM worker, said: Everybody is walking on eggshells right now out of fear they will be laid off or even lose their retirement benefits. (ODewell) If the company did decide to seek out bankruptcy protection, contracts with unionized members and their existing healthcare agreements could be renegotiated (ODewell). GM could then pass on their pension obligations to the federal government, which would reduce a large portion of GMs fixed costs. This major strategy involving the restructuring of GMs pension plan calls on General Motors to follow the same path the U.S. Steel Industry took in their latest bankruptcy filings. The current pension plan standards in that industry are: 1. Elimination of pension plans for current workers. 2. Elimination of pension liabilities for retired workers. 3. Scale back Health Care plans for retired workers. Currently, the Steel Industry is seeing continued signs of profitability as a result of their recent bankruptcy filings, renegotiation of union contracts, and funding from the federal government. We feel that if this tactic can be duplicated in the event that the other two fail, then there will be a great opportunity for re-emergence in the automotive sector for General Motors.

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Appendix K Key Competitors Daimler Chrysler: Strength: - Research and development : Indeed, more than 25000 salaried workers in this department. What is more, 6,2 billion USD were concentrated in 2003 for the research of new products. That is why, the R&D is one of the best way for Daimler to be more competitive. Commercial policy : Mercedes has got a famous image thanks to the reliability of their car. For the consumer, the brand is linked to luxury and standing cars. With the Smart car, Mercedes tries to diversify its range of offerings. Now, Daimler-Chrysler aims at covering all the segments of the market Anticipation and reactivity: This firm did a partnership with Mitsubishi to penetrate the Asian market. Moreover, the company succeeds in anticipating the use of diesel in the French market, thanks to that it achieves to earn market shares.

Weakness: - The brand image : Chrysler has got difficulties to make the ends meet because of its image. Indeed, this brand has got a high American image, so it can not export its brands in all over the world. The quality : Mercedes had to cope in 2004 due to a problem with quality: some of the cars did not succeed the crash tests performed on the car; that brought a decrease in their sales.

Ford: Strength: - The brand image : Thanks to over 100 years of experience, this brand is well known in all over the world. What is more, the organisation of the work created by Ford is also famous. That allows underlining that Ford gets the leadership in the world with the sales of the Ford-Focus.

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The offer : The range of Ford is very large. This firm is present in all the segments, that is why it is able to compete with other brands. Activity of credit : This activity represents a part increased in the activity of the firm.

Weakness: - The brand image : Like Chrysler, Ford has got difficulties to make the ends meet because of its image. Indeed, this brand has got a high American image, so it can not export its brands in all over the world. Also, like GM, they are dependent of the US market. The costs : Compare to GM, Ford has got high costs. Actually, its R&D department is not as good as the Daimler one. Lack of anticipation : Compare to its competitors, Ford is not able to be reactive. Indeed, this firm is late in Asia and adapts to slowly its range.

Toyota : Strength: - Innovation : The R&D department is very successful. Toyota is the brand top of the pile for the technology. This firm gets indeed all the knowledge of the Japanese companies in this way. What is more, Toyota innovates for the organisation of the production (JIT) in order to reduce the costs. The offer : The range of Toyota is very large. This firms is present in all the segments, that is why it is able to compete all the others brands. In USA, Toyota earns market shares thanks to its pick up. The offer is valued by the capacity of the brand to adapt the product to the market and by the brand image (reliable).

Weakness: - The range :

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Even if Toyota is present in all segments, this firm is not able to develop the top of the range product. The position : The firm is based in Japan. This market is too narrow. That is why, Toyota is obliged to compete is foreign countries were national brands are praised.

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Appendix L Using the pictures below, we polled 32 students by asking them which picture they preferred. We received an unanimous vote of 32-0 for the Lucerne model (the bottom).

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