In the summer of 2015, about a dozen of General Motors’ top brass flew to Silicon Valley for a series of not-your-father’s auto industry meetings. Over the course of a week, the leaders sat down with Google, Facebook, venture capitalists and Stanford University experts to talk technology and its impact on mobility.
“We were seeing this massive disruption coming to the auto industry,” said Tony Cervone, referring to electric and self-driving vehicles.
Cervone, GM’s head of communications, was on the Silicon Valley trip, and remembers its impact: “We came back asking how do we lead the disruption by disrupting ourselves?”
It was a profound question for CEO Mary Barra, still relatively new at the time. She was already working to fix GM’s finances and dodge the profit pitfalls that led it into bankruptcy and a government bailout in 2009.
GM already had pulled Chevrolet out of a money-losing business in Europe in 2013. Barra, who took over as CEO in 2014, then pulled the plug on GM in Russia and Indonesia a year later, where GM was bleeding cash.
But the trip to Silicon Valley signaled that GM’s leaders knew the future was going to mean behaving markedly different from the past.
So while GM’s recent job cuts and plant closures dominate today’s headlines, the roots of its restructuring actually took shape five years ago as GM changed its global business, selling some operations, restructuring others and making a big bet on electrification and autonomous cars.
While attention is focused on North America, the company continues reshaping its global operations, cutting and restructuring to ensure profitability.
Here’s a look at the crucial plays the 110-year-old automaker made and what its leaders believe it must do to stay relevant for another century.
From 2005-08, the “old” GM lost about $86 billion. It ultimately led to filing for federal bankruptcy protection and a government bailout.
As part of its bankruptcy and bailout, GM was forced to make significant structural changes. In 2009, it closed 11 assembly plants in North America and dropped Hummer, Pontiac, Saturn and Saab brands.It cut production by 1.3 million vehicles, or 22 percent of GM’s capacity in the process, according to LMC Automotive’sJeff Schuster.
The “new” GM regained financial footing, but when Barra took over in 2014, she walked into a firestorm ultimately requiring her to testify to Congress about the company’s ignition switch scandal.
GM had produced more than 2.7 million small cars with faulty ignition switches that could shut off the engine during driving, preventing the airbags from inflating. The company knew about the defect and risk for years without acting. The result was at least 124 people were killed and 275 were injured. It cost GM close to $120 million for claims and penalties and settlements of an estimated $2.5 billion, including $900 million to settle a U.S. Department of Justice criminal case.
Insiders say that out of the scandal, Barra realized GM’s culture was too mired in bureaucracy with ineffective communication among departments. The company was a lethargic behemoth, out of step with the quickly evolving market.
“GM was always a company where making a decision would take 10 weeks when it should take 10 minutes,” said Maryann Keller, principal of Maryann Keller & Associates an industry analyst based in New York. “This company couldn’t execute quickly. What I see Mary Barra creating is a company where she demands the information that emboldens her to make what she believes is the right decisions and move quickly.”
Far East funding
One of the first things Barra and her team did was assess GM’s strengths and weaknesses around the world. It exited Russia and announced it would cease production of GM-branded cars in Indonesia in 2015.
Then, at GM’sGlobal Business Conference in October 2015, Barra outlined the company’s big play for the future: Improve GM’s core business so it can fund investment in autonomous vehicles, electrification, connectivity and ride-sharing _ the topics it talked about with the sultans of Silicon Valley earlier that year.
“The convergence of rapidly improving technology and changing consumer preferences is creating an inflection point for the transportation industry not seen in decades,” Barra said at the 2015 conference. “Some might find this massive change to be daunting, but we look at it and see the opportunity to be a disruptor. We believe our decades of leadership in vehicle connectivity is fundamental to our quest to redefine the future of personal mobility.”
As GM looked to the future, it also looked to the Far East to fund it. The company had a solid foothold in the fastest-growing market in the world: China. In 2016, GM said it would roll out about 60 new models through 2020 to meet demand for SUVs, luxury cars and electric vehicles in China. GM also had a long and strong partnership with SAIC Motor in China, where it builds and sells Chevrolet, Buick and Cadillac brands. GM’s growth plan there locked in a large, long-term revenue stream, analysts said.
Last year, GM China reported equity income of $2 billion in China despite a softening market. That’s consistent with 2017 and 2016 results. Cadillac sales in China rose 17.2 percent year over year.
“China is the world’s largest car market and the world’s largest EV market,” said Michelle Krebs, executive analyst for Autotrader in Detroit. “Despite last year’s setback _ first time sales dipped in 20 years _ and a flat year expected for 2019, China will return to growth mode and become the world’s largest car and EV market by an even wider margin in the future.”
But Europe was a different story.
GM was reporting a pretax loss of at least $1 billion each year since 2012 from its operations in Europe, according to its annual earnings filings.
So in March 2017, GM sold its money-losing European operation, Opel-Vauxhall, to French automaker PSA Group for $2.2 billion.
GM had controlled Opel-Vauxhall for 90 years and it made up 10 percent of GM’s global sales and 18 percent of its workforce. The company decided that cutting loose the operation would allow it to focus on more profitable markets, core products and technology such as electric cars, fuel cells and self-driving vehicles.
Later that year, GM terminated more overseas operations by selling its South Africa business to Isuzu and ending sales in India.
“Getting out of India, that was interesting,” said Schuster, the LMC analyst. “That could be challenging because it could be the next great emerging market. But it’s been in that position for a few years and still hasn’t delivered.”
Meanwhile, GM and SAIC in China delivered 4.04 million vehicles that year.
Rocky overseas sailing
In the early spring of 2018, Barra and GM leaders zeroed in on operations in South Korea.
GM got an agreement with its South Korean labor union to cut costs and allocate new car models to GM Korea factories. The deal steered GM away from filing for bankruptcy protection for its loss-making Korean unit. It also paved the way for support from the Korea Development Bank, which holds a 17 percent stake in GM Korea.
GM closed a plant in Gunsan last year and took a pretax charge of $942 million in the first quarter on ’18 from restructuring at its South Korea operations. GM says the unit is positioned now to be profitable.
Now, Barra has told investors, GM is working on a plan to restructure in South America to address financial struggles there.
One of those fixes might mean job cuts. In January, GM posted a message at Brazilian plants saying that after racking up heavy financial losses during the past three years there, GM faces “a critical moment that will require sacrifices from everyone,” according to Reuters.
GM’s warning surprised workers in Brazil, Reuters reported, because GM has surpassed Volkswagen and FCA in sales as Brazil’s economy recovered. In fact, GM sold 690,000 vehicles in South America in 2018, up from 669,000 in 2017.
More: Ford, GM face another restructuring, but this time they are profitable
More: GM factory workers get $10,750 in profit sharing; company earnings slip
South America “is a weak point, but that market doesn’t represent much anyhow,” said David Kudla, CEO of Mainstay Capital Management investment adviser. “When it comes to regional markets, they’ve gotten out of Europe, so it’s about China and the U.S. They’re the ones that will swing your profit either way.”
Last year, 27.7 million vehicles were sold in China and 17.3 million in the United States, said LMC Automotive’s Schuster.
The latest question centers on if GM will keep its Holden division in Australia, with sales continuing to fall. The brand’s January sales dropped 27 percent to 4,167 from the year-ago period, and less than half the vehicles it sold in January 2015, according to CarsGuide.
In 2017, GM closed its local manufacturing facilities in Australia. Earlier this month, the Financial Review reported that U.K. independent distributor Inchcape has hired an accounting firm to analyze Holden’s finances with the possibility of taking it over. Inchcape distributes for Subaru, Peugeot and Citroen brands in Australia.
GM spokesman Pat Morrissey, said GM is working on a turnaround in Australia.
“Under the leadership of Dave Buttner, who was appointed in August last year to lead Holden, we are turning around the Holden business, growing sales, re-engaging and re-energizing our distribution network and launching exciting vehicles like the all-new Acadia. We are fully focused on supporting Dave in building a strong Holden for the future, as it remains an important part of GM’s business.”
Plant closure, job cuts
So far GM’s global restructuring and moves to introduce redesigned product such as the 2019 Chevrolet Silverado and GMC Sierra pickups have paid off with profits. Between 2013 and 2018, GM earned $36.5 billion from its continuing operations, a company financial spokesman said.
The company went on a hiring spurt for nearly five years, seeking people with new skills to develop automated and add electrified vehicles. It has hired 9,000 new people in the past 24 months alone.
But on Nov. 26, GM announced a further restructuring plan to indefinitely idle five plants in North America, and, with previously announced white-collar cuts, trim nearly 14,000 jobs, or 15 percent of its global workforce. Two of the plants are in Michigan: Detroit–Hamtramck and Warren Transmission. GM is discontinuing the sedans those plants build to focus on SUVs and pickups, which are in higher consumer demand.
It has also announced it would invest $36 million in its Lansing Delta Township plant for future SUV production. The plant builds the Buick Enclave and Chevrolet Traverse SUVs. GM is also putting $20 million into its Romulus propulsion plant to increase the plant’s capacity for future 10-speed transmission production.
Barra and GM have endured intense criticism by President Donald Trump, unions and lawmakers for idling the plants.
The backlash by the UAW and Canada’s union, Unifor, has been intense, with the unions demanding GM reverse its decision to idle the plants. The unions take issue with GM shifting product allocation, including the new Chevrolet Blazer SUV, to Mexico.
But Barra has held firm, indicating GM won’t reverse its decision. And, in Feb. 6 earnings call with Wall Street analysts, Barra reiterated the importance to make such strategic moves while GM is profitable and in a position of strength.
“We are committed to continuing to strengthen the core business as well as continue to accelerate our work to lead in the future of personal mobility,” Barra said. “We are repositioning the company from one that was trying to be all things to all people in all markets to a very strategic, agile and profitable company. We believe we’re in a very differentiated position than many other competitors in this industry.”
GM’s big bet
“Is Mary possibly making a mistake?” asked analyst Keller. “Sure, of course, but she has to have the flexibility to see that she’s made a wrong turn and figure out how to adapt to it. That’s what I see happening in this company _ agility.”
Agility and leadership in what GM sees as the future: Robot cars and electrification. In October 2018, GM with GM Cruise, its self-driving vehicle development arm, partnered with Honda to speed up the deployment of self-driving cars to major cities next year. Honda will contribute about $2 billion over 12 years to these goals. It will also finance a $750-million equity investment in Cruise, bringing its total commitment to the project to $2.75 billion.
GM Cruise announced a deal with SoftBank Investments in June. That deal, combined with the Honda transaction brings the post-money valuation of Cruise to $14.6 billion, Barra said during a press briefing late last year. Not bad, given that GM paid $1 billion to buy Cruise in 2016. It was a 40-person startup then. In 2018, it had 1,100 employees.
Today, GM Cruise has about 180 electric Cruise AV cars. They still have operating controls, such as a steering wheel and brakes. They are being tested mostly in San Francisco, with a handful deployed in Milford and the Phoenix area.
Barra has also talked about an “all-EV future” saying the company will bring to market 20 EVs by 2023. She’s hinted that GM has even given some thought to an electric pickup one day, and the company is said to be in talks to invest in Michigan startup Rivian, an electric truck maker that won a $700 million investment from Amazon.
Indeed, global EV sales are forecast to be 18 million by 2030, with China accounting for 7.5 million, said Tyson Jominy, managing director of the data and analytics consulting group at J.D. Power.
“It’s a rapidly expanding number with China leading, followed by Europe and both are driven by regulations in those countries,” Jominy said.
In the United States, Jominy said about EV sales will increase by 100,000 vehicles each year through 2025, putting it at 700,000, only about 5 percent of the retail car market.
As to self-driving cars, by 2030 forecasters say there will be 4 million robot cars on the road in ride-sharing fleets, and personal ownership of such cars will start around that timeframe, said Jominy.
Essentially, this global restructuring was to free up money for autonomous and electric vehicles in the future, said Schuster. It’s made GM a bold and aggressive company, albeit at some painful prices for those who lost jobs in global restructuring or as GM restructures now in North America, he said.
“There’s pain along the way, but they’re doing what they can, knowing the future will be much different than what it is today,” said Schuster. “If the market gets there, the payoff is going to be high. I think GM sees the vision of what the future is … but can they hold onto the current GM until we get there?”
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