General Motors a Giant Stalls, Then Revs Its Engines

By Stephen Koepp

General Motors was in no mood to hold back last week. Dispirited by slumping profits and weary of accusations that it produces bland, look-alike autos, the company decided that it needed to give car buyers a peek at coming attractions. In a surprise marketing step, GM's Chevrolet division announced it would supply Avis, National and other car-rental agencies with several thousand advance models of its 1987 Corsica sedans and Beretta coupes. GM hopes that the cars, to be available for rent about three months ahead of their official March 12 debut, will turn some heads. The spiffy Chevrolets (estimated price: $8,500) represent GM's strongest answer yet to the popular styling of Ford's Tempo and Taurus lines.

The arrival of the Corsicas and Berettas should give a much needed boost to GM, the leading automaker and world's largest industrial company (1985 sales: $96.4 billion). Only a year ago GM stood as a shining example of a U.S. firm that was rapidly adapting to the high-tech, low-cost automaking techniques of the next decade. But on its way to that goal, the company has lately come across a roadful of financial potholes -- many of GM's own creation. In the past four years, the zealously modernizing company has spent billions of dollars to build four new plants and to automate dozens of others but has failed to slash expenses sufficiently. GM was slow to close old factories and reduce its capacity. The company persisted in building cars at its traditional huge volume, even though its share of the U.S. new-car market declined from 47.6% in 1978 to 41.3% during the first nine months of this year.

The difficulties began to rattle GM late last summer, when the automaker discovered it was stuck with more than 1 million unsold 1986-model cars and trucks. To move the merchandise, the company launched a 2.9% financing incentive, which sparked similar deals from the competition and erased GM's third-quarter earnings. As Ford and Chrysler posted hefty operating profits, GM produced a loss of $338.5 million. For 1986 as a whole, the company is expected to earn a net income of $2.8 billion, down 30% from 1985.

To get back on track, GM will have to lighten its load considerably, and the company shows signs of doing just that. Chairman Roger Smith announced two weeks ago that next year GM will begin the largest slimming-down operation in its history. Just for starters, he said, the company will close or cut back eleven outmoded plants in four states. These steps, which will cost at least 29,000 jobs out of 762,500 worldwide, will reduce GM's capacity by more than 750,000 vehicles a year, to just over 7 million.

The penny-pinching moves have come just in time; criticism of GM's bloated size has been reaching a peak. Says one prominent critic, Maryann Keller, who follows the auto industry for the investment firm of Furman Selz Mager Dietz & Birney: "GM has done more to help itself in the last three months than it has in the last few years combined." But GM's Smith will have to cut costs even more dramatically if he hopes to quiet the company's sharp- tongued gadfly, H. Ross Perot, chairman of Dallas-based Electronic Data Systems. Perot, who joined the GM board when the automaker bought EDS in 1984, has particularly attacked GM's slowness in curbing old-boy management perks like chauffeur-driven cars and executive dining rooms.

GM's main handicap at the moment is its high production costs, which analysts put at $11,500 an auto, compared with $9,800 at Ford and $9,300 at Chrysler. A prime reason, ironically, is GM's multibillion-dollar rush to reduce labor costs by installing robotic factories, many of which still have bugs. Example: at Detroit's Poletown luxury-car plant, the taillights on some models tended to melt in the automated paint-hardening ovens. The technology * should gradually become a financial advantage as it begins to operate more smoothly. Says Chairman Smith: "You know we are not making clothespins. We are making a car with 15,000 parts in it."

GM hopes it will soon satisfy buyers who have complained in recent years that certain classes of mid-size GM cars -- for example, the Chevrolet Celebrity, Pontiac 6000, Buick Century and Oldsmobile Cutlass Ciera -- have tended to look as though they were made by the same cookie cutter. The first major departure will be the Beretta and Corsica, followed in the fall of 1987 by a line of intermediate-size autos, designated the W-body cars in keeping with Detroit's penchant for alphabetic code names. GM allotted nearly $7 billion, its largest development budget ever, to create the front-wheel-drive W-body models. While the cars have no names yet, their distinctive rounded shapes have been spotted on GM's test tracks.

The company intends to bring back its product differentiation, so that Chevrolet will once again be perceived as the bargain-price brand, Pontiac the high-powered car, Buick and Oldsmobile the posher models and Cadillac the top of the line. The new stylings may provide added motivation for GM's network of 9,720 car dealers, many of whom have been clamoring for stronger GM brand identities. Observes Joseph Cappy, president of rival American Motors: "That Chevrolet dealer network is so strong they can sell anything. You give them a good product, and they'll just knock the doors off."

If car buyers and investors are a bit impatient with GM, one reason is that the company has so heavily touted its new high technology without delivering much in the way of specifics. Many Wall Street experts see few major contributions so far from GM's acquisitions of EDS, Hughes Aircraft in 1985 and Britain's Group Lotus, the maker of rakish sports cars, this year. But as cars and auto factories become more electronic, GM's space-age alliances could help the company pass its competition. Indeed, none of GM's rivals have taken the giant's poor third-quarter performance as a cue to throttle back. "It's a fluke," says Chrysler Chairman Lee Iacocca. "I know GM, and I'm sure they'll straighten it out as quickly as they know how."

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With reporting by Paul Lienert and William J. Mitchell/Detroit