Costs crisis threatens GM's life: Larry Black examines what went wrong at the ailing car giant

IT WAS just two years ago that Robert Stempel was heralded as the saviour of the world's largest company, a traditional Detroit 'car guy' who had resurrected General Motors' European operations and who would now rescue the car maker from the scourge of Japanese competition.

Instead of an accountant looking for ways to save pennies, GM had chosen as its chairman an engineer who would reverse its loss of North American market share, meeting the Japanese challenge with a full line of cars and trucks.

'It's a great day for the automobile industry,' proclaimed Ross Perot, a long-time GM critic and former director.

Mr Stempel told his critics at the time: 'We just have to stay the course in North America.' If Detroit cannot compete in small cars, he warned, 'it's only a matter of time before you can't do it for mid-size cars, and you then can't do it for full-size cars.

'We're committed to building cars for the profit of the country,' he said. What was good for GM, in other words, was still good for the country. But after two years - during which the car maker lost an estimated dollars 16.5bn ( pounds 10.3bn) and two more percentage points of the North American car market - what is good for GM, let alone America, has become a matter of survival, rather than a choice between long-term market share and short-term profit.

GM faces a financial crisis for the first time in its history, with its credit-rating in danger and new product plans on hold. With another quarterly loss of dollars 845m to be announced this week, Mr Stempel, 59, was all but sacked on Friday, the victim of a boardroom revolt that has been swelling since last spring.

Time is clearly running out for GM, which has emerged as the industry's high-cost producer at a time when demand for cars is down across the continent. It is estimated that GM's broad range of models and its commitment to 'vertical integration,' which gives it control over its product from raw steel through to the used-car lot, add almost dollars 800 to the cost of each vehicle it sells, giving its competitors a dollars 4bn price advantage.

Mr Stempel had hoped he could cut these costs gradually, shedding 75,000 jobs and closing one in six GM plants by 1995, but relying on cyclical recovery rather than sweeping reform to ease the transition. But the rebound never came; even the Japanese are losing money in the US.

A more painful restructuring now seems inevitable, accelerating the current closure schedule, consolidating models, and forcing price cuts on parts suppliers.

On Friday, while Wall Street waited for confirmation of Mr Stempel's successor, the company announced the merger of several divisions, reducing its North American operations to three groups: luxury, mid-size and compact, blurring GM brand names such as Chevrolet, Buick, Pontiac and Oldsmobile.

Next month, the car maker will announce more plant closures and give details of a big early retirement programme. The streamlining is being supervised by its president, John F Smith, who was forced on Mr Stempel by GM's outside directors in April, and is now considered the most likely candidate for his job.

Ironically, Mr Smith, 54, succeeded Mr Stempel in Europe, and has been given much credit for transforming subsidiaries such as Vauxhall and Opel into low- cost manufacturers. GM insiders say Mr Smith has been given free rein by the board's outside chairman, John Smale, to shake up the car maker's bureaucracy, creating an all-powerful interdepartmental 'strategy board' based in Warren, Michigan, 10 miles from GM's landmark headquarters tower in Detroit - and from Mr Stempel.

Mr Smith has brought with him to the US his controversial chief of purchasing, Jose Ignacio Lopez de Arriotua, and given him a mandate to cut GM's supplier costs by 20 per cent, or dollars 100m a week.

Applying 'lean production' techniques pioneered by Japan's Toyota, he is sending engineers to each of GM's 5,000 suppliers to help to them reorganise their assembly lines, eliminating waste, and of course jobs. Mr Lopez, known to unhappy suppliers as the Grand Inquisitor, is also recommending the transfer of contracts now filled internally to cheaper independent suppliers, and, even more revolutionary, the sale of much of the in-house parts division, which provides for 70 per cent of GM's components.

Mr Smith's cost crusade is meeting resistance, not only among suppliers but also from some GM dealers, the United Auto Workers union and GM's own bureaucracy.

Officially, at least, cost-cutting has been the by-word at the company for at least a decade, and many have grown cynical about this GM revolution.

Mr Smith's original mission from the board was to turn round the North American operation by the end of the year, a task that now appears impossible. More than one analyst suggests that the principal reason for Mr Stempel's impending departure is not so much ideological conflicts as his inability to maintain an adequate sense of crisis at GM.

His successor will certainly achieve that, as will recurring rumours that GM is willing to file for bankruptcy court protection to get out of costly labour and supplier contracts if it does not get the concessions it needs to survive.

Mr Smith's new team, however, is serious about its mission. 'If we lose this battle,' Mr Lopez said last month, 'we will face the prospect of becoming second-class citizens in second-class countries in the global economy.'

(Photograph omitted)