General Motors, the world’s largest automaker, has been a global sales leader for 75 years and currently employs 327,000 people while manufacturing autos and trucks in 33 countries.
Nevertheless, GM (as well as its American competitors Ford Motor and Daimler- Chrysler) are now under great stress and have suffered from high costs, tougher competition from foreign competitors and a decline in the popularity of their most profitable pick-up trucks and sport utility vehicles.
GM faces continuing pressure to halt its steady slide in market share. Its cost structure, burdened by a strong union which over the years negotiated high wages, healthcare and pension benefits, has taken its toll on the company as foreign competitors have increased production at non-union factories in the U.S. and Canada (Carol Loomis, 2006).
In 2006, GM took steps to improve its financial position. It negotiated healthcare concessions from the United Auto Workers (UAW), convinced thirty-five thousand hourly workers to accept buyout offers and agreed to sell 51 percent of the company’s financial arm (GMAC) to raise needed cash (Paul Ingrassian, 2006).
Nevertheless, GM is still under stress. It is burning cash, its core North American operation is not sufficiently profitable and several broad trends in the auto industry are working against its ability to recover market share (Rafferty and Stoll, 2007). Rising gasoline prices in the summer of 2007 are slowing the sales of trucks and sports utility vehicles that generate most of GM’s profit.
The consumer market appears to be shifting to the type of vehicles that Toyota and other Asian automakers are very competitive ― and where GM’s profit margins are thin (Rafferty and Stoll, 2007). The possibility of a transformational deal with the UAW to reduce pension and health care costs, however, has made GM more attractive as a short term trading possibility in the summer of 2007. Because of the persistence of many of the problems described above, there is considerable uncertainty about GM’s long-term competitive position.
GM is a firm that is clearly at the crossroads. Given the company’s illustrative history as a global giant and its almost intractable problems, it provides an excellent example upon which to base a security analysis.
The purpose of this paper is to provide a teaching note as a framework of analysis for instructors to use in an investment class. First, the paper provides an abbreviated top down approach in which the auto industry is assessed in terms of its sensitivity to the economic business cycle. Secondly, a current overview of the auto industry along with an examination of its competitive structure is provided using Porter’s five-forces analysis.
All of these are critical components of a security analysis that are typically ignored in valuation projects designed for students.1 Third, a variation of the Discounted Dividend Model (DDM) is used to determine the intrinsic value of GMs stock. Finally, DDM is used to determine its value relative to other stocks in the auto industry. ]
The rise of foreign competition and its impact on the American oligopoly of Ford, GM and Chrysler (the big three) has been the most significant historical change to have taken place in the auto industry. The import share of the American market increased to 21 percent over the period 1976 to 1983 (Adams and Brock, p. 101). Initially, foreign firms concentrated on the small car segment of the market. When the big three were able to enlist the government’s help in establishing import restrictions on this segment of the market, the Japanese firms moved into the midsize segment of the market.
Eventually, both Japanese and European producers moved into the higher priced luxury market. In order to circumvent government trade restrictions, foreign producers began building production facilities in the U.S. While the big three continue to account collectively for two-thirds of all new automobile sales in the U.S. (Adams and Brock, p. 101), they are losing market share (in 2007) and encountering the same problems: hefty pension and healthcare costs and a vehicle line up that is inconsistent with risingfuel costs.
The big three enter negotiations this summer (2007) with the UAW in the hope of easing the burden of retiree health care liabilities that add significant cost to each new vehicle produced. They hope to off load $120 billion in long-term medical liabilities to a new, union run trust fund outside the company (see Value Line Industry Commentary, June 7, 2007).
Consequently, the big three are seeking to sell assets in order to help finance the health care trust fund. Ford is considering the sale of Volvo, Jaguar and Land Rover while GM has already agreed to sell its Allison Transmission unit after nearly 50 years of ownership (Stoll, WSJ article, July 17, 2007).
In mid-May (2007) DaimlerChrysler sold 81 percent of its stake in Chrysler to a private equity firm Cerberus Capital Management, a watershed movement in the U.S. auto industry (Value Line Industry Commentary, June 7, 2007). Obviously, Daimler AG (as the German Company will be known) was unwilling to tolerate the grim financial position of its American operation. The following description of Chrysler’s situation is symptomatic of the problems encountered by the big three:
“Chrysler’s labor costs are $30 an hour higher than Toyota’s, headed for a gap of $45 by 2009. Chrysler pays the same wage to UAW janitors and skilled craftsmen. It carries idle workers on its books when no jobs are available. Most of all, it’s on the hook for untrammeled health-care spending of 134,000 unionized workers, retirees and dependents ― an $18 billion liability that Toyota, Honda and Nissan don’t face. This alone adds a cost of $1,500 per car.” (Jenkins, WSJ article, July 17, 2007).
Study – How Much Can the Internet Help GM?1. Analyze GM using the competitive forces and value chain models. ANSWER: GM is operating in a highly competitive environment. Since the 1970s, the company’s auto sales have declined from about 60 percent of the U.S. vehicle market to 28 percent today. Its competitors, Ford, Daimler Chrysler, and the Japanese, have lower production costs and reputations for better styling and quality. GM’s original top-down control and decentralization model, as well as it being a vertically integrated corporation, hampered its ability to compete.
GM’s competitors could obtain parts at lower prices from outside vendors;
GM could not update its selection and style as fast as its competitors; and GM’s quality was not deemed to be as good as its competitors. GM’s bureaucracy, production processes, and outdated information systems were causing the corporation to spend more time and money than its competitors to produce a car. GM is using information technology to offer innovative products and services, as well as develop its e-business. GM wants to “intensively weave Internet technology into all of its business processes.”
2. What management, organization, and technology issues do you think GM has had to face and will need to solve in implementing its Internet strategy? ANSWER: The change from a corporation with “lumbering bureaucracy, inefficient production processes, and thousands of ‘legacy’ information systems” has required massive restructuring and reorganization. GM has had to reconstruct and reorganize its entire value chain, as well as introduce and use new Internet technology to integrate and streamline its business processes.
The company has had to address issues relating to downsizing, level of digital integration, level of process integration, changes in its relationships with its customers, dealers, employees, and suppliers, as well as competitors; employee training with the new systems, and security and privacy of customer and employee information.
3. Evaluate each of GM’s e-commerce and e-business initiatives describe in this case. How much benefit can they bring the company? ANSWER: GMBuyPower.com, GM Owner Center, Dealer World, and GMAC Smart Auction are several of GM’s e-commerce and e-business initiatives for selling its vehicles online. As the article points out, GM does not directly sell its cars to customers. It uses its various e-commerce sites to provide its customers and dealers with a range of services. For instance, its GMBuyPower.com site allows customers to research GM vehicles and then find a dealer in their area.
For instance, if a customer wanted a black Cadillac Escalade AWD, the system could locate the vehicle for the customer. One of the advantages of this site is that it helps dealers sell their inventories to customers who might not otherwise frequent the dealerships. GMBuyPower.com generates more than 2,000 leads a day and over 20 percent of those leads become purchases.
The GM Owner Center provides current GM vehicle owners with information about their vehicles. For instance, this site enables the owner to obtain vehicle value estimates, maintenance records and reminders, recall information, warranty information, and news bulletins about current offers.
This site is very beneficial to GM customers, since it allows them to have detailed access to information about their vehicle that they might not otherwise have readily available. Dealer World is a Web portal that provides a dealer with access to several applications that will enhance and speed the selling process. GMAC Smart Auction enables GM dealers to locate and then bid on pre-owned GM vehicles.
This system increases the reach and richness of information provided to GM dealers. In its effort to move to a more customer-focused business and reduce its hefty inventory investment, GM provides its customers with the ability to build their own vehicles, has co-created Calvinist, and uses a private industrial network called GMSupplyPower. Using the Build Your Own feature, customers can configure a vehicle to their specifications. Covisint brings together auto parts and equipment suppliers with auto manufacturers; the ultimate goal of Calvinist was to link automakers to the entire supply chain.
Unfortunately, this has not become a reality. GM’s extranet, GMSupplyPower, provides its suppliers with current information about its product scheduling, inventory, and part quality. On Star is GM’s online service that provides Internet, safety, and communications capabilities to its customers. Although On Star provides valuable information and services to GM customers, many are not renewing their subscriptions to the service, primarily because of the price. However, On Star is generating a nice revenue for GM, since GM also licenses the service to Honda and Toyota.
GM recognizes the need to streamline, integrate, and coordinate its systems. GM used Internet technology to develop a collaborative engineering system. This system enables GM employees to share and exchange design information and track parts and subassemblies. GM’s suppliers also have access to this system. Socrates, GM’s intranet portal, allows GM employees to access a variety of resources, such as human resource data, take part in training programs, and locate best practices for a given situation.
4. How will GM have to redesign its business processes to be able to compete successfully and achieve a leading role in the new economy? ANSWER: GM must streamline and integrate its business processes. One area mentioned in the article is that when GM builds vehicles to order, it must be able to take orders on line, link its factories and suppliers, modify vehicle designs to support the use of modules, and cut shipping times. GM must also carry larger work-in-progress inventories, as opposed to JIT component supply inventories. 5. Evaluate the current business strategy of GM in response to its competitive environment. What is the role of Internet technology in that strategy? How successful is that strategy? ANSWER:
GM realized that its top-down control and decentralized execution model was fast becoming an impediment to the corporation’s success. So, in the face of stiff competition, GM is transforming itself into a customer-focused business and offering its customers many electronic services and vehicles. GM has developed its e-business capabilities and now sells vehicles online, builds vehicles to order, provides online services, and streamlined its internal processes. GM is “intensively weaving Internet technology into all of its business processes.” GM hoped its new strategy would enable the company to become smarter, leaner, faster, and more customer-focused.
By eliminating supply chain inefficiencies, the corporation hoped to reduce the required time to design, engineer, and manufacture a new vehicle from 24 to 12 months and eliminate about 10 percent of the cost of making a vehicle. GM’s restructuring and reorganization have provided the corporation with numerous benefits, including reducing the time to produce a car from 48 to 18 months, reducing engineering costs by $1 billion, developing online sales channels and sources of revenue, and improving its quality and quality ranking.
6. In GM’s drive to sell cars online and to build-to-order, what are some of the problems that technology cannot address? ANSWER: One of the biggest issues that GM is being confronted with is channel conflict. Its dealers are leery of its GMBuyPower.com site. However, as the article points out, GM is not interested in selling directly to consumers, but wants to provide helpful, beneficial services to its customers and dealers. Most customers will want to test drive, touch, and see the vehicle before they make their purchase.
From the above all industrial over view, we can see that, Internet helps General Motors (GM) by different ways, these are:
❖ To create better customer relationship❖ Selling their product properly by using E-Commerce method. ❖ Building vehicles to order❖ Provide online services
By internet they are able to collect market information, which help to lead their business properly. Now they overcome profit loss and earn more profit.