September 2, 2009

Why GM Will Go Bankrupt Again

[This article first appeared on Forbes.com]

Ford is profitable again. General Motors is exiting bankruptcy much faster than anyone expected. It would seem that Detroit is recovering and that GM will limp through the rest of the recession. But the real question is whether the biggest of the Big Three will make the strategic shifts necessary to survive until the next one.

Early signs indicate it won't.

First, look at how GM got into this mess. The decline of the American automakers took decades, but one massive misstep lies at the core of what happened more recently. GM and its Detroit brethren missed a seismic green wave that swept the business world and society, a rising tide of real environmental challenges and growing public concern about those challenges. When GM was hit by a deadly combination of global resource constraints--which drove energy prices to historic highs--and changing consumer preferences, the already-weakened giant was unready. Indeed, former chief executive officer Rick Wagoner actually recommitted the company to big, energy-inefficient vehicles as late as 2005.

The frightening thing now is how many companies--not just automakers--remain overexposed to environmentally driven risks. Gas will not stay under $3 a gallon much longer. It already appears that China and India will soon resume their torrid growth, and when the full global economy recovers along with the rising East, the demand for fossil fuels will outstrip supply. Add to that the reality that governments everywhere will make fossil fuels even more expensive through legislation aimed at reducing greenhouse gases. Climate action is now a political and business reality. But how many companies are changing their products and strategies to deal with that fact?

The "new GM" certainly hasn't done so so far. As recently as last year, vice chairman Bob Lutz, who is now in charge of GM's communications of all things, called climate change "a crock of s--t." Imagine what sort of language he must have used to describe U.S. auto sales for the first eight months of 2008. During that crucial period of high fuel prices, sales at GM, Ford and Chrysler fell a bone-jarring 15% to 25% (year over year). Over that same stretch, Subaru, Honda and Nissan actually increased their sales. With gas prices at historic highs and consumers demanding more energy-efficient vehicles, the automakers with greener portfolios performed much better.

GM apologists will be tempted to make excuses by blaming the higher costs of producing vehicles in the United States, or even the credit crunch. But higher labor, pension, and health care costs affect profitability, not, necessarily, sales. And the deep recession came after those critical eight months. Only by putting those stale excuses aside can GM move forward.

What would success look like? GM could learn from other American giants that have proved adept at riding the green wave. Leaders such as Wal-Mart, General Electric, and DuPont have realized that "going green" is now a matter of survival. They're not scaling back their sustainability efforts because of the current downturn; they're accelerating them. They've realized that environmental strategy doesn't raise the cost of doing business, as many fear; it actually lowers expenses, reduces risk and drives innovation and sales.

GM can also look to its direct competitors to see the benefits of having a longer-range environmental strategy. Toyota announced this spring that it had received 80,000 preorders for the new 2010 Prius, and that it had instituted overtime production to meet the demand. Meanwhile Honda's Insight was the bestselling car in Japan in April--not the bestselling hybrid, but the bestselling vehicle. These results must have been very welcome during the worst decline in auto sales in history, but they were not overnight successes. Toyota started developing its "environmental" car not one but two recessions ago.

It takes foresight, hard work and courage to get ready for a green and carbon-constrained future. For GM to survive--and for American taxpayers to avoid having to bail it out again--it will have to completely overhaul its portfolio. Developing one new green model, the much-hyped Chevy Volt, will not be enough, especially when the Warren Buffett-backed Chinese firm BYD has already produced a similar vehicle. No, GM's only hope is to design all its cars to reduce resource use in the supply chain, require less energy to manufacture, and of course, need much less or no gas to drive.

Missing the green wave cost GM dearly. The realities of higher resource prices, political action on climate change and changing consumer demand are poised to swamp it again. And unless we see big changes soon across the business community, GM won't be the only company to go under.

Comments

On September 3, 2009 12:29 PM, Matt Blumberg said:

Maybe with bankruptcy and GM, third time's a charm?

On November 9, 2009 2:55 AM, M. Wollenweber said:

After what they just did to Opel. You better be right Matt. No qualms with that article, valid points all. They think that it was good keeping the chains on, what they don't realize yet is that what they have at the end of that chain has a serious case of rabies. ~MW

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