General Motors is one of the most recognizable brand names in the United States and a longstanding symbol of American industry. Nevertheless, it is no secret that GM has recently fallen on hard times. Astronomical losses, a slipping market share and a sinking credit rating are just some of the problems that this once-great corporation now faces.
Two weeks ago GM released its most recent plan to turn itself around. Dividends will be cut in half, to one dollar per share, while the salaries of top executives will be reduced significantly. Rick Wagoner, GM's Chief Executive Officer, received the largest of such cuts: 50 percent (or $1.1 million). Additionally, GM is capping the amount of spending towards employee health-care at the current level. These changes will save the company hundreds of millions of dollars over the next few years. Unfortunately, this may be too little, too late.
General Motors lost $8.6 billion last year. A great deal of this loss was the result of pension and health-care obligations to both current and retired employees. Additionally, relatively high capital and labor costs cut deeply into potential profits. At this point, both unions and management have made concessions, but much still needs to be done.
It is no accident that GM has found itself in its current predicament. Years of poor decisions are finally catching up to the once great innovator, and there's enough blame to go around. Executives are at fault for letting themselves fall behind Japanese carmakers in terms of innovation and accepting the terms of union demands that were grossly unfair. Union workers over the years have also contributed to the current crisis. The outrageous benefit packages that they demanded and received put GM in a situation in which it could not compete with its Japanese rivals.
Nevertheless, the blame game is not the primary issue. The main concern is how the problem can be fixed. Unfortunately, these recent cuts are not enough. The fact that General Motors is paying any dividends is absurd. Dividends are to be paid when a company has reached a successful point in its lifespan, and has found that the owners of the stock would have more use for the money than the company.
Dividends also serve as proof of legitimate cash flow, removing any doubt by investors that they own part of a company using illegitimate accounting methods (see Enron). Unfortunately, it has become obvious that GM no longer has any reason to pay dividends. The company is no longer profitable. In fact, it is outright irresponsible for owners to take money out of a company that is having trouble paying off its debt. If GM was truly concerned about its long term goals as opposed to current stock price, it would cut all dividends.
Though many poor financing decisions are easy to identify, doing so ignores the most significant issue: consumers do not like American cars, especially cars made by General Motors.
Cost-cutting will not be enough. Innovation is the true key to saving GM. Since the 1970s it has been playing catch-up to the Japanese. This will never be a successful strategy. The key for General Motors will be finding a niche in which it can produce better cars for less money than Japanese manufacturers. Models that have been losing money should be cut, and GM has refused to do that.
It is time for management at GM to realize that GM will most likely never be what it once was. Such is the reality of globalization. Japanese manufactures are better at building and marketing cars. Downsizing GM to focus on a specific niche may be the company's best chance at making a profit, or at least avoiding bankruptcy.
Because big changes are necessary and current management has yet to prove it is capable of such, it may be time to bring in new executives from outside the company. Wagoner, the current CEO, has been with GM since the 1970s. It could be time to bring in some people with a fresh outlook who have already demonstrated quality leadership in the industry.
Regardless of what General Motors decides, it must decide quickly, since the probability of bankruptcy continues to rise.
With tens of thousands of jobs at stake, few would argue that the situation isn't dire. Unless significant adjustments are made to the way GM does business, this once shining example of American innovation and industry will never relive its former glory days.
