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GM Q3 Earnings: Down is Up

by Roger Lanctot | Nov 08, 2018

Can it be just five years ago that General Motors CEO Mary Barra, then head of global product development, purchasing and supply chain for the company, was telling an audience at Fortune Magazine’s “Most Powerful Women Summit” that her arrival would introduce an era of, in her words: No more crappy cars? GM reported impressive earnings last week, yet the reliability ratings for GM brands were simultaneously reported near the bottom of the industry list by Consumer Reports.

The earnings report marked the ongoing disconnect between the company’s financial performance and its overall industry ranking in sales and vehicle quality. On the earnings call financial analysts were delighted with the results and the announcement of a dividend, and only cheered further when the call was followed by the announcement of a buyout offer available to 18,000 of the company’s 50,000 North American employees.

It seems that the financial outlook for GM gets better and better as the company gets smaller and smaller. The one-time global vehicle sales leader is now number five overall behind Volkswagen, Renault-Nissan-Mitsubishi, Toyota and Hyundai.

It’s worth noting that the leaders in the Consumer Reports reliability report were all Asian auto makers including Nissan, Toyota and Hyundai. In fact, if you look at J.D. Power’s Initial Quality rankings, the list is topped by Hyundai and Kia with Ford Motor Company as the highest ranking domestic brand.

Initial quality and reliability matter now more than ever in an industry increasingly obsessed with upping vehicle usage rates for (and via) car sharing and ride hailing applications. The underlying battle in the industry is over miles driven more even than over sales.

Regular users of ride hailing services and taxis are reminded of this on a daily basis. My taxi ride to the airport in Germany last week was in a Mercedes with 470,000 kilometers on the odometer. A separate ride, also in a German taxi, this time a Toyota Prius, showed 130,000 kilometers on a vehicle less than a year old.

Upon my return home I was picked up at the airport by a Lyft driver with a Toyota Corolla. Standing at the curb waiting for my driver I was overwhelmed by the sea of Toyota’s approaching to pick up other passengers.

My Toyota taxi driver in Germany explained what many other drivers have already discovered – Toyota is a leader in reliability and low cost of ownership. The brand is proving itself around the world in this respect – most notably in Germany where Toyota Priuses are increasingly populating taxi fleets and pushing out durable but expensive BMW’s and Mercedes’.

Last week’s earnings call from GM immediately followed the Consumer Reports assessment, but made no mention of the multiple CR dings – against Buick, Chevrolet and Cadillac – perhaps because CR has a long history of praising imports over domestic brands.

But it isn’t just CR. J.D. Power, too, has long sounded the same note regarding the inferior quality, reliability and cost of ownership of domestic brands vs. imports. While the latest earnings from GM were indeed impressive, they only seem to blind GM's leaders to the issues of greatest concern to consumers.

The earnings call highlights the detachment of all car companies from the markets they serve. Senior managers at car companies talk about targeting segments with new cars and strategies for addressing electrification and mobility, but there is a fundamental disconnect from consumers.

For the senior-most leaders at car companies the priority constituencies are most often investors and regulators, with dealers and consumers coming in further down the list. There is talk of vehicles being well received, based on sales, but what is missing are progress reports regarding reducing recalls and improving recall closure rates and improvements in initial quality, reliability and overall cost of ownership.

GM did note, on the earnings call, the fact that it was in the process of addressing a 3.3M-vehicle recall for suspension systems on vehicles in China. The comment from GM came in response to an analyst inquiry as to the recall’s potential impact on earnings. GM’s comment: “None."  (Because warranty exposure was already accounted for in the data.)

GM needs new measures that will determine and define long-term viability, revenue growth, profitability and success: recalls and recall closure rates, quality, reliability, and cost of ownership. Customer retention and vehicle utilization rates are also worthy candidates for measuring current and future performance.

All we seem to hear from GM lately is more news about market exits – India, Russia, South Africa, Europe, etc. – and cost reductions along with profit increases. We also hear about average prices on the rise and promotional dollars on the decline. What is missing is an assessment of the quality of the product.

Part of the problem is the fact that GM’s primary customer is its dealer network. While GM might prefer to sell its cars directly to consumers some day, the company lacks the resources to service cars thereby making dealers a necessary evil, in the eyes of some.

I am currently in the middle of reading Tammy Darvish’s “Outraged,” which describes the bankruptcy-related shuttering of thousands of dealers by GM and FCA. Darvish led the effort to restore dealers unfairly terminated in the midst of the twin bankruptcies. The move to close dealers during the bankruptcy actions amid the economic downturn of 2008 reflected the dim view of dealers held among car makers – and sadly shared by the government’s turnaround team.

In this context, the view of consumers is nearly irrelevant, as a car buyer is once-removed from the car maker. That distance is reflected in GM’s sparkling earnings report and in its faltering efforts to diversify its portfolio beyond selling cars.

Last week ended with news of the demise, perhaps temporary, of GM’s Book by Cadillac two-year-old car subscription service. It’s possible that GM may yet bring the program back, but for now it has been cast aside.

Progress at GM’s Maven car sharing service appears to have hit a wall of its own, with no new cities to speak of on the earnings call and only a new peer-to-peer service to offer up as evidence of continued positive momentum. Never mind that Maven is mainly targeted at non-vehicle owners – hence, no vehicles to share peer-to-peer.

As for autonomous vehicle development, GM’s Cruise operation is attracting investments (from SoftBank and Honda) while failing to hit milestones and burning through hundreds of millions in cash. Nevertheless, GM insists it will launch a driverless service based on Cruise technology in 2019.

Analysts on the earnings call praised GM’s commitment to EV technology in the form of the Volt and the Bolt while noting the piddling number of EVs sold as compared to Tesla. In the withering words of Morgan Stanley analyst Adam Jonas: “Tesla makes about as many Model 3s in three weeks as your whole year worth of Volt sales in the States.

But what really irks is GM’s inability to understand the value of its own IP. There was little or no mention on the call of the company’s groundbreaking Super Cruise technology – widely being emulated across the industry – nor a tip of the hat to OnStar, which ought to be an essential ingredient in putting distance between GM and the rest of the industry when it comes to redefining connectivity and enabling autonomous operation.

The analysts were fawning and flattering of CEO Barra and her CFO, notably also female. The subsequent announcement of GM employee buyouts also served as cause for acclaim. 

The only folks who take buyouts are those that are confident of finding a better opportunity somewhere else or those already on the verge of retirement. It’s true that GM needs something of a reset, to restock its shelves with developers and product managers tuned to the new opportunities manifest in electrification, connectivity and autonomy.  Buyouts are more of a gimmick to please investors than a solution to this problem.

Investors and GM brass should be following up on its learnings from the ignition switch recall and related (and ongoing) lawsuits and settlements and establish externally sharable metrics for recalls (and recall closures), quality, reliability, cost of ownership, vehicle utilization and customer retention. Creating these metrics will require tighter coordination and collaboration with dealers – which will ultimately be essential to succeeding in maintaining if not growing market share and, certainly, profitability.

It’s worth remembering that aftersales – the realm of auto dealers – represent 10% of revenue for the average auto maker, but 70% of profit. The care and nurturing of dealers should be a higher priority for GM and ought to be worthy of mention on an earnings call. Other than that, Q3 was fantastic, GM. Congratulations!

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