GM Struggles to Achieve Financial Turnaround

Burdened by costly union overheads and hit by the impact of gas prices on SUV sales, General Motors lost $1.1 billion during the first quarter of 2005. Jim Zarroli looks at how GM hopes to overcome its problems — and what might stand in the way. This is the first of three reports on the U.S. auto industry.

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STEVE INSKEEP, host:

What's good for the country may be good for General Motors, but what happens when they do badly? GM is trying to overcome problems that caused it to lose $1.1 billion in the first three months of this year alone. And today, we're starting a series on the American auto industry by going to a showroom for GM cars. That's where NPR's Jim Zarroli is looking at the company's effort to recover.

(Soundbite of vehicle doors slamming; from an OnStar navigation system)

Electronic OnStar Voice: It's time to play the game. Have your driver's license handy.

Unidentified Man: Get your driver's license out.

JIM ZARROLI reporting:

Alfonzo Williams(ph) settles into the passenger seat of a large sedan that's parked in the showroom of LaSorsa Buick Pontiac Chevrolet in the Bronx. He turns on the car's navigation system, which is called OnStar. A voice pipes up and asks for his phone number and then...

Electronic OnStar Voice: OK, are you ready to play?

Mr. ALFONZO WILLIAMS (Auto Shopper): Yes.

ZARROLI: This is part of the new promotional contest sponsored by GM called Hot Button. By playing, you have a one-in-3,000 chance of winning a free car. The voice on the other end of the navigation system soon tells Williams he didn't win anything, but he can fill out a form and try again later. And he goes off to test drive a Grand Prix.

Mr. WILLIAMS: I'm not too lucky today.

ZARROLI: To play the Hot Button game you have to come into a GM dealership. It's part of GM's efforts to lure new buyers into its showrooms. And Mike Perna, the general manager for sales here, likes the game a lot.

Mr. MIKE PERNA (LaSorsa): Well, I'm a mercenary. Anything that somebody else can do to drive traffic into our store, I'm a total buy-in with.

ZARROLI: Do you think it's helped you sell more cars to people who otherwise wouldn't have come in?

Mr. PERNA: I'll let you know at the end of the month when we look at the list, month and a half. I would say yes at this point in time for sure.

ZARROLI: GM is turning to gimmicks like this because it desperately needs to sell more vehicles. Like Ford, it's lost considerable ground to foreign competitors over the years. Higher gas prices have helped slow down sales of sports utility vehicles, which have provided a big chunk of GM's profits in recent years. GM spokesman Tom Kowaleski says the company is taking steps to reverse the decline in market share. It's introducing new models like the Pontiac Solstice and the Chevy HHR. It also hopes to build up its presence in places like the East and West Coast where its vehicles don't sell as well.

Mr. TOM KOWALESKI (GM Spokesman): We are going local in a lot of the marketing action, such as advertising and promotions. We're working with our dealers to greatly upgrade their showrooms in these areas to really go after getting our underperforming markets to be performing.

ZARROLI: Critics say they've heard grand promises from GM before. The Saturn, for instance, was supposed to help GM compete with imports, but it never lived up to its potential. Whether or not its new models succeed, GM faces other problems largely outside its control. For one thing, raw material prices have risen sharply this year. But competition from foreign imports means GM is unable to raise its prices very much. David Cole is chairman of the Center for Automotive Research.

Mr. DAVID COLE (Center For Automotive Research): Well, this is an industry that's going through a period of very high drama and trauma. What they are faced with right now is what we would characterize as the perfect storm.

ZARROLI: And Cole says GM suffers from another disadvantage.

Group: (In unison) I Pledge allegiance to the flag of the United States of America.

ZARROLI: About 40 or so retired auto workers are reciting the Pledge of Allegiance inside the hall of Local 595 of the United Auto Workers in Linden, New Jersey. The men used to work at the local GM plant, which is now idle. They include 74-year-old Rufus Miller(ph), a thin, scarecrow of a man who walks with a cane. In the nearly two decades since Miller retired, he's had a long string of medical problems.

Mr. RUFUS MILLER (Retired Auto Worker): To begin with, I had four hips replacement, OK? I had a shoulder replacement. I had an ulcer operation, and then I have a cancer operation. This is going back years.

ZARROLI: But as bad as his health has been, Miller hasn't had to worry about paying for medical care. Under the UAW contract, Miller is eligible for the same benefits that active workers get.

Mr. MILLER: Glasses, a hearing aid, dental, the whole works.

ZARROLI: With so many active and retired workers, GM's health-care costs have become a major drain on its finances, adding about $1,600 to the cost of each vehicle it sells. Toyota and Honda pay a small fraction of that. A lot of union members, especially the retirees, are worried that their benefits are threatened. Guy Messina is the president of Local 595.

Mr. GUY MESSINA (President, Local 595): All of our members know that there's going to be co-payments coming. We have to help the company out. There's no way that we can allow GM to go bankrupt. That's what happened to Bethlehem Steel.

ZARROLI: But for now, GM has lots of cash on hand and the union has made clear it's not going to give up any benefits before the current contract expires in 2007.

To auto industry analyst Susan Jacobs, heath-care costs are only part of GM's problems. She says that if GM is to compete with higher-quality Japanese cars, it needs to lower its prices. But it can't do that unless it reduces costs.

Ms. SUSAN JACOBS (Auto Industry Analyst): The key for General Motors right now is to realistically assess the magnitude of the problems.

ZARROLI: Jacobs says GM is simply too big and bureaucratic with too many divisions and too many factories running at less than full capacity. That's OK as long as the cars are selling. But in a downturn, cuts need to be made. But GM's labor contracts make it difficult for the company to close down plants. And when it lays off workers, it has to continue paying part of their salary. GM says cutting costs is a priority, and last week it announced plans to pare down the number of models it sells. GM spokesman Tom Kowaleski.

Mr. KOWALESKI: In the past, we were guilty of, perhaps, spreading a common product across a couple of brands and that has a tendency to water down the image. So we're making sure that if our product is a Pontiac, it really lives up to what the Pontiac image should be, ditto Cadillac or Buick or Chevrolet.

ZARROLI: In the long run, GM's biggest problem may be its image. Many customers simply consider GM cars less reliable than imports, a claim the company diligently tries to refute. The good news for GM is that in the auto industry, reputations can change quickly. In recent years, Hyundai's reputation for quality has improved considerably, while Mercedes, once the gold standard for performance cars, has slipped. GM is hoping to see its own fortunes turn around just as quickly.

Jim Zarroli, NPR News.

INSKEEP: We're going to continue our series on the auto industry tomorrow. Things have changed since 1979 when Chrysler used federal loan guarantees to get out of trouble. And we'll report on why a similar bailout is hard to imagine for any other carmaker today.

This is MORNING EDITION from NPR News. I'm Steve Inskeep.

RENEE MONTAGNE (Host): And I'm Renee Montagne.

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