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Wednesday, June 08, 2005

Cost cutting by GM is not the solution

When General Motors' Chairman and Chief Executive Officer Rick Wagoner announced that it will reduce its manufacturing employment level in the U.S. by 25,000 or more people in the 2005 to 2008 period to generate annual savings of approximately $2.5 billion, my reaction was, "Too little, too late."

When a business leader uses layoffs and plant shutdown as the only ways to create shareholder value, it is time for her/him to stop leading that enterprise. It is the easiest way out. Even an idiot can cut costs by doing this and make the business look profitable. It does nothing to improve the overall, long-term outlook of the business. (Related article: How to implement cost-reduction programs?)

Let us briefly look at what GM's competitors are doing while it is trying to cut costs and shut down plants. Hyundai has recently invested approximately $1.4 billion in North America and has now facilities in Alabama, Michigan, and California. The company does not stop talking about the number of American jobs that it has created, because it really has. The Alabama plant, Hyundai’s first U.S. manufacturing facility opened May 20, 2005 with an investment of $1.1 billion.

Similarly, Kia - another GM competitor, continues to sell more cars each year, as demonstrated by the chart below provided by the company.

Vehicle sales of Kia Motors in the United States keep growing.

So why is GM having difficulty surviving in a market in which the Korean and Japanese carmakers are thriving. Wagoner attributes "high structural, or fixed, cost base" as the main reason. Of course, there are others - healthcare costs, for instance. GM reports that it loses $1,500 from the profit of each unit that it sells. In a market in which margins keep shrinking and consumers are opting to buy fewer expensive SUV's, this can make all the difference.

In other words, GM's business model is collapsing and the company refuses to admit it. And it does not appear as if the company is working on a business model transformation. GM is merely being tactical in its approach, and while this may divert the attention of the shareholders for a few quarters, the long-term issues remain unaddressed.

What does it mean for you?

  1. If you are in a manufacturing business, take a hard look at your cost competitiveness. Your competitors may come from overseas, but do not be surprised if an overseas company beats you right in your backyard.
  2. Ruthless cost cutting might make sense as part of a business model transformation, but if it is the only thing that you are doing, you are not helping anyone. Neither your employees, nor your shareholders, and nor your customers. If a manager can come up with only this idea to fix a problem, it is time to say goodbye to that individual.
  3. What may give you a competitive advantage at some point in time may mean nothing at another point in time. While making cars was high-tech a few decades ago, it is no longer the case. Koreans, who already dominate many high-tech areas, are fully capable of making great cars.

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