In Carlos Ghosn We Trust?
It’s been a while since I spoke to the GM saga, so I figured I’d chime with some interesting new developments. I recently read a great Fortune article about Carlos Ghosn, the CEO of both Nissan and Renault. It seems the prospect of fixing GM has struck Ghosn’s fancy. This new found interest could most succinctly be attributed to an invitation to assist by GM’s largest shareholder, Kirk Kerkorian. Kerkorian, who owns roughly 10% of GM, has made his presence felt by publicizing his dissatisfaction in the speed and steps being taken in the turnaround effort.
Enter Carlos Ghosn: Ghosn has been dubbed a turnaround specialist, by financial analysts and industry experts, for his past successes with reviving both Nissan and Renault. It seems Ghosn has proposed an alliance between his two organizations and GM. You heard me right. And here you thought he already had too much on his plate! Such an alliance would almost certainly oust existing CEO Rick Wagoner and position Ghosn as the head of all three companies. I’d like to point out that Ghosn is the only CEO ever to manage two Fortune 500 companies simultaneously. Adding a third seems like lunacy to me, and I’d be very surprised if this proposed alliance comes to fruition. Just the same, drastic change is needed at GM.
Enter Rick Wagoner: I think the time for organic change has come and gone many years ago. It’s most certainly time to break out the hatchet and shake things up. We all know that Mr. Kerkorian feels that way. Wagoner has always boasted a pragmatic leadership style which has spanned over his 2 decade-plus employment with GM. Could his close affinity with the company be clouding his judgment? Does he really have the gumption to do what is necessary? Many analysts feel he doesn’t. I tend to agree.
Enter the Turnaround: There’s obviously no clear roadmap that will resurrect GM from the clutches of potential doom. But…there are a handful of issues that will definitely need to be addressed:
First, the endless union drama, excessive job banks, pension funds, a potential strike from Delphi, etc., are all extremely sensitive subjects that would frustrate even the most seasoned CEO. I firmly believe there’s no silver bullet for these items. I think the damage was done long ago and it’s something that GM is just going to have to deal with.
The best they can do is continue to work on striking up mutually beneficial labor contracts in the future, hope more and more workers accept severance packages in order to cut labor costs for the long term and assist Delphi is reducing their own labor costs to stave off a potentially devastating strike.
Second, GM should also strongly consider reducing their number of brands. This has been a recurring theme across Wall Street lately. Currently GM owns 11 vehicle brands: Chevrolet, Buick, Pontiac, GMC, Saturn, Hummer, SAAB, Cadillac, Holden, Opel and Vauxhall. Strong brand equity? YES. Strong profits? For some. GM director, Jerry York, recommended a brand reduction some months back, but it seems that idea has fallen by the wayside. I guarantee to you that if Ghosn gets his foot in the door, the total number of brands will be greatly reduced. The end-goal, of course, is to increase aggregate profitability by dumping less profitable brands (hopefully at a premium).
Third, size matters. A good portion of GM’s troubles can be attributed to the rising costs of fuel which clearly do not bode well with their beefier line of vehicles. À la the infamous, gas-guzzling, Hummer. I know there’s definitely a niche market for these larger cars, but there’s definitely a fundamental fact when it comes to fuel efficiency. Isn’t there? Smaller cars generally equal better gas mileage.
Why invest inordinate amounts of money into new technologies such as fuel cells when the solution can be much simpler and can tackle the root of the problem? I’m not saying cut it out of R&D altogether, but why not consider the introduction of a larger number of small cars into the marketing mix? Japanese vehicle makers have certainly mastered this technique over the years. Shareholders have definitely benefited from this foresight. Their profitability has not been nearly as entwined with the cost of fuel as say the Hummer.
Whether it’s Wagoner, Ghosn or anyone else – action is immediately required.
Wild Recommendations: Replace Wagoner with Ghosn. Sell Hummer, Buick and SAAB. Continue to cut back staff. Hope synergies yield cost savings. Introduce larger percentage of smaller vehicles across all brands. Smaller cars do not mean weaker quality or style. Cut back on the marketing budget, just a tad. Tighten up the operational reigns. Hopefully, at that point, the company would be back in the black. Sustain profitability. Continue to reduce labor costs. Then and only then should they then should they look to expand. Perhaps — I don’t know — buy out a car rental company. Sound crazy? Enterprise, for example, is the largest car buyer in the world. They are estimating the purchase of roughly 800,000 vehicles this year alone. Enterprise also touts revenues over $9 billion, this past fiscal year, and profit estimates of almost $700 million. Turnaround complete – enjoy cigar and large glass of wine.