GM Tries to Reverse Course, but Can it Catch Toyota?

By Jason Simpkins
Associate Editor

It has taken three straight years of declining profit for General Motors Corp. (GM) to realize it is no longer on the cutting edge of the world's automotive market.

To its credit, GM has shifted its turnaround into high gear, painstakingly reshaping what was once regarded as an American business icon. But even with the changes put in motion, it may be too late to catch rival Toyota Motor Corp. (ADR: TM).

General Motors announced yesterday (Tuesday) that it would cut jobs, costs, and possibly sell off its Hummer brand, all in an effort to reduce its exposure to sluggish truck and SUV sales, and respond to a "structural change" in the automotive industry.

That change is, of course, the rising cost of fuel.

The price of crude oil accounts for more than 55% of the retail price of gasoline, according to the federal Energy Information Administration, and as the price of oil has more than doubled in the past year, gasoline has followed suit by breaking the $4-a-gallon mark and causing motorists to cringe.

"Since the first of this year, however, U.S. economic and market conditions have become significantly more difficult," Rick Wagoner, GM chairman and CEO said in a statement. "Higher gasoline prices are changing consumer behavior, and they are significantly affecting the U.S. auto industry sales mix."

During the first four months of this year, sales of pickups dropped 16.8%, SUVs dropped 9.9% and luxury vehicles fell 12.9%, according to Autodata Corp. Sales of small cars, on the other hand, rose 7.5%. This rebalancing of the "industry sales mix" has swung the pendulum of popularity away from large gas guzzling SUVs back to fuel efficient compacts, and yes, hybrids.

Sales of hybrid cars surged 25% during the first four months of 2008 compared with the same period last year. And the trend only grew stronger in May when sales jumped 58%, outpacing a gain of 18% in April, the Los Angelas Times reported.

While GM's response to this shift has been thoroughly detailed by Wagoner, change has come slowly.

Wagoner said yesterday that GM would close four truck plants, cutting its North American truck capacity by 700,000 vehicles. The maneuver is expected to save the company $1 billion.

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And as far as the company's Hummer brand is concerned, Wagoner said GM is "considering all options from a complete revamp to a partial or complete sale of the brand."

However, these changes may have come a tad too late to fend off Toyota, which has pulled nearly even with GM in terms of global vehicle sales and continues to increase its share of the U.S. market.

"Unfortunately, it's just a sign that once again they're behind the curve," Peter Jankovskis, a chief investment officer with OakBrook Investments, told Reuters. "If they were looking to sell the Hummer brand, the more sensible thing would have been to do it three years ago. They're not going to get anything for it. Just in terms of timing, it's a very poor example."

Indeed, GM has already made its bed over the past decade, ignoring smaller hybrids in favor of mainstream success with the popular H2 and Cadillac Escalade. But in that time Toyota was building for the future and assembling a fleet of fuel-efficient hybrids.

The Beast of the East

While GM is struggling to catch a rapidly emerging trend Toyota is at the forefront. Toyota - the world leader in hybrid sales - sold about 429,400 hybrid vehicles in 2007, an increase of 37% from 2006.

In fact, the company announced just last month that sales of its Prius hybrid car topped 1 million units worldwide since its launch just over a decade ago. The Prius, the world's first mass-produced gasoline-electric hybrid car, first went on sale in Japan in late 1997, and since then, more than 1,028,000 cars have been sold Toyota said.

In addition to the Prius, Toyota's Camry and Highlander are also regarded as some of the best hybrids on the market today. And the latest addition to Toyota's hybrid family is the company's A-BAT, a concept truck that debuted at the 2008 North American International Auto Show in Detroit.

Roughly the size of Toyota's smallest SUV, the RAV4, the crossover is intended to combine fuel economy with the versatility of an SUV.

"This is classic Toyota," Erich Merkle, of automotive forecasting firm IRN, told BusinessWeek. "They're positioning themselves ahead of the curve, preparing products for a generation of consumers that is still coming up."

And as Toyota continues to find success on the frontier of a changing market, GM is losing ground even in its own backyard.

A decade ago, GM executives wore pins with the number 29, signifying their determination to hold 29% of the U.S. market share, the Wall Street Journal reported. But by 2006, the bar had been lowered to 24%, and the goalpost continues to move.

In April, GM's share of the U.S. market hit a record low 20.5% according to Autodata Corp., and most analysts suspect it may have dropped below 20% for the first time ever in the month of May.

Meanwhile, Toyota's U.S. market share hit a record high 17.4% in April, which means May's sales totals could put Toyota within two or three percentage points of actually passing GM in its home market. Such an achievement would be a watershed moment for Toyota, on par with passing GM as the global automotive sales leader.

With the wind clearly at Toyota's back, GM seems to be on the verge of accepting the inevitable.

"I would rather be a highly profitable, great shareholder value, great reputation, growing No. 2 than a struggling No. 1," GM Vice Chairman and Product Chief Bob Lutz told reporters after a speech at the Automotive News World Congress. "I would almost say that being No. 2 for awhile - if it happens, and it well may [for] they are in a lot of areas that are growing faster than we are - [well], it may be a powerful motivator for GM employees."

Toyota seems to have the edge in terms of both global trends and the U.S. market, but one final battleground remains. And that's China.

A Race Around the World

Auto sales in China climbed 18% in the first four months of the year, Xinhua reported. And auto sales in China are expected to exceed 10 million units this year, which would represent full-year sales growth of 14%, according to the China Association of Automobile Manufacturers (CAAM).

GM has already been quick to boast of its success in the world's fastest growing market, proudly announcing that it was the first automaker to sell 1 million vehicles in China in a single year.

"From day one, GM and our partners have been committed to continually rolling out new and upgraded models with specific engineering done in China for China to satisfy the needs of Chinese vehicle buyers across the country," GM's Wagoner said.

The partners Wagoner mentioned are a big reason why GM was the first to hit the 1-million-car milestone. GM's flagship joint venture in China, Shanghai General Motors Co. Ltd., sold 500,308 vehicles in 2007, a 22% increase from a year ago, Shanghai Securities News reported. 

According to Kevin Wale, president of GM's China unit, the company won't be tapping the brakes on its China-focused investments anytime soon. He recently told Bloomberg News that GM would spend about $1 billion a year on production and sales in China over the next five years. Wale estimates that China's total automotive demand will rise to 9.5 million to 10 million vehicles in 2008. 

"GM's main hope is put in Asia-Pacific within which China is the most important part," Ashvin Chotai, an analyst with Global Insight Inc., told Bloomberg. "Even with this $1 billion a year, it'll be tough to remain No. 1 in China.  With China becoming the most important strategic market in the world, it's crucial to have their investment to stay in the race."

Toyota isn't about to take GM's progress in China lying down either. Earlier this year the company announced plans to set up a new automobile plant in China's Jilin province - its eighth production plant in the country. Operations are expected to start in 2010, and the plant's production could be as high as 100,000 vehicles a year.

Toyota is also opening its first research-and-development center in China next year. Based near Shanghai, and is expected to build more R&D sites in Tianjin (China's third largest urban area near Beijing) and Guangzhou (China's third-largest metropolitan area about 75 miles north of Hong Kong). 

Most recently, Toyota announced it would spend $214.6 million to boost production capacity at a facility in Tianjin by 50% to 150,000 vehicles a year.

Whichever company manages to pull ahead in China will likely cement itself as the world's automotive leader for decades to come. The stakes are definitely high as GM, founded in 1908, has been the annual global industry sales leader for 77 years. But it looks as though it will soon be passing the torch on to Toyota, at least for a while.

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