Automaking Major Overhaul

By William McWhirter/Detroit

The Christmastime speech from the chairman of General Motors traditionally sounds like an address from a head of state. Small wonder: the company is so large (1990 revenues: nearly $127 billion) that if it were an independent nation, its economy would rank among the world's Top 20. By closed-circuit TV from GM headquarters in Detroit, this year's 45-minute broadcast reached 395,000 employees who stopped work and put down their tools in 130 factories across the U.S. But the message from chairman Robert Stempel was like no other in the 83-year history of the giant corporation.

As of Jan. 1, Stempel said, the company would embark on a three-year program that would close 25 North American plants and reduce its current work force by 74,000, or about 19%. GM would abandon for the foreseeable future its hopes to regain its lost share of the U.S. market, which has fallen in the past decade from 45% to just over 35%. According to the plan, which did not specify which plants would be closed, GM would emerge by 1995 only half as large as it was a decade earlier and, as Stempel said, "a much different General Motors."

The announcement was a drastic departure from the company's past benevolent assurances of prosperity and well-being. So was the self-effacing and chastened candor. Stempel conceded that this was not the holiday message he had originally intended. But the severe losses in the company's North American automaking operations, estimated at $450 million a month, had prompted a revolt among GM's directors. They rejected Stempel's reorganization plan and humiliatingly ordered up a more drastic revision. The rebuke left Stempel and his senior management staff publicly lurching. The Christmas message was postponed by a week; a preferred-stock offering to raise $1 billion in cash was halted; even GM's annual Christmas party for the automotive press was canceled. Then last week Stempel gave workers the overhauled speech: "We are asking you to help remake the world's largest automobile company. We can't wait."

If not yet a different company, GM is already vastly different from what it was in the free-spending days of Stempel's predecessor, Roger Smith. Money seemed to be no object for Smith, who spent $5 billion to acquire Hughes Aircraft, $3 billion to build the experimental Saturn division and $700 million to buy out his boardroom rival H. Ross Perot.

But Smith's vision hasn't been fulfilled fast enough to endure the recession and customer apathy. Because of its cash drain, GM has had to float $3.2 billion in premium-interest stocks and bonds (current rate: 9 1/8%), mainly to meet operational expenses. GM's outside directors have become so concerned in recent months that they have begun to meet privately, without the company's officers. They have reportedly put Stempel on notice that his own 16-month tenure, as well as those of GM president Lloyd Ruess and chief financial officer Robert O'Connell, are under close scrutiny. Says a board source: "They are down to a real cash-flow problem now. All the money is out of the mattress."

Blaming Stempel, say his defenders in the company, seems unfair given his brief duration at the top and a bit of unlucky timing -- GM rolled out its best lineup of cars in many years smack in the midst of a nasty recession. Those close to GM, even some of Stempel's union adversaries, give him credit for fostering an improved atmosphere of fairness and openness that was noticeably missing under Smith's autocratic reign. Stempel, a 58-year-old engineer who developed the catalytic converter for GM in the 1970s, is said to be so unassuming that he still takes his own notes at management meetings. On the other hand, his methodical and prudent approach can be a drawback when more radical measures are needed. "These are crisis times, and Stempel may not be a man for crisis management," says a GM director. "The rules have changed overnight from the old collegial culture, and he may be disoriented and in over his head."

Yet by his actions, Stempel seems to accept that something is structurally wrong with GM. As analyst Chris Cedergren puts it: "The main problem with GM is that there is too much of it." The automaker's majestic size, assembled from a rickety bunch of automotive tinkerers and run with an almost military sense of discipline by its legendary chief Alfred Sloan, once made it an invincible world leader. But today GM's bulk has fostered a chronic lack of flexibility and decisiveness. Said Stempel last week: "We cannot blame our problems totally on the war, the plunge in consumer confidence or the recession. Rather, we must make fundamental changes in the way GM does business."

Just paring things down isn't the only answer. Even before the new layoffs, GM had cut 130,000 jobs since 1986. As Chevrolet chief James Perkins points out, his 2,100-employee sales and marketing division is now smaller than rival Toyota's equivalent U.S. operation, but with three times the Japanese company's sales volume. On some days, says Perkins, "we haul out tons and tons of unused furniture and paperwork." Still missing at GM is any real sense of what such "lean" operations are supposed to create and produce. Says a major Detroit supplier to the auto industry: "The spirit within GM is still not equal to what it is at either Ford or Chrysler. It's just a huge, huge enterprise that is trying to evoke individual reaction, and that is terribly, terribly difficult."

Even more frustration bubbles up from the lower ranks, particularly among what GM calls its Hi-Pot (for "high potential") new engineering recruits, who feel intellectually cramped. Instead of dealing with an entire product design or manufacturing process, they find themselves sidetracked into such specialties as heating and cooling systems. Complains a 28-year-old engineer: "How would you like to develop door handles all your life?" A young engineer grouses that a pilot project last year to review GM's entire product- development process ended up in a form of corporate limbo. "We just found out we weren't as empowered as we thought we were, and ended up spending all our time preparing elaborate briefings explaining the study to senior management rather than actually doing it. That's why all the engineers want to get out of engineering and into management." A cynical expression still circulates within the company: "At GM, we don't build cars, we build careers."

GM's laboratory of ideas for reinventing itself is its Saturn plant in Spring Hill, Tenn. But in attempting to do everything differently, Saturn's craftsmanlike attention to detail and quality is causing delays in turning out the cars. A year after the assembly lines began rolling, current production is less than 100,000 units a year, far from the estimated break-even point of 250,000, costing the division as much as $2 billion annually.

GM's problems have not been felt as severely at the other two Detroit automakers. Ford and Chrysler went through their own major retrenchments in the 1980s and have been able to make stronger commitments to team-production techniques. In terms of corporate structure, "size guarantees you nothing anymore," says Chrysler president Robert Lutz. "It's not necessarily the small buildings that are the most affected by earthquakes. Skyscrapers are just as vulnerable."

Japanese automakers, whose success in the U.S. has come largely at GM's expense, feared that the Detroit automaker's cutbacks would add fuel to the political backlash against Japan. Toyota, for one, took the remarkable step of publicly expressing sympathy for laid-off GM workers. Next month the chiefs of the Big Three U.S. automakers will accompany President Bush on a trip to East Asia, where they are expected to urge Japan to buy more U.S.-made autos to reduce the trade deficit. But more radical measures are brewing in Congress. House majority leader Richard Gephardt and Michigan Senator Donald Riegle Jr. introduced a bill last week to limit U.S. sales of Japanese cars and trucks to 2.5 million, a cut of more than one-third from current levels. A few days later Japan suffered another blow when the Commerce Department indicated it would impose penalty duties on minivans sold in the U.S. by Toyota, Mazda and other Japanese automakers after ruling that the companies were "dumping" the vehicles in the U.S. at artificially low prices.

GM, even after shedding as many plants and people as there are in all of Chrysler, will still be the world's largest automaker -- but no longer the richest. Toyota, Japan's leading carmaker, has $12.7 billion in cash reserves, vs. GM's $3.5 billion. Toyota shows every indication of reinvesting its huge sums to improve both product and design. Unless GM can return to profitability and make similar investments, the current cutback won't be its last.

CHART: NOT AVAILABLE

CREDIT: 1991 projection by UBS Securities Inc.

CAPTION: GM's total profits and losses in billions

GM's share of U.S. car market

With reporting by Joseph R. Szczesny/Detroit