On Nov, 21, amid the hoopla over Detroit's CEOs using corporate jets, ABC News reported that General Motors leased seven jets at the beginning of 2008, dropped two in September and will drop two more at the end of the year. Now I guess they'll all be gone. Believe me, I'm not against CEOs using corporate jets, but isn't seven a little excessive for a company that's circling the drain? It's not like business was really great back in January. apparently they thought GM was still America's premier manufacturer when, in fact, GM has been on the road to bankruptcy for years.
Management would have us believe that all the trouble is due to the recent turmoil in the financial markets. If that's true, then why did GN's stock price decline steadily from $87 in January 1999 to $11.50 in January of 2008? That's an 97 percent destruction of shareholder value before the current crisis. the story is similar at Ford and Chrysler. Investors have been voting with their wallets, and the results are terrible.
And why do we keep referring to GM, Ford, and Chrysler as "automakers"? the core business of all three is light trucks, i.e. pickups and other truck-based vehicles (SUB's, minivans, etc.) with a gross weight of less than 8,500 pounds. Wards Automotive data show that through October 2008, the three companies sold just more than 2 million cars and almost 3.5 million light trucks in the U.S. By comparison, Toyota, Honda, and Nissan sold almost 2.5 million cars, their core product, in the same time frame. As far as cars are concerned there's a new Big 3 in town.
Consumer Report's Web site lists 65 "Best of the Best" cars. The list includes on GM car, a Buick. There are 14 Hondas and 15 Toyotas. The "Worst of the Worst" list of 34 cars includes 19 models from GM. No Honda or Toyota is listed. GM and Ford actually are building some cadent cars today, but consumer perceptions of inferior quality have been burned in for decades. Changing a perception like that is very, very tough. Edmunds.com lists the 50 most popular cars, base don Web page requests for information. The first American car on the list is No. 28, the Chevy Malibu. the preference for Japanese and European cars is clear.
When your reputation for quality is a disadvantage and customers aren't that interested in your product, what do you do? Detroit's answer has been massive advertising expenditures, rebates, and sweet financing packages. the Big 3 have systematically taught us not to buy an American car unless there is a rebate and/or free financing available.
Recently, the Wall Street Journal reported data from the Power Information Network that demonstrates this effect. Chevrolet sells its Cobalt at a price $3,638 lower than Honda's price for a Civic. So even if Ford and GM achieve competitive production costs, the Cobalt and Focus will still return significantly lower profits than the Civic. Bailout loans and borrowed time won't save Ford, GM, and Chrysler. Gut wrenching changes are needed. these companies and their unions have had about 30 years to swallow some really bad medicine. They've been in denial. they're not all likely to make it.
There are important lessons any organization can take away:
1. Denial an incremental ism can kill. You've got to face facts and act decisively. When facts call for bad medicine, you've got to hold your nose and swallow it all at once, not a little at a time.
2. When you move whole-hot into an adjacent segment, as the Big 3 did with light trucks, you rick abandoning your original core business to others.
3. You must take customers seriously, listen and protect your reputation in the market at all times. Understand that perception is reality, and customers always remember bad impressions much longer that good ones.
4. Trying to hang on to market share by slashing prices can permanently damage your market position and the price you can command. It teaches your customers to wait for sales and sweeteners. Sometimes, it's better to give up some share and preserve your pricing integrity.
Richard Randal is finder and president of management consulting firm New Level Advisors. E-mail him at info@newleveladvisors.com