Over the past three weeks, GM has been front-and-center in the business news. It started with a scathing article in The New York Times by Danny Hakim, the outstanding reporter that covers the automotive business for The Times. The gist of the article was that GM is treading water in a very competitive business and that Toyota and the other Japanese manufacturers are eating GM's market share daily for lunch.

With very few exceptions, most all of GM's new products have flopped. To keep the factories going, many new models are delivered directly to the rental fleets at a deep discount. GM's long-term strategy of trying to give every brand a full range of vehicles has backfired and GM's 7,600 dealers end up competing against each other for the same customer because the cloned vehicles for each brand are so similar.

The facts of GM's woes are staggering. Healthcare costs add $1,800 per vehicle and GM spends on average, $3,000 per car just to move it off the dealers' lots.

And how about this little tidbit from investment bankers Morgan Stanley: Nearly half of GM's North American production capacity is either idled or being used to produce cars and trucks sold on the cheap to rental car companies, business fleets or employees and their friends and family.

From our perspective here in Los Angeles, GM simply doesn't offer products that people want. The Los Angeles Times ran a business section article about GM's $848 million loss for the first quarter. The Times reporter, John O'Dell, captured some fantastic, very candid and direct criticism of GM from Frank Zicker, Fleet Manager at Santa Monica Auto Group which sells Chevrolets and Buicks.

"GM just doesn't have anything people want to see. They haven't done anything right for a long time."

Mr. Zicker further stated:

"If we had a good hybrid or something else people wanted, we could get people into our showrooms and then we could sell. You can't sell cars if people aren't looking."

It's very rare to find a dealership executive/manager that will criticize the manufacturer, on the record.

Of course, everything Mr. Zicker says is true. Alan and I have been saying this since we began this website. We had high hopes that Maximum Bob Lutz would really influence the styling and the quality for current and future GM vehicles. Mr. Lutz's performance has disappointed us (and apparently most customers) with dull new product. GM is locked (again) in another product cycle trying to sell second rate cars that no one wants, unless there is a $3,000 rebate and zero percent financing.

GM's products, with few notable exceptions, are all but invisible from the Los Angeles landscape, unless, of course, you are at the airport renting a car.

The new C6 Corvette is a success. So is the Cadillac CTS. But how many Cadillac STS sedans have you seen running around LA? GM still has a large market for Chevy/GMC full-sized trucks and large SUVs; however, with Nissan and Toyota coming ever-closer to making a better, more reliable full-sized pick up truck, even the pick up market is in danger for GM.

For some reason, automotive journalists are still falling all over themselves to compare the C6 Corvette, Cadillac Seville STS-V or XLR-V to the "competition" from the Germans. I see almost every car magazine showering these few GM products with praise. I always get the feeling that these journalists, mostly based in Detroit, simply overlook the cheap interiors and the overall fit and finish in favor of a large GM push-rod V8 and a 6-speed manual transmission. Even Dan Neil, the fantastic, Pulitzer Prize winning automotive critic for the L.A. Times, gave GM a pass for the lack-luster, cheap plastic interior of the new Corvette C6. What gives with that?

In the real car capitol of the world, Los Angeles, a 6-speed manual transmission mated to big V8 is a pain-in-the-ass in traffic and the V8 guzzles gas at an alarming rate. With gas prices in LA nearing $3.00/gallon, the low-volume V-series Cadillacs are mere toys for rich kids in Beverly Hills, rap artists or a weekend toy for someone with five or six other cars. In LA, if you want a daily driver, with great performance, true luxury, and a tad bit better fuel economy, you get a BMW, Mercedes, Audi or Lexus.

The Truth about GM and the LA Market

GM simply can't compete in the LA market, except on the basis of price. And even cheap prices aren't enough to stop the inevitable loss of market share to the Japanese and the Germans.

• GM's exterior panels and interior fascia fit and finish continue to be sub-par for the industry.
• Most GM vehicles use antique push rod engines and 4-speed automatics. The competition has left GM far behind with modern, sophisticated engine technology mated to five, six and even seven-speed automatics for better economy, faster shifts and more efficient torque management.
• GM's interior materials are still far below the benchmarks set by the Germans and now the Korean twins, Hyundai and Kia, in just short 10 years, have far surpassed GM in quality. The new VW Jetta, under $20k, puts Cadillac interiors to shame. Even a $75k Cadillac XLR has cheap hard plastic on the dash board and center console.
• GM still is unable to integrate its radio, On Star, satellite radio and GPS Navigation antennas into one exterior antenna or simple hidden antennas that create a unified look to the car. GM even finds it all but impossible to color match the cheap plastic pods it currently use and centering antennas on the roof is an anathema to GM. The competition has left GM in the dust.
• Styling is still a major problem for GM. Oh, I long for the days of Bill Mitchell, John DeLorean, Harley Earl, Zora Duntov, etc. These guys could style a car and make it exciting. GM had products that people really wanted.
• GM's US divisions do not have any mainstream cars that excite customers and bring them back to GM. This business is all about great product. Styling is the number one reason people buy a car. The second reason, reliability, is also not a quality customers perceive in most GM vehicles.

Bankruptcy IS the Answer

My personal belief is that GM is going to have to enter Chapter 11 bankruptcy if it wants to effectively restructure the company to compete at a smaller, but more effective level. GM should forget the race with Toyota. Toyota is going to beat GM, no matter what GM does at this point.

I am, however, concerned about the negative economic effect a GM bankruptcy would cause. GM, its suppliers, dealers and surrounding support businesses touch almost every city in the country. A GM bankruptcy would send a shiver all over the world. But maybe it's better to get the pain over now and just go forward with a realistic plan to compete at a global level with products that people want.

GE Credit has already withdrawn a large credit facility from GM and GE Credit considers GM's debt to be "junk grade". If Standard & Poors and the other credit rating Wall Street bankers downgrade GM's debt to junk status, debt repayment clauses in many of GM's bonds and credit facilities are triggered. GM has enough cash to cover it in the short term; but if that happens, then the cash won't go to research and development.

Without a large R&D budget, GM will fall even further behind the competition. Last week, Toyota announced that its profits would be flat or down this year due to increased research and development spending. Toyota's management isn't worried about the short-term effect on profits because they know it will come back many times to the company in both increased sales, profit and market share. I fear that GM will bow to Wall Street and only concentrate on boosting profit in the short term. And that is a very short-sighted, almost fatal mistake.

Bankruptcy may be the only way for GM to restructure its North American operations. Bob Lutz has already hinted that a division (think Buick) may be eliminated. But GM needs its dealers to get real and know that the days of multiple clones, of the same crappy GM product, across all divisions, is G-O-N-E. Rather than spending billions on bad investments like Fiat, GM needs to buyout hundreds of existing dealers and consolidate brands into the remaining dealerships.

GM's "Legacy" costs consist of 1.1 million retired Americans with pensions and healthcare benefits that are some of the best in the U.S. In fact, GM is our nation's largest private healthcare provider. GM is also locked into absurd contracts with the UAW that require GM to pay employees even if a plant is idle. In fact, the labor contracts forbid GM from closing plants! These contracts must be renegotiated and restructured. The "good old days" of full employment of UAW workers is over.

Mr. Lutz thinks that one division may need to disappear. But it is two divisions that need to go: Buick is dead and needs to be buried. GM's decades of mismanagement has rendered Buick as irrelevant as Oldsmobile. And everyone knows that a GMC truck is the same as Chevy truck with some extra options and a better warranty. GMC has to go. It's a completely unnecessary duplication of identical trucks. In some cases, it would even make sense to grant a special franchise to existing GMC dealers to simply sell Chevy trucks and SUVs. This would save GM millions in just advertising alone, not to mention the reduction of corporate staff and development costs with the complete elimination of two divisions.

Can They Do It?

I doubt GM's executives can make the changes required without the "big stick" of bankruptcy. I'd bet that GM's financial executives are closely following the United Airlines (UAL) bankruptcy. UAL has/had huge legacy costs too. UAL even got rid of its old defined benefit retirement plan by turning over the assets, short of a few major contributions, to the already over-extended and nearly broke federal PGBC (Pension Guaranty Benefit Corporation). Further, UAL has negotiated significant wage and benefits concessions from its pilot and flight attendant unions. It also sold some unprofitable routes and got out of some high-cost leases.

GM's dealerships and unions will dig their heels in and refuse to negotiate without the threat of total loss of jobs, healthcare coverage and livelihood. The reality is that the long ride and spiral down is over. Reality must be recognized. It will be very ugly; but that's how it works here in the US.

So What about Los Angeles?

Back in La La Land, GM's dealer network is vanishing with along with its customers. The lack of dealerships in urban areas provides one more obstacle to any recovery of GM's market in Los Angeles.

Here's my own example. I live just about in the center of the Santa Monica to Silver Lake corridor. If I want to buy a Corvette, I can buy it at several dealers in the greater LA area; but where do I get it serviced? In the past, the GM dealer on La Brea, just north of Wilshire, was the closest dealer. It's gone. I know why -- no one was buying GM's cars and sales of the Corvette alone couldn't sustain the dealership. The small, almost unnoticeable Santa Monica dealer is on the very east edge of Santa Monica, and I'd have to drive at least 30 minutes, crossing the great traffic nightmare where Santa Monica Blvd crosses the 405 Freeway, just to get service.

The Culver City dealer, Albertson Chevrolet, is so far on the fringe edge of Culver City that it would be too is too far to take a car for service. How would I get home? It's too far for the normal shuttle service. And if I rent a car, that's expensive too. A taxi to either Santa Monica or Culver City would cost at least $30. Another option is to go to Burbank or Van Nuys. The travel time is the same and the difficulty of getting back home or to work or the cost of renting a car for the day is the same. The inconvenience of after-purchase service can easily sour a customer on a purchase.

If GM wants to sell cars again in Los Angeles, the product has to be first class and the infrastructure, long neglected, needs to be replaced and updated. The investment is going to have to be huge and the culture in Detroit has to change. This needed to happen 20 years ago, or even 5 years ago; but at this rate, it will take at least 10 more years for GM to restructure and develop new, exciting products that customers in LA want. I sure hope it happens because millions of Americans and American businesses are counting on GM to do the right thing.