Racing to Rebuild GM

Racing to Rebuild GM

The idea was for Bob Lutz, the vice-chairman of GENERAL MOTORS, to challenge doubters of the beleaguered automaker to race him on Utah's Bonneville Salt Flats. He would drive Cadillac's muscular, 556-horsepower CTS-V luxury sedan while challengers would have their choice of rival production models. And, with any luck, Lutz would win and a brilliant marketing campaign would be launched.

But the ad agency's concept apparently wasn't bold enough for the former Marine, who, incidentally, flies fighter jets in his spare time. He pushed for having the throwdown on an actual racetrack, where the chance of damage to GM's battered brand would rise with each twist and turn. "I said, 'Hey, that's an interesting idea, but let's not use the salt flats, because going fast in a straight line isn't proving anything to anybody,' " Lutz said in an interview with Maclean's. "The world has always known that Americans can build cars that go fast in a straight line."

Predictably, it wasn't long before someone - namely, the automotive blog Jalopnik - picked up the gauntlet that "Maximum Bob" had thrown down. The race took place last month at a track in upstate New York. And while Lutz may have ultimately lost to a 21-year-old BMW driver, he handily beat Jalopnik's Mitsubishi Lancer while first, second and third place went to other Cadillac drivers. (Seven of the 10 cars on the track were Cadillacs.)

More importantly, the race got people talking about GM's vehicles - not its financial woes - for a change. "He doesn't pull punches," CSM Worldwide analyst Mike Wall says of Lutz, who was brought out of semi-retirement to be the automaker's product and marketing czar when GM exited bankruptcy protection in July. "He wants to shake things up and make sure these vehicles get on people's shopping lists, which isn't easy."

With Lutz leading the way, GM appears to have regained its swagger in record time. Sales are up, market share is growing, and at least one Ontario plant is increasing production. GM also startled the industry last week by putting the brakes on a planned deal to sell its European division, Opel-Vauxhall, to Frank Stronach's auto parts giant Magna and a Russian partner. Not bad for a company that was left for dead at this time last year. Analysts warn, however, that the road back to profitability will be a long one. GM still depends heavily on sales incentives to move vehicles off dealers' lots, and consumers still harbour doubts about the reliability of its cars, trucks and SUVs. And then there's the not-so-little question of paying back the more than US$50 billion in taxpayer bailout money that's currently keeping GM afloat.

Progress is being made, but it's not yet clear whether the "new" GM is fundamentally different than the old one. Indeed, as GM's confidence grows, its biggest challenge may be avoiding the same missteps, including a tendency to overreach, that brought it to the brink in the first place.

The future is looking brighter than it has in months from inside the gleaming showrooms of Carter GM, a dealership with two locations in Greater Vancouver. While it had to close its Port Coquitlam location earlier this year as part of a North America-wide downsizing, president Bill Mitchell says Carter's remaining dealerships in Burnaby and North Vancouver are witnessing renewed interest from customers in recent months. "Our biggest challenge with General Motors today is getting enough product," says Mitchell. "Trucks, for some reason, are very hot right now. We sell every one that lands."

It's tempting to dismiss Mitchell's enthusiasm as a car salesman's well-rehearsed pitch. But what leads Mitchell to believe a transformation is truly afoot is the type of customer walking onto his lots these days. He says an increasing number belong to the Lower Mainland's large Asian community, a category of consumer he says has typically been more difficult for the Detroit Three to crack.

Observers credit the rising interest in GM vehicles to buzz surrounding new models - the hot-selling Chevy Equinox "crossover" SUV is one example - and GM's 60-day cashback guarantee, which allows customers who purchase a new car or truck to return it with no questions asked for a full refund. Mitchell, for one, says he has yet to have anyone return a vehicle to his two dealerships. Meanwhile, GM says more than 176,000 vehicles have been sold in the United States since the offer was put in place, and only nine cars have been returned. Originally scheduled to end Nov. 30, the program has been extended until early January.

The guarantee is part of a larger marketing campaign dubbed "May the Best Car Win," which essentially pits GM's vehicles head-to-head with the competition. The campaign is what prompted Lutz to slide on his crash helmet and, presumably, compels him to continue with the trash-talking. "This Audi coupe, he did five practice laps and then had a complete brake failure," Lutz boasts about his race. "I mean, he cooked the brakes to the point that they were unusable. And Jaguar wouldn't even [show up]."

It's all part of a bold, and risky, effort to challenge consumers' long-held perceptions that GM vehicles are gas-guzzling monsters with spotty track records when it comes to quality. A recent Chevy commercial sets the new tone: ex-football player Howie Long touts favourable side-by-side fuel economy comparisons between Chevy vehicles and those made by Honda. The Chevy Cobalt goes up against Honda's Civic, the Traverse SUV against the Pilot, and the Malibu faces off against the Accord. The spot ends with a smirking Long saying that "Honda does make something we just can't compete with," as the camera pans to a Honda lawnmower parked on the showroom floor.

A bit cheeky for a company that lost US$80 billion over the last four years? Perhaps. But experts say drastic measures are needed to change people's perceptions. "GM is still better known for sport utility vehicles and pick-up trucks, so consumers may not even realize that they have vehicles that get 30-plus miles per gallon," says Wall.

There is reason for GM to be optimistic the message is getting through. With the U.S. cash-for-clunkers program now a memory, the automaker still managed to post a five per cent jump in the number of cars and trucks sold during the month of October in the all-important U.S. market, its first such increase in nearly two years. (Sales fell in Canada, but executives attributed that to the fact that the Canadian market never really bottomed out, a lack of inventory, and the wind-up or sale of the Pontiac, Saab, Saturn and Hummer brands.) GM's share of the light vehicle market has also climbed for three straight months to about 21 per cent.

When GM emerged from bankruptcy protection in July, chief executive Frederick "Fritz" Henderson pledged that the new GM would only build vehicles that customers wanted to buy - more smaller cars and fuel-efficient "crossover" vehicles - and would dramatically speed up the length of time it took to bring them to market. "We recognize that we've been given a rare second chance at GM," Henderson said at the time. "And we appreciate the fact that we now have the tools to get the job done." The "tools" Henderson was referring to are a balance sheet largely wiped of debt, new agreements with GM's unionized work force, fewer assembly plants and dealerships, and a focus on four core brands - Chevrolet, GMC, Buick and Cadillac - instead of the previous eight.

Critics, however, say GM remains at risk of falling into some of the same traps that felled it in the first place. For example, some analysts have expressed concern about GM's plans to ramp up production in anticipation of an economic recovery next year. Just this week, GM revealed plans to sink $90 million into its plant in Ingersoll, Ont., jointly owned with Suzuki, to boost production of the Chevy Equinox and GMC Terrain SUVs. But GM has stressed there are no plans to go back to its previous money-losing penchant for building more cars and trucks than it had buyers. "We will not revert to bloating inventories for short-term revenue gains as we begin the slow recovery from this horrible economic environment," wrote Mike DiGiovanni, GM's executive director of corporate planning and alliances, on a company blog last month.

GM's about-face on Opel has also raised eyebrows since GM's initial restructuring plan called for a retreat of the once-sprawling company to the North American and Asian markets. Turning around Opel will likely require billions and the European market is currently suffering from overcapacity. The flipside is that Opel provides the automaker with badly needed technologies that underpin smaller cars - a segment where GM has lagged behind its overseas competitors. Even Lutz admitted the decision wasn't an easy one. "Is this really the time to reduce the strategic weight of General Motors worldwide? Would it not be worth a little additional short-term financial pain in order to retain this global asset? You could easily come down on either side of that."

In the end, though, GM's success or failure is largely going to depend on what are often referred to as the three P's of the AUTOMOTIVE INDUSTRY: "product, product, product." And while the company is making strides in this area, the harsh reality is that many consumers still don't see GM cars and trucks as being up to snuff in an ultra-competitive sector, Lutz's racing acumen notwithstanding. Many GM vehicles are still sold with heavy incentives and a recent issue of Consumer Reports magazine gave only 20 of 48 models an "average" reliability ranking. By contrast, cross-town rival Ford was given high quality marks by the magazine.

And, as if to rub salt in the wound, Ford recently posted a US$1-billion quarterly profit before taxes. Unlike GM, Ford narrowly avoided filing for bankruptcy last year and made a decision not to take any government bailout money. So while GM and Chrysler were busy battling with lawmakers, Ford was able to continue focusing on improving its vehicle lineup without the taint of lining up at the government trough. The result is increased sales and, thanks to fewer incentives, improved profitability. "Ford has shown that if you do a couple of things - bring out successful new product and improve quality - consumers are willing to pay more for the vehicles," says Tony Faria, a director of automotive research at the Odette School of Business at the University of Windsor. "I'm sure there's no doubt that GM and Chrysler have taken notice of Ford's financial performance."

Ford may indeed provide a blueprint for GM to follow, but its recent gains also highlight a key challenge facing any GM turnaround - namely that its competitors won't be standing still. Similarly, Detroit's third-place player, Chrysler, recently unveiled ambitious plans to return to profitability by 2011 and then push forward with a slew of vehicles built with its new partner Fiat. The one bright spot for GM is that the industry's once-unstoppable force, Toyota, has finally run into a wall. The Japanese company, which topped GM in global auto sales for the first time two years ago, has suddenly found itself navigating unfamiliar territory, littered with vehicle recalls and excess production capacity, both problems that helped to bring down Detroit. Following its first net loss in 60 years, Toyota launched a major turnaround effort that has so far resulted in the closing of one jointly owned U.S. plant and scaling back at others.

And, in what is no doubt music to the ears of "Maximum Bob," Toyota has revealed plans to withdraw from Formula One racing events after this year. For the record, Lutz claims he doesn't plan to make racing the competition a habit, but he's not exactly ruling it out either. "I'm 77," he says. "That's my story and I'm sticking to it."

Maclean's November 23, 2009