GM’s India decision also reflects the compulsions that MNCs typically face. GM has faced issues, including bankruptcy, since the financial crisis in 2008.
By Jagdish Khattar
General Motors’ (GM’s) decision to stop selling cars in India this week is driven partly by global compulsions. The company is also exiting the South African market. However, it plans to continue exporting cars from India, will maintain its technical centre, R&D facilities and sourcing. The decision is also a reflection of how GM navigated the Indian market and lost its way. And it is good manifestation of the competitive dynamics in the Indian car industry.
It has been a long ride for GM in India. Frequent changes in the corporate structure resulted in absence of a long-term strategy. Started in 1994 with Hindustan Motors (HM) in a 50:50 joint venture, GM bought out HM’s stake in 1999 and went solo. In 2009, thanks to the global economic crisis, the Detroit giant became 50:50 JV with SAIC, its Chinese partner. In 2012 it bought 43% of the Chinese partner’s holding, raising its stake to 93%. With so much going on elsewhere, no wonder GM lacked a coherent India strategy.
There were other problems too — starting from the top. The Indian business saw a consistent churn at the top. GM, in over 21 years , had nine CEOs with an average tenure of 2.5 years; in 35 years, Maruti is on its fifth CEO. I always felt that the auto business is a marathon race — like a cricket Test match. GM CEOs played the T20 game. Expat CEOs moved before settling down. Stability at the top is critical.
GM was a large MNC with operations in many countries. India reported to its South-Pacific office. It controlled many aspects of Indian operations. The India CEO had to often participate in various committees relating to product, strategy, sourcing and the like. I often joked with the CEO that he spent more time with such chores than with the dealer network in India.
Pod tlakem
All this reflected in lack of consistency in product strategy and marketing in India. GM made a debut under the Opel brand with Astra and Corsa. These were neither big nor small with limited market. Later in 2003 they brought in the Chevrolet brand. Around 2012 they shifted to Chinese models.
This did not help in brand-building or customer loyalty. In 20 years they have introduced about 20 models of which 10 were withdrawn. The price tags ranged from Rs 3 lakh to Rs 30 lakh. Frequent launches and withdrawal of models demotivate customers who own such models. It adversely affects not only resale value but discourages buyers for new cars. All this led to a demotivated dealer network. GM’s total sales are about one million units. In 33 years, Maruti has also launched about 20 models, phased out eight with total sales of 13 million.
GM’s India decision also reflects the compulsions that MNCs typically face. GM has faced issues, including bankruptcy, since the financial crisis in 2008. Its stock has been stagnating and is facing pressure from investors to show results. These global pressures do weigh heavily on the way MNCs take decisions. Just two years back CEO Mary Barra had said that India is a strategic market and will invest further. The decision to exit now tells you how these pressures are manifesting.
It is also a reflection of how tough it is for MNCs to do business in India. India is a unique market. Many MNCs try to replicate their international experience in India with disastrous results. Globally cars are an aspirational product but in India price, fuel efficiency, cost of ownership play an important role. For example, 70% of luxury cars sold are of diesel variant.
That Maruti and Hyundai together have close to 65% of the market makes it even more difficult. Most carmakers, like GM, had to undergo a painful experience before falling in line — by producing compact cars. But the lack of range explains their minuscule market shares. Excess capacities have nudged them to export using their international network. Some export more units than their domestic sales.
They await more robust growth in the mid segment, SUVs. Many have the resources to wait and see the evolution of the market (but will all be that patient?). Till then they will continue with a mix of domestic and exports, developing R&D facilities, sourcing components.
GM has decided to be different and will concentrate only on exports. Will we, like some other foreign companies, see GM return with a new management and more favourable conditions? That’s possible but it will not be easy.
(The writer is a former MD of Maruti)
(As told to Malini Goyal)
Falling demand for sedans and a determination to be prepared for a mainstream transition to electric and autonomous vehicles drove GM’s cost-cutting plan, say experts.
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John Paul MacDuffie
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Znalosti ve Wharton Staff
Wharton’s John Paul MacDuffie and University of Michigan’s Marina Whitman and Erik Gordon discuss GM’s decision to close plants, layoff workers and drop certain car models.
The decision earlier this week by General Motors to close five plants in North America, lay off some 14,000 workers, and retire six of its 15 car models is a timely move, and one that will likely benefit the company as it looks to secure its future in the rapidly changing auto sector, experts from Wharton and elsewhere say.
In an announcement, GM said that in 2019, five plants would be “unallocated,” or targeted for possible closure, including two in Michigan and others in Ohio, Maryland and Ontario, Canada. The company hopes to achieve cash savings of $6 billion annually (with cost cuts of $4.5 billion and lower expenditure of $1.5 billion). In addition to the previously announced closure of an assembly plant in Gunsan, Korea, GM said it would also cease the operations of two additional plants outside North America by the end of 2019. Among the car models it would phase out include the Chevy Volt, the Chevy Cruze and the full-size Impala.
GM Chairman and CEO Mary Barra said those actions will enable the company to be “highly agile, resilient and profitable, while giving us the flexibility to invest in the future.” GM made the right decision, according to Marina Whitman, professor emeritus of business administration and public policy at the University of Michigan and a former vice president with General Motors. She noted that GM is facing pressures on multiple fronts: falling demand for sedans as SUVs, crossover vehicles and trucks rise in popularity; increased costs, partly because of the Trump administration’s higher tariffs on imports of aluminum and steel; and the need to allocate investments in developing autonomous vehicles and electric vehicles.
“What [Barra] is doing – looking at it from the outside – is absolutely right for General Motors,” Whitman said. “It’s not a sign of trouble. It’s a sign that she wants to avert trouble, particularly when the next downturn comes, which it will sooner or later.” The closures will no doubt bring pain to affected employees and the local economies around the five plants, she noted. “But it greatly reduces the likelihood of real trouble going forward.”
GM’s restructuring efforts are consistent with patterns in the automobile industry to make adjustments as demand fluctuates, said Wharton management professor John Paul MacDuffie, who is also director of the Program on Vehicle and Mobility Innovation at Wharton’s Mack Institute for Innovation Management.
MacDuffie noted that while consumer demand shifts with business cycles, and there are “signs of a bit of waning of the long recovery, we’re not certainly at a point when the economy’s in trouble.” The company is determined that it should not be caught unprepared when the next economic downturn occurs. In the statement announcing the restructuring, Barra has stressed “the need to stay in front of changing market conditions and customer preferences.”
“What [Barra] is doing – looking at it from the outside – is absolutely right for General Motors.” –Marina Whitman
Consumer preferences are changing in a more significant way in that they are moving away from car ownership, said Erik Gordon, professor at the University of Michigan’s Ross School of Business. “The auto industry is going to be selling fewer cars of any type,” he pointed out. “If it was just demand shifting from one type of vehicle to another type of vehicle, you’d say, ‘Well, let’s make some of the popular vehicles in these plants instead of closing them.’ [Barra is] trying to reduce the overall manufacturing capacity because going forward there are going to be fewer individually owned cars.”
Whitman, MacDuffie and Gordon discussed the factors underpinning GM’s announcement on the Knowledge at Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)
MacDuffie has closely watched the buildup to GM’s proposed moves. “The plants being closed have been reducing their production for quite a while now, down from three shifts to two shifts, [followed by] two shifts to one shift,” he said. “These assembly plants are huge and very capital-intensive. To run them at much less than capacity can be a money-losing venture, and so with no sign of demand for the cars made in these plants turning up, I expected some kind of action.”
Changing Demand
The auto industry in general has been responding to increasing consumer preferences for crossover utility vehicles and trucks, and falling demand for sedans, and GM’s selection of plants for possible closure reflects those trends. In October, almost 65% of new vehicles sold in the U.S. were trucks or SUVs, a dramatic shift from trends five years ago when cars accounted for 50% of vehicles sold, according to a New York Times report. Fiat Chrysler Automobiles exited small and midsize cars two years ago, while Ford announced plans to shed all cars but the Mustang sports car in the U.S. in the coming years, the report notes.
At the same time, GM has to embrace “the new industry reality” of the longer-term shift away from internal combustion vehicles towards electric vehicles, autonomous or self-driving vehicles and ride-sharing, MacDuffie said. “Incumbent automakers have to run their legacy businesses in ways that allow them to invest in these new technologies, new business models and all the disruptive changes coming to mobility.”
“With no sign of demand for the cars made in these [five] plants turning up, I expected some kind of action.” –John Paul MacDuffie
The auto industry was not entirely prepared for the drop in demand for sedans. “A bit of a surprise is that the auto industry had turned to making smaller vehicles on the expectation that customers would care more about fuel efficiency,” said Whitman. “But at the moment, they seem to care more about convenience.”
With electric vehicles, too, GM is moving forward. It has identified for phase-out the Chevrolet Volt, which was, as MacDuffie pointed out, “a bridge vehicle for GM getting into an electric design.” While the Volt was retrofitted on existing vehicle architecture to accommodate the electric drive chain, the later-generation Chevrolet Bolt was “the first completely rethought design of an electric vehicle,” he said. While the decade-old Volt can run 50 miles on a battery before it switches to a gasoline engine, the Bolt is fully electric and can go up to 238 miles on a single charge, the New York Times zpráva zaznamenána.
According to MacDuffie, U.S. automakers had invested in manufacturing smaller cars a few years back, to ensure their competitiveness in that segment but also on expectations that consumers would prefer smaller cars in a poor economy with the risk of higher gas prices. However, consumers have not exactly flocked to sedans as was expected. “Companies like Honda and Toyota that have strong sedan models in the U.S. market – the Accord and the Camry, respectively – have said that they’re not backing away from those segments one bit.” With GM exiting that market, Honda and Toyota could increase their market share in the sedan segment, “and it may be harder for anyone else to get into the demand that’s left.”
GM is being proactive now, perhaps picking up cues from those earlier misreadings of consumer preferences. “U.S. carmakers have been behind the ball so many times and have been so criticized for it, and it’s hurting them,” said Gordon. “They’ve finally gotten the message, and they don’t want to be left behind again.”
Impact of Tariffs
Few doubt that GM’s cost cutting is related to the Trump administration imposing tariffs of 25% on steel and 10% on aluminum imported from Canada, Mexico and the European Union. Barra did not specifically mention that during GM’s latest announcement, but both GM and Ford pointed to the higher costs from the tariffs when they lowered their profit forecasts in July. While GM said “commodity costs and unfavorable currency in Brazil and Argentina would have a net impact of around $1 billion on its 2018 results,” Ford said the tariffs could cost it up to $1.6 billion in 2018 in North America, according to a Reuters report.
Gordon, however, did not think the tariffs were a factor in GM’s decision to retire five plants. “What led to the plant closings is not that it’s costing more,” he said. “GM actually has reduced costs; GM’s profit margins have gone up. They’ve managed costs quite well, largely because they’re not doing as much discounting.” While GM’s total revenue has fallen from $156 billion in 2014 to $146 billion in 2017, profits fell from nearly $4 billion to losses of roughly the same amount in that period. However, the company has bounced back to profitability with increasing strength in the last three quarters; in the latest quarter ending September 2018, it posted $2.5 billion in profits on revenue of $36 billion.
Gordon agreed that the import tariffs “don’t help [GM] on the cost side,” but he did not think they would lead to so-called “runaway plants,” or manufacturing facilities moved outside of the U.S. “It’s just that the plants that are producing the unpopular cars are not in Mexico,” he said. “They are here in Hamtramck, across the river from where I sit in Ontario, and they’re down in Ohio.”
“A more regional — as opposed to national — logic has come to characterize where [automobile manufacturing] investments are taking place.” –John Paul MacDuffie
Auto Jobs on Decline
GM’s proposed layoffs include 15% of its salaried employees and 25% of executives. GM has said that many of the U.S. workers impacted by its manufacturing restructuring could be absorbed at its other plants that make trucks, crossovers and SUVs.
Automotive jobs in the U.S. are on a secular decline, according to Whitman. “That trend … of a huge decline in automotive employment in the U.S. … has been going on for a long time now, and is going to continue and possibly even accelerate.” She traced that to increases in productivity. “The auto industry in the U.S. until recently was producing more cars than it ever had before with less than half as many employees. The shift to self-driving cars and all-electric cars is going to continue that. It may speed up the shift to reduce the number of employees per car or per 100 cars.”
Electric vehicles have fewer parts and are easier to assemble than the internal combustion engine cars with the transmissions, “and that alone is going to reduce employment on the manufacturing side,” said Gordon. “We’ll have more people doing software and sensors, but you don’t need a ton of them. But a car with fewer parts … inevitably leads to fewer people on the line.” He noted that GM’s plants in Warren, Michigan and outside of Baltimore that have been identified for possible closure “make propulsion systems that will probably not be used 10 years from now.”
How the advent of electric vehicles and autonomous vehicles will impact automotive jobs “is still a bit hard to predict” and will not be the main driver of job cuts, according to MacDuffie. “The switch to electric and autonomous vehicles is no doubt coming, but will be slower than many predict.”
According to MacDuffie, the GM restructuring plan reflected a longer-term trend of automakers preferring to invest in manufacturing facilities. “A more regional — as opposed to national — logic has come to characterize where [automobile manufacturing] investments are taking place.” He noted that the big three U.S. automakers – GM, Ford and Fiat Chrysler – have been locating plants in Mexico for not just small cars, but also SUVs and pickups.
“[Barra is] trying to reduce the overall manufacturing capacity because going forward there are going to be fewer individually owned cars.” –Erik Gordon
Bold Leadership
Whitman saw GM’s latest action as Barra’s attempt to prepare GM for a changed market terrain with electric vehicles and self-driving cars. “This is an attempt to get … ahead of the curve and try to be ready for what Mary [Barra] and many people who follow the auto industry see coming in the way of consumer demand.”
“Mary Barra is the boldest GM CEO in many, many years,” Gordon noted. He described the changes underway in consumer demand as making it a “very tough time” for automakers. “It is not a time to be timid. This is [also] a very tricky time. You have one foot in the manufacturing and sale of what you won’t be selling 10 years from now.” At the same time GM, Ford, Fiat Chrysler and the other auto manufacturers have to make “gigantic investments” in technology and manufacturing facilities for their new electric vehicles, he noted.
MacDuffie agreed that the move is in keeping with how Barra has led GM so far. “She is no longer trying to maintain GM’s strength in terms of size and volume of sales but rather in terms of profitability and agility.”
