The car business may look like it’s on shaky ground right now. Bottom lines are suffering and plants are getting shut down.
But, General Motors’ new CFO John Devine says he’s seen this picture before. In 1988, his bosses at Ford Motor Co. sent him to run the company’s First Nationwide savings bank subsidiary. At the time, the San Francisco thrift was struggling through the maelstrom of the savings and loan crisis.
First Nationwide ultimately merged with one of its rivals, and by 1994, Devine returned to Detroit to become Ford’s controller. Later that year, he was named Ford’s CFO, and he held the post until he retired in November 1999.
Devine then spent the next year running a venture capital firm, Fluid Ventures, until he landed at GM, Ford’s Motor City rival, in a headline-grabbing development in December.
By the time Devine left Ford, the company could arguably stake out a claim as being the strongest financially among the Big Three automakers. Devine can’t take sole credit for that accomplishment, but when GM hired him, it was clearly hoping some of his magic would rub off.
Devine is also being well-compensated for his efforts. While his salary at GM isn’t a matter of public record, and probably won’t be disclosed until GM’s proxy statement is published in early 2002, a filing made with the Securities and Exchange Commission earlier in January disclosed that Devine received options on 500,000 GM shares. The shares will vest in 100,000-share tranches over the next five years.
In Devine’s last year at Ford, according to that company’s April 2000 proxy statement, he earned $600,000 in salary and $1.7 million in bonuses prior to his leaving the company on Sept. 30, 1999. He also held options on at least 416,000 shares of Ford’s common stock, and the value of the in-the-money options was approximately $5 million.
If Devine can help GM achieve a degree of financial health comparable to that of Ford’s by the end of his tenure there, he’ll have more than earned his keep. But GM obviously needs his help. The company’s problems have been more intractable than any of its two rivals among the Big Three, Ford and DaimlerChrysler.
What’s more, GM’s challenges are aggravated by the generally weak economy that has been a drag on car sales this year. A sign of the difficulty facing GM was borne out in its fourth quarter earnings report last week.
In the three-month period, the company earned $609 million, some 51 percent less than the $1.2 billion the company earned in the fourth quarter of 1999. The company blamed weak sales in Europe and losses at its Isuzu affiliate, of which GM owns 20 percent.
The fourth quarter results were a sour ending to a year that managed to produce GM’s highest revenue figure in its history. And, had it not been for the severity of the fourth quarter slowdown, that quarter would have been viewed as one of the best in recent memory.
For the year as a whole, GM had $183 billion in sales. But much of the growth came about in the first half, when car sales were still rolling along thanks to a thriving economy. By the second half of the year, high gas prices and a weak economy had taken their toll on all the automakers, and GM is now looking at a first half of 2001 that promises to be much more challenging than years past.
Devine has been at his new job barely a month, but he has enough experience in the auto business to know what he needs to do. Recently, the CFO took some time out during the North American International Auto Show in Detroit, to tell CFO.com and its sister publication CFO Magazine, how he plans to help turn around the largest carmaker in the world.
Devine says the auto business is undergoing a revolution with three key aspects: One is in product design, the second is the push toward globalization, and the third is the massive restructuring underway in car makers’ internal operations.
As far as the revolution in products is concerned, Devine says GM wants to get in step with the so-called “build-to-order” business model perfected by Dell Computer.
“The customer wants more diversity,” he says. That doesn’t mean building an infinite number of car models. Wall Street would probably have him sacked for the damage that would wreak upon GM’s bottom line. Rather, Devine says, he’s looking for GM “to have a stable of platforms” and use each of them for a variety of car models targeted to different segments of the car market.
The second revolution is the push toward globalization, and while the DaimlerChrysler merger appears to be coming apart at the seams, Devine says globalization is going to continue.
Already, GM owns 20 percent of Suzuki, 20 percent of Subaru, and 20 percent of Fiat, Devine notes. The company is also negotiating a bailout of Korea’s financially troubled Daewoo Motor Co., although Devine says that while a beachhead in the Korean market is important to GM, the company is only going to do a deal with Daewoo if it makes business sense.
But of all the changes underway in the auto industry, perhaps the most significant are those taking place internally at carmakers.
“There are two things you have to do,” Devine says. “You have to restructure part of the business, and you have to grow other parts of the business. The trick is to know what parts to restructure and what parts to grow.”
From Wall Street’s standpoint, the restructuring part of the equation should simply consist of more cutbacks.
In fact, from early December to mid-January, GM had announced a series of plant closures that cut its overall production in North America by 21 percent. But the shutdowns were temporary, and largely spurred by the abrupt slowdown in the economy and car sales. Wall Street is pushing GM to shut down enough plants permanently so its manufacturing capacity shrinks to a level that matches the company’s market share.
GM currently has 28 percent of car sales in North America, but 34 percent of the manufacturing capacity, and with Japanese and European rivals steadily adding more factories and gaining market share, GM is not likely to grow its way out of the imbalance between market share and manufacturing capacity. Instead, Wall Street wants to see some major cost cutting.
However, the issue isn’t pressing for GM alone. The company’s rivals are feeling it, too, particularly as the economy has weakened.
But closing plants comes with a cost. Like most car makers, GM can’t easily shut down factories without risking job action by its unionized workforce. Moreover, in the event of a major series of permanent closures, GM would have to take some large write-offs against its earnings.
“We don’t have the flexibility to just shut down plants,” he says. But Devine also believes that there are alternatives that would be far less disruptive than wholesale plant closings. The company could shorten or reduce the number of shifts at some plants. In other instances, depending on market demand, a car plant might be converted to producing light trucks, for example.
As bad as the recent economic news has been, Devine says the bad news at least provides GM’s management with a rationale for keeping dealers and workers focused on the need to change the business.
“Nobody wants a downturn,” he says. “But what we have to do is use it constructively to drive the business, and part of that is creating a sense of urgency.”
While the entire auto industry is focused on the issue of excess manufacturing capacity, GM needs to use finesse more than brute force in slashing its expenses. Devine says, “These are not easy decisions, and you’ve got to be careful that you don’t downsize yourself to death.”