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)

Life and Style
A teenager boy wakes up.
Life and Style
It is believed that historically rising rates of alcohol consumption have contributed to the increase
food + drink
The erotic novel Fifty Shades of Grey has already been blamed for a rise in the number of callouts to the fire brigade for people trapped in handcuffs
voicesJustine Elyot: Since Fifty Shades there's no need to be secretive about it — everyone's at it
Arts and Entertainment
Critics say Kipling showed loathing for India's primitive villagers in The Jungle Book
filmChristopher Walken, Bill Murray, Scarlett Johanssen Idris Elba, Andy Serkis, Benedict Cumberbatch, Cate Blanchett and Christian Bale
Life and Style
Playing to win: for Tanith Carey, pictured with Lily, right, and Clio, even simple games had to have an educational purpose
lifeTanith Carey explains what made her take her foot off the gas
Arts and Entertainment
The White Sails Hospital and Spa is to be built in the new Tunisia Economic City.
architectureRussian billionaire designs boat-shaped hospital for new Dubai-style Tunisia Economic City
Arts and Entertainment
You could be in the Glastonbury crowd next summer if you follow our tips for bagging tickets this week
Husain Abdullah returns an interception off Tom Brady for a touchdown
nflLeague has rules against 'sliding to ground on knees'
Life and Style
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
food + drink
Arts and Entertainment
Kylie performs during her Kiss Me Once tour
musicReview: 26 years on from her first single, the pop princess tries just a bit too hard at London's O2
Arts and Entertainment
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

SQL Developer (Stored Procedures) - Hertfordshire/Middlesex

£300 - £330 per day: Ashdown Group: SQL Developer (Stored Procedures) Watford...

Day In a Page

Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?
Royal Ballet star dubbed 'Charlize Theron in pointe shoes' takes on Manon

Homegrown ballerina is on the rise

Royal Ballet star Melissa Hamilton is about to tackle the role of Manon
Education, eduction, education? Our growing fascination with what really goes on in school

Education, education, education

TV documentaries filmed in classrooms are now a genre in their own right
It’s reasonable to negotiate with the likes of Isis, so why don’t we do it and save lives?

It’s perfectly reasonable to negotiate with villains like Isis

So why don’t we do it and save some lives?
This man just ran a marathon in under 2 hours 3 minutes. Is a 2-hour race in sight?

Is a sub-2-hour race now within sight?

Dennis Kimetto breaks marathon record
We shall not be moved, say Stratford's single parents fighting eviction

Inside the E15 'occupation'

We shall not be moved, say Stratford single parents
Air strikes alone will fail to stop Isis

Air strikes alone will fail to stop Isis

Talks between all touched by the crisis in Syria and Iraq can achieve as much as the Tornadoes, says Patrick Cockburn
Nadhim Zahawi: From a refugee on welfare to the heart of No 10

Nadhim Zahawi: From a refugee on welfare to the heart of No 10

The Tory MP speaks for the first time about the devastating effect of his father's bankruptcy
Witches: A history of misogyny

Witches: A history of misogyny

The sexist abuse that haunts modern life is nothing new: women have been 'trolled' in art for 500 years
Shona Rhimes interview: Meet the most powerful woman in US television

Meet the most powerful woman in US television

Writer and producer of shows like Grey's Anatomy, Shonda Rhimes now has her own evening of primetime TV – but she’s taking it in her stride
'Before They Pass Away': Endangered communities photographed 'like Kate Moss'

Endangered communities photographed 'like Kate Moss'

Jimmy Nelson travelled the world to photograph 35 threatened tribes in an unashamedly glamorous style