Changing The Paradigm At GM

NEWS ANALYSISChanging The Paradigm At GM CHICAGO, IL (July20, 2006) - In the days since the proposed General Motors (GM)-Renault-Nissan was made public, one surety has been exposed: No one to date has said no to the approach. That, in itself, should indicate how serious the matter is being considered by the three automakers. The proposal brokered by Kirk Kerkorian's Tracinda Corp., which owns 10 percent of GM, would result in Renault and Nissan taking up to a 20 percent stake in GM. By comparison, the three largest GM shareholders currently are State Street Corp. (15 percent), Capital Research and Management Co (14 percent) and Brandes Investment Partners LP (11 percent).  As part of their fiduciary duty to shareholders, the boards of directors for all three automakers need to consider the proposal. The corporate boards for both Renault SG and Nissan met following the public disclosure of the proposal, and both have agreed to pursue alliance discussions. GM's board of directors also has endorsed a recommendation by the company's senior management that it should engage in exploratory discussions with Renault and Nissan regarding the automaker's potential participation in an alliance among the three companies.  According to GM Director George Fisher, "The GM board of directors authorized management to proceed with its plan to consider ideas the other two companies have and to weigh the potential benefits of such an alliance in order to assist the Board in its decision making." The pros and cons of an alliance aside, any GM decision will also factor into the progress of its North American turnaround. Does pace make the race? GM's restructuring has come slowly, is far from completed and still faces risk going forwards. According to Bloomberg News Service, that it took so long for GM to react to years of declining prominence, market share and profitability - and only then after considerable pressure from Kerkorian, as he accumulated a 9.9 percent ownership stake - has led some to question the automaker's leadership.  In a July 3 report, Bloomberg said that Kerkorian had lost confidence in GM CEO Rick Wagoner's plan and pace to fix GM, and would prefer Renault/Nissan's Carlos Ghosan at the helm. Bloomberg reports that, "Wagoner has insisted that shutting factories, eliminating 30,000 union jobs and designing new vehicles more cheaply is enough to restore the world's largest automaker to financial health. Kerkorian may be seeking to tap the expertise of Ghosn, who led Nissan to six straight years of record earnings, to accelerate cost cuts at Detroit-based GM." Over the past five years, Nissan shares have gained 67 percent, Renault has risen 63 percent, while GM has fallen 54 percent. In addition, GM is nearing the completion of its sale of 51 percent of GMAC. The financing arm has been the cash cow for GM in North America, and without it, last year's $11 billion loss would have been much more. In selling off its major profit generator, GM will begin to feel more even more bottom-line pressure in North America. The sale will provide a cash reserve in the short term, but it will also shrink GM's North American revenue stream accordingly in the latter half of the year, often a difficult sales period for GM. Beyond the smoke and mirrors Marketing is about putting the best face forwards. Sales and profits strip marketing to its core, and sometimes painful, reality.  By early June, GM's 2006 vehicle sales had slowed, inventories were building, assembly lines were creating more inventory and this year's discounting programs had already begun - a month earlier than in 2005 - fortified by gas cost rebates to consumers.  On June 27, GM's marketing chief, Mark LaNeve said that June U.S. sales are going to be brutal compared with a year earlier. LeNeve also said that July sales also would decline from the same month last year, when GM offered its employee discount to all buyers. In fact, when GM reported actual June U.S. sales in early July, they were down 26 percent for June and 12 percent year-to-date (YTD).  For all of GM's restructuring gains, vehicle sales have shrunk continually month after month in 2006, compared to 2005. Despite its high profile, flex-fuel vehicle based "Live Green Go Yellow" campaign; there are less than 200 E85 pumps in America to purchase the fuel.  Like the sight of a major hurricane on the horizon, lagging sales and decreasing market share in 2006 portend difficulties ahead when landfall occurs. Cash reserves in the bank may pay to repair the damage, but once used, leave little in the tank to diagnose and resolve the root causes, let alone handle future financial storms.There is no safety net In the face of the dichotomy that separates GM from other, more successful automakers, the need for GM to consider real change in driving sales is nakedly apparent - with or without the alliance. GM, Ford and DaimlerChrysler account for a combined 56 percent market share in 2006, yet they all reported declining sales for both the month of June and YTD. As a group they are averaging a decline in YTD sales of 8 percent.  By comparison, Toyota, VW and Honda hold a combined 40 percent market share, are not showing June declines and each has shown a substantial YTD increase in sales. As a group, they are averaging increased YTD sales of 8 percent. Taken together, the chasm of 16 percent between the two groups will require more than smaller steps to cross. 2006 Sales Trends
AutomakerMarket Share 2006June 2006 vs. June 2005June 2006 YTD vs. June 2005 YTDToyota15%14%10%Volkswagen14%6%20%Honda9%0%7%Nissan6%-19%-6%DaimlerChrysler14%-15%-5%Ford17%-7%-4%General Motors24%-26%-12%(Source: PR Newswire) That the sales figures arise from within the same U.S selling environment makes the difference between GM's performance and that of other automakers' stark. It leaves the GM boardroom door open to the tough questions and criticism Kerkorian has brought to bear. The performance gap also suggests that the solution is more than just a matter of the pace of change.  Factors such as making the right changes, seeing opportunities ahead rather than being focused on putting out fires of the past, being visionary rather than reactionary, and weighing new perspectives versus old may be driving Kerkorian, a newcomer to the politics and entrenched loyalties inside GM, to consider the major shift towards an alliance. He's seen the value and the impact of such a move before being involved in the merger between Chrysler and Daimler-Benz.  Bottom-line? It may not be enough to retool GM. It may also require the infusion of new blood.Changing the bathwater Automotive market forecaster CSM Worldwide (says that a GM-Renault-Nissan alliance would create a one-of-a-kind global enterprise. According to figures compiled by CSM, the combination would dominate vehicle sales and production worldwide. Its profile would include:  Estimated 2006 combined sales figures would dominate key automotive markets throughout the world. Projected 2006 Combined Sales and Production of GM/Renault/Nissan Alliance, 
By Region

RegionSales
# Vehicles - 
World RankingProduction
# Vehicles - 
World RankingNorth America6.3 Million - Number 15.7 Million - Number 1Europe4.6 Million - Number 14.5 Million - Number 1China0.6 Million - Number 10.6 Million - Number 1Globally14.3 Million - Number 114.6 Million - Number 1(Source: CSM Worldwide)

An alliance would also establish a formidable presence in both market cap and global revenue, while balancing income globally. 

Consolidated 2005 Financial StatementsRegionMarket CapRevenueNet IncomeGM$16 Billion$193 Billion-$11 BillionRenault$31 Billion$51 Billion$4 BillionNissan$48 Billion$83 Billion$5 BillionCombined$95 Billion$327 Billion-$2 Billion(Source: CSM Worldwide)

CSM identified a number of pros and cons for a GM-Renault-Nissan alliance:

Pros and Cons For A 
GM/Renaut/Nissan AllianceProsConsBalanced global footprint of the combined enterprise.Disparate corporate cultures may not be easy to integrate.Vehicle platform rationalization will drive higher economies of scale for each OEM.Opportunities for comprehensive synergies could be limited without strong and centralized leadership and commitment throughout the organizations.Powertrain and part consolidation opportunities could provide substantial cost savings over time.Further cost savings through supply chain price concessions will be difficult to achieve due to the fragile financial state of the supplier industry.Risk associated with developing advanced technology could be spread among all three companies.An alliance between the OEMs would increase risks associated with UAW negotiations.(Source: CSM Worldwide) At the end of the day, the ability to sell vehicles for a profit is at the heart of any automaker's survival. Pace matters of course, but only when it is in the right direction. Changing the mindset and developing a perspective from a more global view may illuminate the way. Decision-makers at GM will need to search their collective souls, without letting the chains of history and loyalty restrict their vision or hobble their action. For without profitability - alliance or not - GM's survival is in the balance.(Source: Bloomberg, GM, SEC, CSM, PR Newswire)