GM has more troubles than you think

Bad cost-cutting ideas, poor efficiency and lousy cars - it's going to take a lot more than the Volt to save General Motors.

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By Alex Taylor, senior editor

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NEW YORK (Fortune) -- For the past several weeks, I've been trying to put myself in the shoes of the Treasury Department's auto task force to figure out what its members should ask General Motors to do in order to become competitive again.

It isn't easy, and here's why:

The viability plan that GM (GM, Fortune 500) submitted to the government is all about getting smaller - but it says very little about getting better. Fewer nameplates, fewer brands, fewer workers, fewer dealers - that's supposed to be the way down the yellow brick road. Once GM gets sized right and gets its costs in line with its revenue, The Land of Oz awaits as soon as the market comes back.

To me, that is a fatal flaw. One of the oldest laws in business is that you can't cost-cut your way to prosperity. And who knows when the market will come back?

Now lower costs are a necessary condition for GM's survival. But they aren't sufficient, because the automaker ranks below its biggest foreign rivals in operating smarts.

For one thing, GM isn't as clever as Toyota (TM) and Honda about sharing parts among different models. According to an analysis of platform efficiency by CSM Worldwide, a Detroit-based forecasting and consulting firm, Toyota makes an average of 406,000 cars from each basic architecture, while Honda gets an amazing 509,000 cars. Higher volume means lower costs per car. So when GM by comparison, spins out a mere 350,000 units, it can't hope to save as much.

Nor does GM run its plants as efficiently. When last measured by CSM, GM was operating at just 73% capacity, while Toyota was at 86% and Honda at 93%. Plants carry lots of fixed costs and burn a lot of cash when they aren't running at full speed.

BUT most importantly, GM just doesn't make very good cars and trucks. In Consumer Reports' latest scorecard on automaker performance, the automaker ranked 14th out of 15, or next to last. Only Chrysler scored worse.

The leaders were the usual suspects: Honda, Subaru, and Toyota. To make it worse, Consumer Reports won't even give a recommended rating to some newer GM cars like the Buck Enclave or Cadillac CTS because of poor reliability.

It is true that GM gets pulled down by some of its older models, Consumer Reports points out. But it's been making cars for 101 years. Shouldn't all its models be at least competitive?

No other car company that I know of expects to get a pass by brushing off its mistakes the way GM does. Can you imagine Toyota dissing its old Camrys and Corollas, and saying, "Wait until you see next year's model?"

For another thing, GM has also been pursuing a disastrously wrong-headed development policy on hybrids. While the automaker was working on systems for low-volume trucks and buses with no consumer visibility, Toyota and Honda were building popular-priced hybrids that average people could actually buy.

As a result, Toyota is coming to market with a third-generation Prius that carries an EPA rating of 50 miles per gallon. And Honda just announced that its new Insight, which gets 43 mpg on the highway, will sell for $20,000.

GM's current contender in that race is the most popular version of the Chevy Cobalt, which gets 25 mpg with a conventional engine. Meanwhile, the company is imploring everybody who will listen to wait for its $40,000 Chevy Volt, a so-called "range-extended" electric vehicle due 18 months from now. The Volt has flashy mileage numbers but is very expensive and will have limited utility for most drivers.

Eventually, GM is going to get rid of all its excess overheard. But if I were voting on more government loans, I'd want to hear how it is going to do things faster, smarter, and better:

  • How it is going to make its product development more responsive to actual customer needs.
  • How it is going to overhaul its marketing and advertising to better understand its buyers and what GM needs to do to repair its reputation.
  • And how to reform its distribution system to better serve customers.

I'm not confident that Treasury will ask the right questions, or that GM knows the answers. But I'm hoping.

--An earlier version of this story incorrectly stated that the Chevy Cobalt gets 24 miles per gallon. The most popular version of the Cobalt gets 25 mpg. To top of page

Company Price Change % Change
Wells Fargo & Co 45.70 -0.20 -0.44%
Coty Inc 13.50 0.26 1.96%
Kroger Co 24.22 -0.44 -1.78%
Under Armour Inc 23.58 1.70 7.77%
Verizon Communicatio... 58.09 0.71 1.24%
Data as of May 17
Index Last Change % Change
Dow 25,764.00 -98.68 -0.38%
Nasdaq 7,816.28 -81.76 -1.04%
S&P 500 2,859.53 -16.79 -0.58%
Treasuries 2.39 -0.01 -0.50%
Data as of 7:01am ET
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