Behind GM's Rebirth: Changing US Manufacturing Culture

Two years ago, General Motors (GM) went bankrupt with the support of the government, proclaiming that the manufacturing industry in the United States is getting thinner. But in just two years, GM was born again from bankruptcy, and profits in 2011 reached a record. The years of difficulties and historical burdens that have plagued the Detroit auto industry have been left behind, and they have re-invented the American automobile production culture.

In 2011, when profits reached a record level for two weeks, GM’s financial report showed that profits in 2011 were US$7.6 billion, up 62% from the previous year’s US$4.7 billion, exceeding the GM’s previous record – 6.7 billion in 1997 Dollars. With the increase in sales and the increase in the price of general-purpose vehicles, revenue increased by 11% to US$150.3 billion. In 2011, partly due to the impact of the earthquake in Japan on Toyota's production, GM re-established itself as the world's largest automaker.

“This is indeed a bit surprising,” Tracy Handler, IHS Global Insight’s auto analyst, told the China Business News. “General Motors can come out so quickly, thanks to the government’s support and forced Bankruptcy reorganization."

General Bankruptcy divided it into "good" GM and "bad" GM. Good GM got all the effective assets, re-emerged with a clean capital structure and a light labor contract. The “bad debt GM” picks up bad assets and unpopular brands. At that time, people were wondering whether GM could quickly go through the bankruptcy process. It turned out that GM not only passed the crucial speed test, but also took the opportunity to unload the historical burden that plagued it for more than 30 years.

The Detroit auto industry has historically been criticized for the labor costs caused by strong unions and historical commitments, making it intrinsic to competition in the US market with Japanese cars. At that time, the salary and benefits of the employees of Detroit Motor City reached 75 US dollars / hour, far more than the cost of Nissan's 40-50 US dollars / hour.

In fact, before the general bankruptcy, the reform of employee benefits was already in progress. In 2007, an agreement was reached with the union to establish a voluntary employee benefits association (VEBA) trust fund to replace GM’s open-ended welfare protection plan. The Auto Union will be responsible for managing tens of billions of dollars in retirement worker welfare funds from 2010. General Motors will pay 70% of the total amount of 50 billion U.S. dollars, that is, 35 billion U.S. dollars will be set up for VEBA and will be managed by trade unions.

At the same time, unions have to make concessions in the face of the overall recession in the auto industry. Workers newly recruited by the Big Three will not enjoy any retirement benefits. Bankruptcy liquidation exacerbated this process. At the end of 2010, the cost of workers in Detroit was almost the same as that of major competitors.

And after bankruptcy, GM and Chrysler both adopt a double pay structure, and new employees can only get half of their bankruptcy.

"The new universal cost structure is completely different from before." David Whiston, automotive analyst for Morning Star, told this newspaper that "in 2007, GM needed to sell 3.875 million vehicles in the market to achieve balance. And in 2011, just 1.89 million vehicles will be able to achieve balance."

According to Morning Star, medical insurance is the only one. In 2005, GM spent US$16 billion, of which US$12 billion was the expenditure of existing workers and 4 billion was the medical expenses of retired workers. In 2011, thanks to the establishment of VEBA, GM only had to pay 5 billion US dollars for medical insurance. In the past, labor costs of up to more than 70 US dollars per hour were now reduced to more than 50 US dollars per hour.

In addition, although GM’s sales are rising, its underwriters have also dropped from the previous 6,000 to 4,500. "Universal has now become a more streamlined and more effective business." Weston said.

The corporate culture's aiming at the bankruptcy of small-sized vehicles has changed GM's corporate culture, which had previously been largely unfounded. The previous nine brands had only four bankruptcy procedures. And, most importantly, Detroit took a lesson from bankruptcy, investing energy and innovation in the production of small, profitable vehicles.

Detroit’s focus on producing large-scale SUVs (Sports Utility Vehicles) and small trucks that are profitable but fuel-efficient is a direct cause of the bankruptcy it had forced in previous years. Large-scale vehicles are lucrative but fuel-intensive. Once oil prices rise, the rapid shift in consumers will mean a catastrophic blow to manufacturers specializing in them. Chrysler’s bankruptcy in the 1980s was due to this.

In 2008, the GM CEO was questioned by Senators on Capitol Hill: “When you offer loans and consumers demand bigger, faster, heavier cars, doesn’t anyone question this?”

The then CEO Wagner replied: "This is the culture of this industry. We have to painstakingly re-examine it."

The consensus of the industry at the time was that Detroit did not find a way to make money on small cars, but GM after bankruptcy did.

"From a historical point of view, GM is not competitive with Japanese cars in the mid-small car market in the North American market." General spokesman Jim Cain told the newspaper, "But after bankruptcy, we will invest most of our energy. In this regard, we have produced our compact cars for Japanese cars."

At present, in the North American market, Sedan for GM Chevrolet is for Toyota, and Cruze for Chevrolet is for Toyota Corolla. In the past, general-purpose vehicles that could not compete with Toyota in terms of brand quality and reliability have now greatly increased. According to the 2010 annual consumer report of the auto industry, 83% of Chevrolet has increased its reliability by 50% compared with the previous year.

And although GM's brand reliability has generally been low in the past few years, it is now even more reliable for some brands than many European brands, such as Audi and BMW. After the bankruptcy, GM introduced the new cars Chevrolet Camaro and Equinox, Buick LaCrosse and Cadilac to establish a good reputation on the market. Moreover, at the time of bankruptcy, GM shut down five brands such as Hummer, Pontiac, and Saturn, which have a poor reputation. This made GM's overall brand quality improve in the eyes of consumers. The price has also been greatly improved. At present, the sales volume of large-scale vehicles such as general-purpose SUVs and trucks still exceeds 50%, but the sales of small cars are becoming more and more attractive.

"The improvement in the quality of general-purpose vehicles has made it unnecessary to promote them by substantially reducing prices as before," Professor Gerry Meyers of the University of Michigan's Institute of Automotive and Transportation said in an interview with the newspaper. The drop in production costs has also enabled it to no longer blindly pursue production, but to produce truly profitable vehicles."

Miles once said in GM's bankruptcy that GM must turn itself into a company that can make small cars and make it profitable in the future. And GM really did.

Overseas markets are far less than the US market's blind pursuit of production for more than 30 years. How can a corporate culture that cannot produce high-quality, profitable small cars be reborn in a radical change in two years, depending on the profitability of major vehicles?

"They have to improve their technology," said Handreller. "This is a need for survival. With no choice, Detroit is finally back to the fundamentals. The car has to feel good and it must be of good quality. Before, people bought the Detroit car because it was big." Scale discounts are now because the car is good.”

General Press Spokesman Tom Wilkinson said to the newspaper: “People here are very optimistic and we feel that we are producing great products.”

The swift rebirth of GM has even made people see some hopes for the restoration of U.S. manufacturing. In fact, of the 7.6 billion U.S. dollars in record profits last year, 7.2 billion came from the North American market.

In the European market, a loss of $747 million in 2011 was a difficulty for GM's current development. GM is currently reorganizing its Opel brand in the European market, but only lost $562 million in the fourth quarter of last year.

GM also performed poorly in the South American market, changing from a profit of 818 million U.S. dollars a year ago to a loss of 122 million U.S. dollars in 2011. Although in Asia, especially China, GM's performance remains positive and helps it achieve record profits, the profit margin in Asia is shrinking.

"Unlike two years ago, the United States is now the most important market for GM." Myers said.

According to Ward's Automotive, US vehicle sales fell to a low of 10.4 million vehicles in 2009, but in 2011 it increased to 12.7 million vehicles, and this year it expects car sales to reach 14 million.

And with the recovery of the U.S. economy, low interest rate credits make it difficult for American consumers to delay the purchase of new cars. According to Polk, the average age of on-road vehicles in the United States has reached 11 years, the highest number of years ever. This represents a huge opportunity for GM and the global automotive industry. Honda has built a new plant in New Mexico and BMW has expanded production plans in the United States.

"The U.S. market is now a profit," said Handler. "This is a good sign for U.S. manufacturing."