By contrast, Toyota, Honda, Nissan and BMW all earned profit margins of 10 percent or greater in 2002. To be sure, some of that performance was due to currency fluctuations. But a greater part of it was simply due to the fact that while import companies certainly offer incentives, they have not had to discount their vehicles in the same way the Detroit auto companies do. And they are constantly cutting the cost of developing new cars and trucks so that they can keep investing in their expanding businesses. Toyota has ordered its engineers in Japan to cut the cost of vehicles by 50 percent going forward, because it is concerned about the danger posed not by Detroit but by Chinese companies, whose labor costs are minute compared with the expense of employing workers in mature markets such as Japan, the United States and Europe.
What are the implications? Simple. Without adequate profits, Detroit cannot invest in the future, let alone pay the enormous pension and health care liabilities that the companies face. In 2002, analysts estimated that the Detroit auto companies faced a $1,200-per-car burden, called the “legacy cost,” because of the benefits earned by its retired workers. Without adequate profits, Detroit will have trouble simply treading water against the imports, let alone finding the resources to develop lineups of vehicles that could defeat them. It is a reason why, all across the industry, executives are questioning how any of the Detroit companies can hope to get through the next few years as they exist today. The companies are becoming like an upside-down pyramid, with a smaller and smaller tip trying to balance the vast expense of vehicle development against employee and retiree expenses.
Yet the corporate culture of bigness that is so inherent in Detroit and, indeed, in the American business world in general, does not lend itself to the belief that these companies will shrink. Voluntarily slimming down to a realistic and manageable size just isn’t part of the way Detroit does things. Gary Cowger, president of GM’s North American operations, said GM has no intention of letting Toyota push by it to become the world’s biggest carmaker, nor does GM plan to let its market share shrink any further. “We want to be the best American player. Not only the biggest, but the best,” Cowger said. But others see the handwriting on the wall. “If there is one thing that has done the most harm to the Big Three, it is the word ‘big,’” declared Jim Schroer, who was Chrysler’s executive vice president of sales and marketing until he was forced out in May 2003, after Chrysler stumbled in its attempts to keep pace with its domestic and foreign competition. Said Schroer, “We are beset by trying to achieve quantities of scale that require enormous volumes. And then you look around the industry and you see that the advantage is where companies are not big.”
GM vice chairman Bob Lutz is among the most vocal proponents of the idea that the auto industry has seen the end of Detroit—at least, the old definition of Detroit as a monolithic industry whose players were merely big and its vehicles interchangeable. At 71, Lutz, a former marine fighter pilot, is on the last and most critical mission of his career. He is striving to craft a new identity for GM as an aggressive company with exciting products, defeating the imports’ charge with vehicles that outpace them in flair and are their equal in quality. He is about the only man in Detroit who would be capable of handling the job, for he is hands down the most famous automobile executive in America. Ramrod straight, with gleaming white hair and an eaglelike gaze, he unabashedly wears the mantle of celebrity that was once shouldered by Lee Iacocca, his former boss at Chrysler, who refused to name Lutz as his successor and instead brought in Bob Eaton from GM. To this day, Lutz insists that it wasn’t his performance but his brash persona that lost him the job—specifically, a quip at a University of Michigan conference that Chrysler had been a woman on her deathbed, which Iacocca took as an insult. He left Chrysler before its merger with Daimler-Benz, to sit in relative obscurity for a few years as chief executive at Exide, a battery company, before GM’s CEO, Rick Wagoner, appealed to him to come to GM’s rescue.
The challenge that Lutz faces will have far more of an impact on his legacy than everything he did at Chrysler. The actions he is taking will determine whether GM can remain the world’s biggest auto company and hang on to leadership of the American market in the face of the imports’ drive. Under Wagoner’s predecessor, Jack Smith, GM spent the 1990s on its restructuring efforts, coming out as a leaner company financially but with continually eroding market share owing to a bloated lineup of vehicles that with few exceptions seemed out of sync with what consumers wanted. In the nearly three years since Lutz arrived as vice chairman of GM, with all of its product development operations under his wing, he has charged through GM’s engineering and design laboratories like hell on wheels. He has attacked the protocol and lethargy that kept GM’s product developers from getting their best ideas to the car market, handing out stickers reading, “Says Who?” each time someone suggests that GM’s tradition is to do things a certain way. He has insisted on a new identity for Cadillac, which he wants to see become the leading luxury brand in the country. Every utterance, every move results in a hail of publicity, which only serves to fuel the Lutz mystique. “He is an icon that everyone can rally around,” said Jeremy Anwyl, chief executive of Edmunds.com.
Even as Lutz tries to yank GM away from the past and forward into a new reality, the vestiges of old Detroit cling to him like the scent of the expensive cigars that he loves to smoke in a charming if thoroughly alpha male fashion. Asked over lunch in GM’s Detroit headquarters which car he felt represented everything he wanted buyers to think about GM, Lutz unhesitatingly chose the Chevrolet Corvette. Certainly its legions of enthusiastic fans would agree, but to an import audience the ’Vette seems distinctly rough-edged, more The Sopranos and less Sex and the City. Moreover, executives at Toyota would undoubtedly choose the Camry, Honda executives would select the Accord and BMW’s leaders the 3-series as their standard bearers, all of which are within reach of many consumers. But Lutz contends that the Corvette is the market’s premium sports car and as fine a vehicle as GM is able to build. He’s proud to have it speak for the company.
Likewise, when asked which primary advantages GM has over import companies, Lutz answered that GM is able to build an endless number of V-8 engines, and that American customers always show a weakness for as many cylinders as GM can offer them. And, when the conversation turns to hybrid-electric vehicles, which GM had yet to introduce by mid-2003, Lutz dismisses the ecology-minded vehicles from Toyota and Honda as PR moves (to the consternation of Tom Kowaleski, the GM public relations executive on hand for the interview). But lest it be thought that Lutz is a relic of Detroit’s past, completely out of touch with the American car market, he parries with a series of thrusts that show exactly how clearly he understands the threat that GM’s import competition poses.
Throughout the 1980s and 1990s, Ford was widely considered to be the strongest of the Big Three auto companies, reigning as the company producing the best-quality vehicles, as the industry’s lowest-cost manufacturer and as the one with the highest profits. Now all those titles go to GM, which spent the past few years completely overhauling its factories, unloading the Delphi parts division, and streamlining its product development operations. But, says Lutz, GM knows full well that it can’t just be better than Ford to maintain its hold on the American market. Such theories are like the folk tale of two hunters in the woods, racing to escape a threatening grizzly bear. “I don’t have to outrun the bear, I only have to outrun you,” he said with a sly smile as others in the dining room laughed at the punch line. “We don’t see it that way. It would be dangerous to see it that way.” Nor can GM discount any of its competitors. Two years ago, Lutz said, he was ready to write off Nissan, only to be impressed by its swift comeback. The “fear factor” is a powerful motivator, he said, ticking off Toyota, Honda and BMW as companies that he particularly watches.
But Lutz rejects the notion that GM must be like a batter in a cage, whirling 360 degrees to bat at balls from all directions. He doesn’t want the company to deve
lop vehicles just because its competitors have them. In fact, he’d like GM to step out of the batting cage and get into an adjoining cage, scoring hits with vehicles that are a surprise to the car market. “We are going to be the home-run machine,” Lutz declares.
The best example in GM’s current lineup is the Hummer H2 sport utility, a modern street version of the Humvee military vehicles that were so prevalent in the two Gulf Wars. GM can’t take credit for developing the H2 itself—it bought marketing rights to the Hummer brand in 1999—but it has scored an unmistakable success with the SUV, a favorite with well-heeled baby boomers, and which was consistently the only GM vehicle during 2002 and 2003 on which it did not have to offer zero percent financing and huge rebates. Excitement over the H2 was only heightened when the second Gulf War began in March 2003. “When I turn on the TV, I see wall-to-wall Humvees and I’m proud,” said Sam Bernstein, an antiques dealer in Marin County, California, and owner of an H2. “They’re not out there in Audi A4s. I’m proud of my country and I’m proud to be driving a product that is making a significant contribution.” (The H2’s premier status was sullied a bit when it was ranked dead last in a quality survey by J.D. Power & Associates. Owners were disappointed when it achieved poor gas mileage, estimated at around 12 mpg. But then, no one ever claimed that it would be economical.)
The H2 was a notable exception to the situation GM faced elsewhere in the market. Despite all the streamlining efforts during the past decade, GM by far has more car and truck brands than any other company. And though Oldsmobile was scheduled to be discontinued by mid-decade, GM still must feed product to Chevrolet, Saturn, Pontiac, Buick, Cadillac, GMC and Saab, along with Hummer. All that complexity just makes the job so much harder for GM, which is facing competitors with finely honed identities and whose lineups are clear from top to bottom. Yet it is loath to give those brands up. To GM, which began life in 1908 as a collection of brands joined together by William Crapo Durant, brands are a sign of strength, not weakness, no matter how confusing they might be to customers or the burden they pose as GM tries to compete. Its experience with Oldsmobile, whose dealers filed suit to stop GM from eliminating the division, demonstrates the difficulties it faces in getting rid of any of these nameplates.
Even so, GM might be able to justify keeping all those brands if each one had a specifically designed image and mission, with models designed from the ground up to fulfill a specific purpose. However, GM somehow lacks the will and the confidence to put its power behind a single vehicle as proof of its expertise. There is never just one mid-sized sedan, like Camry, or one pickup, like Nissan’s upcoming Titan. A case in point is minivans, which had been offered by Chevrolet, Pontiac and Oldsmobile. In 2003, GM said it would give minivans to Buick and Saturn, too. Doubtless Lutz believes that they will fill a need for customers at each brand, but with so many available, there is just no way that GM can hope to replicate Honda’s success with the Odyssey, or to fight it head-on, as Toyota can with Sienna.
Moreover, a minivan won’t begin to address the problems at Saturn. Saturn reached the market amid incredible fanfare in 1990. Its small cars attracted owners of Hondas and Toyotas, and its no-hassle approach charmed customers. But Saturns earned only minimal profits, a cardinal sin in the eyes of GM's bean counters. GM starved it of new products in the mid to late 1990s, stymieing its potential before it had a chance to grow. By the time Lutz got to GM, Saturn was being folded into the rest of GM’s operations, no longer a stand-alone company. Though its lineup eventually was filled in with a tepid mid-sized car and a small SUV, and Lutz has vowed to revive it with high-performance vehicles that GM has dubbed “Red Line editions,” much of the goodwill that GM had generated with Saturn has evaporated. In 2003 it is just another GM brand, joining the rest in GM’s zero percent financing drive, expressly against its original vow not to resort to incentives. GM’s focus on incentives, in fact, has stolen attention away from the renaissance that Lutz is trying to achieve. Zero percent financing wasn’t anything new to the auto market when GM embraced it in September 2001: Months prior to that, Mitsubishi had offered zero percent financing, zero down and zero payments for the first year on its cars and SUVs. But it was a big deal when GM turned to the concept as a way to jump-start sales following the September 11 attacks. Its Keep America Rolling campaign was a direct response to an appeal by members of President Bush’s cabinet who traveled to Detroit days after the attacks to plead for GM’s help.
Had it been a short-term offer, GM might have basked in congratulations for doing its part to stimulate the economy. Instead, it made zero percent financing available in one form or fashion throughout the next two years, resulting in a barrage of criticism from its competitors and industry analysts, who contended that GM had made customers expect such deals. Chrysler’s chief executive, Dieter Zetsche, was among the most critical, likening the constant flood of offers to automotive heroin. Indeed, the incentives seemed to exemplify a constant complaint that the Detroit automakers, and GM in particular, were guilty of short-term thinking, sacrificing their future sales to expand market share now. In fact, zero percent financing and the rebate deals stopped GM’s market share slide and helped it pick up 0.2 points of share during 2001 and 2002, returning it to 28.2 percent of the market, albeit at a tremendous cost. In one sense, GM’s decision could be justified. Job-security provisions in UAW contracts required the company to pay workers virtually their entire pay and benefits even when they were laid off, meaning that GM didn’t have the flexibility to save money on labor costs by cutting production. Every additional sale helped GM spread its legacy costs over a little broader base.
Also, GM booked its sales when vehicles were shipped from the factory to dealers; since it had reduced its manufacturing costs, the sales generated by the incentives allowed GM to eke out a few dollars more in profits. That aside, the strategy still seemed risky, given that the company has a large number of attractive new vehicles planned for the 2004 model year and beyond. Since his arrival, Lutz has been laying ground for a variety of cars that he thinks will make GM the industry’s hottest company. GM executives initially missed the shift by consumers from cars into trucks, and it was not until the late 1990s that GM finally caught up with Chrysler and Ford in SUVs and pickups. Starting in 1999, GM introduced a well-received wave of vehicles, such as the Chevrolet Silverado pickup and Tahoe SUV, the GMC Envoy SUV and the Cadillac Escalade, which brought the company a raft of new customers for luxury sport utilities, some of whom traded in imports. The SUVs helped Chevy push past the Ford division for leadership in the truck market, although the F-series remained on top as the best-selling pickup, as it had been for more than three decades.
But in shifting so much attention to trucks, GM fell far behind in the car market, to imports’ advantage. Lutz knew that to remain the leading industry company, GM had to refocus its attention. The car market is where he has put most of his thrust. Among the most important vehicles that GM plans to introduce are incarnations of the Chevrolet Malibu family car and the Pontiac Grand Am compact. It will be tough enough for GM to convince customers that these are vehicles worth owning instead of Accords and Camrys. And it faces an additional hurdle: These two cars have been known as rental cars, much as the Taurus has become. (Lutz, who got to GM after development had started, said it was too late for him to order a name change for Malibu, though he said he planned to rename the Grand Am before its introduction.)
Nonetheless, “the new Malibu has to succeed for Chevy and GM if they ever hope to have a volume presence in the car business again, except for GM employees and rental fleets. It has to be a hit,” said Peter DeLorenzo, editor of Autoextremist.com. The GM product plan also includes more vehicles for Cadillac, which has been undergoing yet another widely publicized revival effort for the past few years. As part of the effort, GM was giving every Cadillac an aggressive angular appearance, meant to make the cars stand out from their more-rounded import competition. The look was not to everyone’s taste, including
that of Lutz, who recoiled from it when he first stepped into a Cadillac styling studio upon arriving in 2000. But Lutz had since become an enthusiastic supporter of what Cadillac was trying to do, and he was confident that future vehicles in the Cadillac lineup, including the XLR coupe and the SRX luxury sedan, would be hits. Yet, despite Lutz’s vow to make Cadillac the world’s best luxury brand, GM put incentives on its lineup in 2002, because its marketing department decided that the company’s message came across better if every vehicle in every division was included, no matter what kind of exclusive image the company was trying to create. GM contended that the deals haven’t hurt Cadillac’s image and points to a good first-year performance by the small CTS sedan, which replaced the dreadful Catera.
But analysts saw still another problem with the incentive offers: They were pulling potential customers for GM’s new vehicles into the market before the vehicles went on sale, endangering the launch of those critical vehicles later on. Moreover, by enticing so many buyers into showrooms, GM had triggered a flood of trade-ins, whose presence on used-car lots was destroying the resale value of cars and trucks still in owners’ hands. Those lower values, in turn, angered customers, who would be upset at seeing so much of their investment dwindle away though they had demonstrated their loyalty to GM by purchasing its cars and trucks. Further, and perhaps most important, the situation was exacerbating the division in perception between domestic and import vehicles, making the former less attractive to customers for the latter, whom GM had to capture in order to be successful. Lutz, not surprisingly, disagrees that the torrent of incentives will make it harder for GM to sell its future vehicles. He said consumers have short memories, have proved time and again that they want to be the first to own the industry’s hottest vehicles and will be happy to pay dealer markups to do so (although auto companies officially frown on the practice of charging more than the sticker price). “If the new stuff is good enough, it will sell without incentives,” Lutz said. “They will go from rebates to [markups] quicker than the blink of an eye.”
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