Let the good times roll: the General marches quick-step with a $14.5-billion kitty

"As we look at 1997 we don't have a pinpoint number, but we are using a range of 15 million to 15.5 million vehicle sales in the U.S. The basics in the economy are really strong with low unemployment and low inflation. We're not painting a scenario that says the recession is right around the corner." says General Motors Corp. Chairman and CEO John F. (Jack) Smith Jr.

In short, the good times still have a way to roll.

Meanwhile, GM has amassed a $14.5 billion cash stockpile that should assure the next downturn will he less traumatic than the 1991-92 meltdown and subsequent boardroom revolt that it catapulted Mr. Smith to CEO.

That nest egg could swell considerably if GM finally spins off its Delphi Automotive Systems, as is repeatedly rumored, or if it finds a buyer for the GM Hughes Electronics aerospace business. But the taciturn Massachusetts native isn't offering any clues on the timing of either.

He also stops short of guaranteeing GM can make money in the trough of the next recession, whenever it may come. but he's convinced the company is better prepared than it was in 1991.

"We're feeling we can handle the downturn without stopping our forward product programs," he says.

Meanwhile, Mr. Smith is generally positive about the industry's relationship with the Clinton Administration, which begins second term in January.

"What we were concerned about is that Congress would go Democratic," he says. Although the Democrats picked up some H seats in the November general election, the Republicans still control both the House and Senate, providing what Mr. Smith calls a "healthie balance" as it relates to issues impacting GM and the auto industry.

GM's 1996 profits likely will wind up below the record $6.9 billion generated last year, but well above 1994's $4.9 billion. Three strikes (18 days in March sparked by a walkout at two Delphi Chassis brake plants in Dayton, OH; October's three-week walkout by 26,000 Canadian Auto Workers; and the UAW's recent surgical strike at the Janesville, WI, assembly plant and an Indianapolis stamping plant) cost $1.6 billion by analysts' estimates.

Mr. Smith still bristles at Ford Motor Co.'s concept of a minimum employment level, which by definition is more onerous for GM due to its continued reliance on high-cost Delphi parts plants.

"They (Ford and Chrysler) were worrying about themselves. They weren't worrying about us. That's the way it works," he says.

GM's more aggressive strategy in UAW bargaining may accelerate the sale of Delphi's marginal plants and shrink the cost disadvantage it still shoulders compared with its domestic competitors.

But there's little evidence that the underlying hostility between many union locals and their respective managements won't erupt again over the next three years.

"Obviously we've got some tension in the system. We're a large producer of components. We're highly vertically integrated," Mr. Smith says. "We're trying to run the business a competitive basis and that produces some tension. We don't want that tension. We tried to structure the national agreement so there will be less tension."

On the product development de there are signs of progress. he new Vehicle Line Executive process, through which 13 product executives work jointly with 35 brand management teams, has drawn some criticism from competitors for being too obsessed with market research and not enough with creative instincts. But look at the new minivans: Chevrolet Venture, Pontiac Trans Sport and Oldsmobile Silhouette. Styling may be conservative, but features such as the cargo net between the two front seats (to prevent purses and notepads from sliding to the back) show an attention to customer needs that wasn't always there.

The jury is still out on brand management, but GM clearly is leaner from a marketing perspective. Consolidating Pontiac and GMC will cut costs, as will centralizing all U.S. marketing divisions except Saturn at the new Renaissance Center headquarters. Speculation continues to bubble about an Oldsmobile-Cadillac combination, but in Chairman Smith's words, "I don't know of any such plans."

Now GM must translate its balance sheet muscle into showroom sizzle.

Between October 1996 and the end of 1997 it's rolling out 15 new models, ranging from the new minivans to an all-new Corvette.

The best news is on the quality front, where J.D. Power and Associates awarded GM its first-ever Chairman's award for consistently high performance on Power's Sales Satisfaction Index, which focuses on customers' experience in dealers' showrooms.

Despite some glitches at its Wentzville, MO, plant where the launch of GM's new Chevrolet full-size van and GMC Savana stumbled, GM made considerable progress in what had been its Achilles heel: building new models quickly enough to meet market demand without sacrificing quality.

The most impressive launch came at its Fairfax, KS, plant where the 1997 Pontiac Grand Prix is rolling out in more than adequate numbers thanks to a major investment in a new body shop. As of early November, startup of new minivan production at Doraville, GA, is "on track, but not at full line rate."

"This was the most complex launch in our history," Mr. Smith says. "We wanted to go with a global vehicle, so we had to pay the price. We've got Opel engines in there. We've got North American engines. We've got right-hand drive, left-hand drive, small wheel base and large wheel base."

More than ever, GM's future is tied to what happens beyond North America. International operations, which are growing faster and are considerably more profitable, will generate about 24% of GM's automotive revenue this year, up from 21% in 1995 and 20% in 1994. Indeed, 37% of all GM vehicles sold worldwide were purchased in Europe, Asia, South America, Australia or Africa, up from 33% in 1993.

In Japan, the strengthening U.S. dollar has held sales of the right-hand drive Toyota Cavalier well below expectations. Saturn opens its first Japanese retail outlets early next year.

"I'm a little concerned about where the trade balance (with Japan) is going to go," Mr. Smith says. "With the yen at 115 ([unknown character]112 in mid-November vs. around [unknown character]80=$1 a year earlier) to the dollar, Japanese manufacturers in the U.S. have stopped shipping cars back to Japan."

GM's goal is to reach 10% of the total Asian-Pacific market. To get there it is investing $1 billion to build Holden Vectras in Australia - beginning in 1998 for export throughout Asia. And last June it announced a $750 million project to build up to 150,000 German-designed Opels (the model has yet to be determined) in Thailand, for export throughout Asia.

Largely on the strength of its pickup trucks and the Opel Corsa. GM boosted its Latin American market share from 18% last year to 20% this year. Construction is under way for a new plant in Alvear, Argentina, where GM will build up to 84,000 Chevrolet-badged Corsas for sale in Argentina and export throughout South America.

While the Corsa has established itself as a world car on nearly every continent, Chairman Smith says GM is exploring another "global vehicle" for emerging markets. But rather than moving in the direction of Ford's micromini Ka, Mercedes-Benz's Swatch-mobile or even Chrysler's no-frills China Concept Vehicle, GM is thinking bigger.

"In these markets people will only have one car and they want it to be able to carry their families," Mr. Smith says. They're looking for size. Also they have an affordability problem. Our thought process is how do we give them more car for less money?"

In the $5,000 to $6,000 price range?

"We're probably looking at something a little over that," he says.

GM's Shrinking Share: 30 and Out?

The giant has been whittled down, but how far is down? After commanding a 50%-plus U.S. market share for years, GM's slice just since 1990 has shrunk from 35.6% to 31.6% during the first 10 months this year. Although it's still the world leader with a 16% global share, at home its feisty competitors - a resurgent Chrysler Corp., tough Ford Motor Co., booming Japanese transplants and a variety of European and Korean importers - have feasted on GM's hide with relish.

Here's how Chairman Jack Smith views the subject:

Q - Are you willing to see your market share drop below 30% if it means your profitability per vehicle improves?

A - Share is something we've always said is a residue of being successful on the product side of the market. As a matter of fact, we've taken a number of steps that have actually reduced our share. We downsized our daily rental business from 900,000 to 430,000; we were willing to do that because of profitability.

Q - But how long can that go on?

A - We want to grow our market share, but we want to do it profitably. We don't have any magic numbers, but we are looking to increase our share. We've got a lot of new products (15) coming this year. It's been awhile in the pipeline and we have a great opportunity in 1997 to do the things we need to do.

Q - Is there a psychological disadvantage to dropping below 30%, which you're close to now?

A - That doesn't rest in my mind. It gets down to good product. With the high quality we're running, and being recognized for it, we'll get market share. That's the key. It isn't that we have to buy market share at any price; that's not the way to run the place. You always have to focus on something, and our focus is on profitability.

Lou Hughes Has Mixed Views on GM Overseas

Internationally, General Motors Corp. has a very mixed outlook for 1997, Louis R. Hughes, president of GM's International Operations, tells WAW in a wide-ranging interview.

In short, growth in Brazil and Argentina, where GM is extremely well positioned, coupled with an aggressive expansion plan in Asia will help offset an increasingly difficult European market, he says. But the real payback from the company's Asian investments is still a few years away.

For a guy who has consistently delivered solid profitability in Europe for years, Mr. Hughes sounds surprisingly pessimistic. After all, in recent years GM Europe, led by its Adam Opel AG subsidiary, has always found a way to stay ahead of the pack. The Eisenach plant, in what formerly was East Germany, assembles the small Opel Corsas at a profit and remains a benchmark of lean production. Even in the high-cost plants of Western Germany, Opel has been able to make money. Since 1992, it has cut its work force by 25% and negotiated more flexible work rules with IG Metall, the primary union representing its German production workers. Through the first nine months of this year, GM Europe earned $679 million, up 24% from last year.

Not bad, but it will be a hard act to follow.

"I would not look to the industry for great growth (in Europe), and combined with a real price war on the continent right now, that spells caution," Mr. Hughes says. "Volkswagen significantly reduced its prices in Germany. The French reduced their prices in France. Ford has been particularly aggressive in the U.K. And these three were the most profitable markets in Europe for us."

In the Asia-Pacific region he sees some growth, but expects Australia, where GM's Holden's Automotive unit is particularly strong, to slow in 1997.

Much of GM's Asian investment will not show results for three to five years from now, Mr. Hughes estimates. These ventures include a new $1 billion Australian plant, where Holden's expects to build Opel Vectras (eventual volume is projected at 30,000 a year) beginning in 1998 for export throughout Asia; a $750 million plant in Rayong, Thailand, where GM plans to build between 100,000 and 150,000 Opels (either the Vectra or Astra) for export; and, of course, the $1-billion joint venture in China where it will build both the Buick Regal and Buick Century.

One year after the Chinese government selected GM as the joint venture partner with Shanghai Automotive Industry Corp., GM is patiently waiting for approval of a feasibility plan. It's hard to say when the first vehicle will be built. Sometime in 1998 has been the target.

"We've been to the next stage in that the project was formally registered. Now we have submitted the formal feasibility study to the central government," Mr. Hughes says. "The State Planning Council needs to meet. They do not meet regularly and discuss the feasibility study. Then contracts have to be reviewed by another government ministry. When that's done, the project is approved. It's a laborious process, (but) we do not anticipate any significant difficulties."

The goal is still to build 100,000 of the midsize cars annually. Whether they are called Buicks or Opels or something else remains under discussion. Mr. Hughes also says GM would like to build a version of its new front-drive minivans off the same platform some day in China, but that is merely a hope.

In Latin America, GM's 1996 market share through September is 20%, up nearly 2 percentage points from last year. In Brazil alone, GM now holds 22% of the new-vehicle market, a gain of 2.8 points from 1995.

While construction is under way for a new plant in Alvear, Argentina, where late in 1997 GM will begin building up to 84,000 Chevrolet-badged Corsas, Mr. Hughes is studying the possibility of a third assembly plant in Brazil. The formation of the Mercosur economic region will allow low-tariff exporting among Brazil, Argentina, Paraguay, Uruguay and, beginning next year, Chile.

Another priority on Mr. Hughes' agenda will be intensifying the effort to base North American and European vehicles off common platforms, with an increasing percentage of common parts and, to a limited degree, common engines.

"Up through the (Chevrolet) Malibu, including the (Opel) Corsa and (Chevrolet) Cavalier - and that's about 5 million vehicles between GM International and NAO (GM North American Operations) - we can find common platforms for a little over half our total volume," he says.

That helps explain GM's push for global suppliers, although Mr. Hughes suggests there still may be one supplier of a given component in Asia and a competing company supplying the same part in North America.

"We'll still be relying on regional suppliers because often logistics costs outweigh the advantage of having one single worldwide source," he says. "You don't want to put all your eggs in one basket anyway."