Detroit Report: General Motors in Near Tie with Toyota on Global Sales

DETROIT – General Motors Corporation, the world's largest automotive company for 76 years, turns a century old in 2008. But, it may have fewer bragging rights because it's

possible that Toyota Motor Corp. has taken the global sales crown from GM.

If the official 2007 global sales figures of GM and Toyota that were released in late January are taken at face value, GM barely remains the world's number one automaker. GM reports that it sold 9,369,524 vehicles in 2007 while Toyota stated sales of 9.366 million, separating them by roughly 3,000 units.

More importantly, though, Toyota is the most profitable auto company in the world, having earned $14 billion in profits in 2006 (the last figures currently available), while

GM posted a $2 billion net loss a year ago.

General Motors' sales figures were disputed by Automotive News, the influential trade newspaper, in its January 24, 2008 story. As noted by journalist Charles Child, GM included in its totals the 516,435 vehicles sold by the SAIC-GM-Wuling joint

venture in China. GM only owns 34 percent of the joint venture – with the Chinese companies Shanghai Automotive Industry Corp. owning 50.1 percent and Wuling Motors the remaining 15.9 percent.

Automotive News, which is owned by Crain Publications, followed its industry standard and did not include the Wuling sales in GM's figures and noted that Toyota has taken the sales lead.

In response to the Automotive News, John McDonald, GM spokesman said, “We have always included Wuling in our global sales figures and fully disclosed our equity position. We have the maximum allowable equity interest, and Wuling vehicles are marketed as part of GM's China strategy ... under the GM Wuling brand.”

Automotive News seems to be the only major publication to disregard Wuling's sales as part of GM's, McDonald added.

Toyota's virtual tie with General Motors underscores the sea of change that has be taking place in the global auto industry. It is a tremendous accomplishment by the Japanese automaker, because back in 1995, GM had sales of 8.17 million to Toyota's 5.08 million.

Taking the global auto sales “crown” says a lot about Toyota's sales acumen globally, especially where it has racked up sales records, year after year, in North America, but has also begun penetrating Europe and other world markets.

GM's sales have sunk in America, yet it is growing in China, and has seen turnarounds in Europe and elsewhere. Does the sales crown matter? It may be a bragging point, but both General Motors Vice Chairman Robert A. (Bob) Lutz and analysts David Cole, chairman of the

Center for Automotive Research, point out there are far more important fundamentals at work in the industry.

“Would we like to be the world's largest automaker?” Lutz asked rhetorically while addressing attendees at the Automotive News World Congress, a meeting of hundreds of industry managers, analysts, and others in Detroit. “Well, of course, who wouldn't? And, will we continue to fight tooth-and-nail for every possible sale this year and beyond in the hopes of doing so? Absolutely, however, the bottom line is that we are running the business in the best interests of the customers, employees, and shareholders, period. And that's what we will continue to do no matter what.”

Known as a “car guy”, Lutz overseas GM's global product development. A former Marine who grew up in Europe, he started his career at GM in 1968 and remained there, in Europe, until 1971. He also served stints at BMW, Ford, Chrysler, and was chairman of the battery maker Exide until he rejoined GM in September 2001.

2008

could be the year that Toyota becomes the world's leading car company, noted Cole, who also has GM roots. Working in Ann Arbor, Michigan, with his own analyst firm after teaching for years at the University of Michigan, Cole's father was the late Ed Cole, GM president, whose accomplishments included helping to create the small-block V8 engine.

“I have a slide though where I say market share is nice, but profits are essential,” David Cole said. “If you're not making money, you're not playing the game. You can go bankrupt, number one. You never go bankrupt being profitable.”

The Automotive News dispute about GM's sales matters more to the press than to the leadership of either GM or Toyota. The key is profitability, agreed automotive analyst Jim Hall. The vice president of 2953 Analytics of Birmingham, Mich., Hall was previously with AutoPacific.

Ford Motor Co.

often includes Mazda's sales figures in its totals, even though it only owns one-third of the Japanese auto company. Ford, however, has a controlling interest and picks Mazda's management. Similarly, General Motors has operational control over Wuling from a management standpoint, Hall noted.

“Of course, when it comes to profit time (with Wuling), the Chinese JV kicks in with traditional fashion,” Hall said, before elaborating. “Similarly, the Guangzhou Honda operations functions, for all intents and purposes, as a 100 percent Honda operation. Management and everything is all Honda, but half of the profits go to Guangzhou.

“You have to be very selective on what the ownership percentages mean on a lot of the Chinese joint-ventures.”

Toyota does not have to accept GM's sales figures, and the same holds true in the

reverse situation, Hall noted. No audit company can independently verify all aspects of any manufacturers' sales figures.

Toyota has taken a strategy of only increasing its production volumes when it is profitable to do so. There have been examples, including in the U.S. with the Camry, two generations ago, where Toyota trimmed production so it had zero leftover stock at its dealerships before the new model came out.

“That way, Toyota didn't have to discount the old model and it meant more profit per vehicle,” Hall said.

“This is going to be a tough year as it is,” Cole said. “Toyota No. 1 or GM No. 1, it doesn't make a difference. The question is what is going to happen with the economy this year.”

General

Motors is much less dependent than ever before about what happens in the United States, because its global business is growing, Cole noted.

“If the first half of 2008 is tough and the second half is strong, (GM) will be OK,” Cole added. “But, this year isn't going to be easy for anybody. It's going to be a very tough year.”

In his keynote speech January 23 at the auto congress – which was held at the Detroit Mariott Renaissance Center, the hotel tower in the center of GM's global headquarters – Lutz made his own points about GM's sales and what it meant to be number one.

“General Motors, for the third year in its history, has sold more vehicles outside of the United States than inside,” Lutz said. “We always take a very U.S.-centric view about General Motors and its history but in fact General Motors is increasingly a global corporation. I always draw people's attention to that because living in the United States we always tend to be U.S-centric and forget that there is a great big world out there beyond the 50 states.”

General Motors became an international company (not counting when it expanded into Canada very early in its history) when it purchased the German automaker Opel in 1929. Its international brands now include Vauxhall in the United Kingdom, Holden in Australia, SGM (Shanghai General Motors) in China, and GM Daewoo Auto and Technology in South Korea.

It should be noted that Lutz included SAIC-GM-Wuling as one of GM's brands in his speech.

“One of the things I get asked is, 'Bob, what do you think of global leadership?' I don't care because frankly, it doesn't matter,” Lutz said.

“The answer would be the same whether the sales numbers say General Motors is number one or number two. I got today's headlines and they range from 'GM, Toyota Tied,' to 'GM Loses

Sales Leadership to Toyota,' 'GM Reasserts Sales Leadership for '07,'” he continued. “It is really hilarious the amount of interest this gets. The last time I checked, being the biggest or second biggest automaker on the planet has absolutely no effect on your PandL (profits and losses) statement, your share price or your market cap (capitalization). It simply has nothing to do with it.”

In some cases, being number one makes GM a lightning rod for criticism.

“There seems to be some hostility generated by some of the American media and academia toward being number one,” Lutz said. “Because to a lot of you, the biggest corporation is obviously the 'baddest' corporation.”

The GM vice chairman added that the auto company has been “like the guy at the county fair with his head through the rubber sheet with people throwing pies at you.”

If it's time for the

auto company to “pull our head out of the rubber sheet, wipe our eyes and hair and let someone else catch the pies for a while, so be it,” Lutz noted. “Now my personal preference in pies is lemon meringue.”

GM's global sales have been growing, on average, four percent per year for the past decade. Toyota has grown at a rate of 60 percent. The one tough market where GM has seen declines or no growth has been North America where consumers have punished the auto company for its past sins – vehicles that didn't live up to its previous reputation for excellence – while Toyota has surged based on a solid reputation of quality.

Many have noted that it will take GM a long time to rebuild trust with consumers. GM will have to provide outstanding products to woo customers back. Unlike products of the 1980s and 1990s, it may have that, such as in the form of the new Chevrolet Malibu.

“The Malibu

is a really important vehicle because it is a high volume, mid-size platform,” Cole said. “The fact that it is the car of the year and has been given so many accolades has a positive effect.

I've driven it. It's amazing. It drives like a car that is worth twice as much,” the analyst continued. “I've never seen anything like it. We drive a lot of the different products. Another one that blew me away was the Saturn Aura, which was the early sibling to the Malibu.”

Both the Malibu and Aura were “well executed and perform like cars that are much more expensive the way you look at ride and handling, or rigidity, or structural dimensions. I used to teach courses on automotive engineering and internal combustion engines, so I understand this stuff very well. It's the real deal.”

One of the criticisms of the previous iteration of the Malibu was the cheapened interior. Of course, one of the areas where auto companies are forced to cut costs,

when vehicle programs go over budget, is the interior. But it's the interior where the consumer “lives.”

General Motors is moving toward a business model similar to Toyota's – concentrating on profits rather than production – but it has been taking time, Hall said. In North America, GM's efforts to achieve profitability are starting to pay off.

GM's recent contract with the United Auto Workers is an example of how the company is getting its business under control.

“When the contract kicks in, GM's labor costs are going to be equal to or less than Toyota's labor costs in North America,” Cole said. “That's the big deal. The word today is get competitive or die.”

GM's

partial restructuring of its healthcare within the past contract and now the two tiered wage structure, where new employees will be hired in and remain at a pay level significantly below current UAW members, will bring in substantial cost savings, Cole said.

“The elimination of the defined benefit healthcare will bring about savings of about $2,500 per car,” Cole said. “When you take $2,500 out of the cost of a car, it redefines the competitive environment. If you look at GM between 2005 and 2010, with the new labor contract and global integration, their actual cost reductions will be about $5,000 per car and we have never seen anything of that scale.”

The GM-UAW contract model, which was copied at Ford and Chrysler, may not bode well for Canadian Auto Workers members when a new round of labor negotiations starts this summer. CAW President Buzz Hargrove has verbally rejected UAW style wage concessions whereas the company does not pay directly for healthcare costs. With its universal healthcare system, Canada taxes on its citizens and businesses and is the “single payer,” thus health insurance costs are “hidden” and do not show up on corporate balance sheets.

The Canadian workforce is highly skilled and many Canadian plants have high quality, but with the sinking American dollar versus the Canadian dollar and now the higher labor costs in Canada versus the U.S., many Canadian auto plants belonging to the Detroit Three (GM, Ford, and Chrysler) could be in peril, Cole warned.

“When you are contracting and cutting plants out, as in the case of the domestic three, if a plant is not competitive, they are not going to keep it,” Cole said.

With its sales increases and profits, Toyota has had the financial wherewithal to create superb vehicle interiors and concentrate on the fit and finish, look, and other

unseen improvements, such as improving a vehicle's aerodynamic performance by concentrating on the design of components underneath the vehicle.

Toyota, however, has been under criticism lately for massive recalls and cheapening its vehicle interiors, with harder, lower-grade plastics and poorer fit and finish. Trevor Hofmann, senior editor with American Auto Press cites, “the new Toyota Highlander is an example of Toyota trying to separate its entry-level brand from Lexus, its premium marque. The old Highlander offered more pliable plastics, plus cloth or leather inserts on the doors, for example, where the new one, while dynamically more impressive, features hard plastics everywhere, not all of which fit together nicely.

“GM's new lineup of full-size crossovers, the GMC Acadia and Saturn Outlook that target the highlander directly, offer softer-touch, higher quality interior materials, giving new vehicle buyers the perception of higher quality overall. The same can be said for the

new Saturn Astra, Chevy Malibu, and many other new GM products. This is more expensive, of course, but important.”

GM has gotten its vehicle program costs under control it is improving quality, which is exemplified with the Malibu's new interior, Cole said.

With Toyota's growing production, their quality problems have crept up, Hall added.

“That has to do with the numbers,” Hall said. “As volumes increase, your warranty burden goes up. You need to manage it as a percent of sales ... On a global basis, Toyota has handled it pretty well, but in North America they are still working on it.”

Toyota's quality image, in consumers' minds, may not suffer if its competitors' quality

doesn't measurably improve. In that case, it probably won't matter to potential buyers, Hall said.

“Talking about image is like talking about market share goals. Often companies make their goals with the unintended help of a competitor,” Hall observed. “A company can never absolutely control consumer perception.”

The ultimate battle about which company is number one might also be looked at in terms of profitability, rather than vehicle sales.

On the 2006 Fortune 500 list, GM ranked number five, just above Toyota, with $207 billion in revenues, but posted a $2 billion net loss. On the other hand, Toyota earned $204 billion in revenues and earned $14 billion in profits.

In those terms – the ones that Lutz and the GM board of directors probably would be forced to agree on – Toyota is the world's automotive leader and has been for quite some time.

The disquieting thing for both Toyota and GM is the North American economy. Ironically, Toyota may suffer more in a slump in the U.S. economy than GM because that's where the Japanese automaker is making most of its profits and GM has been diversifying its base, Hall added.