Short-term thinking costs General Motors, US taxpayers

Just after Thanksgiving, General Motors made the jarring announcement that it was closing five factories in Ohio, Michigan, and Ontario, killing the production of several models including the Cadillac CT6, the Chevrolet Cruze compact, the Buick LaCrosse, the Volt plug-in hybrid, and cutting about 14,700 jobs. This is the firm’s largest cost-saving plan since the taxpayer-funded bankruptcy bailout in 2009.

GM received more than $50 billion of taxpayer assistance through the Troubled Asset Relief Program during the financial crisis. While the feds recovered $39 billion, the firm’s management failures cost taxpayers $10.5 billion. General Motors had racked up more than $40 billion in losses since 2005 alone, losses that had little to do with the financial crisis.

Many of the jobs to be eliminated are populated by those who are perpetually in debt, no matter how hard they work. And if you believe senior GM executives will not receive their annual bonuses, then you believe pigs can fly.

The automaker, the leading automobile manufacturer of the 20th century, expects to free up $6 billion in cash flow by the end of 2020, which will enable it to double down on its investment in electric and autonomous vehicles to stay competitive in a fast-changing market and sluggish sales.

The automobile industry is simultaneously facing multiple disruptions. For example, young, environmentally conscious, technology-oriented urban residents increasingly shun car ownership in favor of more convenient, less expensive mobility options. Owning a car and getting a driver’s license aren’t the life milestones they once were.

For years, General Motors has not been building the vehicles American consumers want. As a result, their car lineup has had more misses than hits. It has been slow to respond to competitive pressures and to align firm resources with changing market demands. For example, the rapid rise of Tesla Motors in the electric vehicle market, Toyota gaining market share with its eco-friendly Prius and the subsequent GM bankruptcy suggest that the firm made the wrong decision when it aborted its electric vehicle program in 2002.

In the ultimate irony, General Motors had a head start with electric vehicles. The firm introduced the “Impact,” a concept electric car, at the Los Angeles Auto Show in January 1990. The Impact was met with immediate praise and GM announced that it would become a production vehicle. Based on the proof of concept electric vehicle, the California Air Resources Board passed a zero-emissions vehicle mandate that required all major automobile suppliers to develop them if they wanted to continue to sell in California.

General Motors became the world’s first mass-produced electric vehicle retailer when, in a blaze of glory, it released the EV1 in 1996. The vehicle could only be leased, despite requests by many customers to purchase it.

But in 2002, the firm cancelled the model that might have been its best hope for the future, citing high costs, a limited market for electric vehicles, and the lack of technology to make high-performance cars. GM recalled all the EV1 and, in one of its worst public relations moves, recycled them, meaning the recalled vehicles were taken to Arizona and crushed. The electric powertrain that powered Tesla vehicles was based on the prototype developed for the EV1.

Once again, GM management demonstrated that short-term thinking is extremely costly in the long term. It is a reflection of the firm’s slow adjustment to changing consumer tastes and the failure to tailor the firm’s resources and business strategy to rapidly changing market forces.

General Motors may have been a 20th-century giant with a large past but today its future may be getting smaller. The sands of time may well be running out for the firm to prepare for the automobile industry’s still-uncertain future.

Originally Posted: December 22, 2018

Fiat’s Sergio Marchionne leaves a legacy worth remembering

Many CEOs know how to soar, but few know how to land the plane. One exception was Sergio Marchionne. The Canadian-Italian leader was one of those dynamic, old school executives who was grounded and anchored in reality, a rarity in the contemporary world. He died on July 25 at the age of 66.

Marchionne first saved FIAT and then did the same thing five years later when FIAT took control of Chrysler from the United States government and turned the combination into a profit generator.

He took the driver’s seat at a battered and indebted FIAT in June 2004, an accountant and tax specialist who described himself as a corporate fixer. He had no previous automobile industry experience and was FIAT’s fifth CEO in less than two years.

Thus began his first remarkable turnaround. FIAT was near death when Marchionne became CEO. It was heavily indebted, had suffered huge losses, and was running out of cash. He took dramatic measures to get FIAT off its knees and return it to financial health, including shuttering factories, laying off thousands of employees, and cutting the time it took to bring new models to market from four years to just 18 months.

A key issue for FIAT was its relationship with General Motors. In 2001, the two had entered into a partnership that gave FIAT a put option to sell the 80 percent of the company it still owned to GM. Sergio Marchionne decided to play hardball, persuading GM to pay $2 billion to sever its ties and end its troubled alliance with FIAT. General Motors paid that huge sum not to buy FIAT.

Equally important, he dismantled the bureaucracy and focused on developing leaders, promoting high-potential young managers to senior positions, creating a flat organizational structure, and linking and leveraging information and knowledge throughout the firm. He constantly reminded the organization that he could not make all the decisions and created an entrepreneurial environment. By 2005, FIAT had returned to profitability.

In 2008, the global automotive industry was in a deep crisis. The following year, Mr. Marchionne found himself in a familiar situation. FIAT struck a deal with the United States government to take on the ailing Chrysler group and save several hundred thousand jobs in exchange for providing small-car technology. There was much skepticism about his ability to turn the firm around and grow the combined FIAT Chrysler into a profitable global automaker.

Marchionne chose an office in the industrial engineering department on the fourth floor of Chrysler’s headquarters, sending a clear message that he was accessible and wanted to be where the action was. He understood that Fiat Chrysler Automobiles was too large and complicated for one person to lead, and that human capital is a scarce strategic resource.

Just as he had done at FIAT, Marchionne fired most of the top management at Chrysler in 2009 and installed a dozen newcomers. By the end of the year, almost no one from the previous senior leadership team remained.

As he explained, “It is not a matter of how good they are at their jobs; it is a matter of change. I can spend 12 months arguing with them about what and how to change, but this won’t work and will take a lot of time. I look for the youngster. They don’t have seniority, they don’t play the corporate habits; they’re pure.”

The chain-smoking, espresso drinking CEO was direct and demanding, requiring his senior managers to be available 24/7 to match his own commitment. Like other successful executives he focused on setting stretch goals, developing a clear strategy, constantly communicating it, and ensuring proper execution of the strategy – all while managing to stay cool.

The combined Fiat Chrysler Automobiles group’s stock price nearly quadrupled over the past four years of his stewardship. Last year, the firm posted $4.4 billion in pre-tax profits.

Grazie mille.

Originally Published: August 18, 2018

Transformation takes the fast lane for automakers

Recently, the Ford Motor Co.’s new CEO outlined plans to aggressively cut costs and funnel the savings to electric, self -driving cars. The company plans on increasing its production of profitable trucks and SUVs, while de-emphasizing less profitable cars and sedans.

What a difference a few years makes in the fast-changing automobile business. Car companies all have big plans to transform from mere sellers of vehicles to businesses that touch all aspects of mobility.

There are now multiple sources of innovation in an industry that has seen relatively little change. For over a century, the business model was how many vehicles a firm sold. Now companies are looking at how to reconcile disruptive innovations with traditional products and services.

The transformation is being driven by a succession of innovations — the Internet, the cloud, big data, 3-D printing, robotics, machine learning, artificial intelligence, autonomous vehicles, connectivity, the internet of things, electric vehicle power trains, and shared mobility, as well as changing car ownership preferences. Each reinforces the others and accelerates disruption.

China, the United Kingdom, and France are talking about banning the internal combustion engine by 2030. Moreover, China’s government has implemented aggressive incentives for electric vehicles that favor local companies, which could give Chinese firms significant advantages and economies of scale in the world’s largest consumer market.

These innovations are causing automakers to rethink the way they do business. Given how central the automobile is to the economy and to people’s daily lives, it’s not a stretch to suggest that these innovations will change how Americans live.

In addition to traditional automakers, changes in mobility will impact industries such as energy, insurance, retail, public transit, and health care. For example, the National Highway Traffic Safety Administration reported earlier this month that total traffic deaths on U.S. highways rose 5.6 percent in 2016 to a decade high of 37,461. This is roughly the same number who die from breast cancer, gun deaths and opioid overdoses combined. The Centers for Disease Control and Prevention estimated that in 2010-2011 there were an average of 3.9 million annual emergency room visits caused by motor vehicle traffic injuries.

Driverless technology creates a potentially accident-free future with drivers exiled to old-fashioned leisure trips on Sunday afternoons. What are the implications for reducing health care costs as emergency rooms lose millions of patients each year and hospitals have hundred of thousands fewer patients who need to stay overnight?

Automakers face a number of existential threats. Besides traditional rivals, a wide range of players have been racing to get in on the action, including tech companies, ride hailing firms, logistics companies and auto parts suppliers. Tech companies view the car as a platform, like a cell phone body. They see the vehicle of the future as software on wheels, enabling drivers and passengers to devote their time to personal activities. As Elon Musk once said: “Tesla is a sophisticated computer on wheels.”

On the other hand, automobile companies think of it as a car with extra software. The only certainty is that it is uncertain who will come out on top: Traditional players or new entrants? The hardware or the software folksguys? Western or Asian firms? Product or service companies?

Automobile companies are making big strategic bets on autonomous technology, electric cars, and transportation services. Financial decisions have to be made in light of the need to serve two worlds; the traditional automobile industry and disruptive technology-driven trends that will ultimately take over the mobility industry. Defining the right balance will be critical.

In a pervasive modern view, the past is a burden that must be shed to give way to a new kind of life. This is the fundamental challenge facing so many industries that are being disrupted by a succession of innovations. While it is debatable when driverless cars will be available to the masses, there is no doubt that a driverless future will profoundly change society, even in ways we are not yet even considering.

Originally Published: Oct 28, 2017

Technology transforming the automobile industry

It’s obvious that the automobile industry is on the cusp of a technological revolution. Manufacturers and technology companies are working together to reinvent the automobile, much like the way Apple reinvented itself from a computer company to a cultural force or even how Madonna has remained a media icon by constantly adapting to new trends.

Although new technologies and consumer markets are still in their gestation stage, Ford, for example, is making major investments that will transform it from a company that just makes cars to one that touches all aspects of mobility.

Technology companies see a driverless world of autonomous or robotic vehicles as a software and artificial intelligence play. For them, the car is a platform, a commodity, like a cell-phone body. You can get the car body anywhere; the real smarts are in the software. The car may be the ultimate mobile device.

As the value of each vehicle becomes more dependent upon the software it contains, tech companies may be in a better position to capture this value than the automakers. New technologies are redefining boundaries between software firms and the lumbering dinosaurs of the automobile industry.

Opinions differ as to when widespread adoption of fully autonomous and commercially viable vehicles will occur. They could dot our roadways in five-to-ten years but saturation will take several decades.

Market penetration may not be uniform; it could start in trucks, for example, before private cars, or even as part of an on-demand commercial ride sharing fleet. In any case, it is not too early to start planning for the roadway management challenges that will be created by autonomous trucks and cars sharing the roads with driver-operated vehicles.

Autonomous vehicle proponents claim they hold the potential to dramatically reduce traffic casualties by eliminating human error. Activities like speeding and driving while texting are deadly. The National Highway Traffic Safety Administration says human error is a factor in 94 percent of fatal crashes. According to the National Safety Council, as many as 40,000 people died in motor vehicle crashes last year, a 6 percent increase over 2015. An estimated 4.6 million people were seriously injured.

When we begin seeing fully driverless cars hinges as much on the regulatory environment as advances in self-driving technology. Autonomous vehicles operating without a steering wheel, brake pedals, and human intervention pose questions about whether regulations can catch up to technological advances.

Market participants argue that realizing the safety benefits of autonomous vehicles will require a single national standard, not 50 sets of rules. Automakers complain that states are moving ahead with their own regulations, creating the potential for a confusing “patchwork” of laws under which autonomous vehicles operate. As of December, California, Florida, Michigan, Nevada, Utah, and the District of Columbia had enacted laws authorizing autonomous vehicle testing under certain conditions. Washington, Ohio, Pennsylvania, and Texas have active testing programs but no legislation.

On the same day Uber started to test its self-driving Volvos near its Bay Area headquarters, the state’s Department of Motor Vehicles ordered the firm to stop because its cars did not have the proper registration for such testing. Uber loaded the cars onto a self-driving truck and sent them to Arizona.

Michigan now allows companies to test self-driving vehicles without steering wheels, pedals or a human that can take over in an emergency. In contrast, California has a rule that self-driving vehicles can only hit the road with a safety driver.

It is uncertain how soon fully autonomous vehicles will enter the mainstream. When they do, avoiding the pushback that, for example, on demand mobility firms such as Uber and Lyft have faced in a variety of cities will require clarifying the proper role of all levels of government within the regulatory landscape. If autonomous vehicles are safer than their driver-operated counterparts, it is imperative that regulators not risk preventable injuries and deaths by unnecessarily delaying their deployment.

Originally Published: March 4, 2017

Automakers under pressure to reinvent the industry

Automakers face unprecedented technological changes and market trends that will ultimately force them along with the Cleveland Browns and the Democratic Party to reinvent their business models. Sources of disruption include electric vehicles; connectivity; autonomous vehicles, including trucks; changing patterns of car ownership and use; and on-demand ride services.

Car companies face an array of new competitors. Besides their traditional rivals, new market entrants including Google, Apple, Tesla, Uber, and Lyft, are fielding new technology vehicles.

Technology is but one of the threats that connected, automated and autonomous driving are introducing to the industry. Connected vehicles are able to “talk” with one-another through radio frequency devices or cellular technology.

General Motors plans to have connected vehicles on the street by the end of the year. The 2017 Cadillac CTS sports sedan will offer technology that allows sharing information about driving conditions like weather, speed, sudden braking and more. Other automakers are expected to follow suit.

Automated and autonomous driving is more complicated. Automated cars use on-board sensors and systems to aid the driver, while autonomous vehicles actually do the driving. It is unclear whether fully autonomous vehicles are 10 or 15 years away.

Autonomous vehicles may get the attention, but the notion of cars talking to one another is the real deal. Vehicle connectivity has garnered great interest from the U.S. Department of Transportation. The Holy Grail of connectivity is vehicles talking with one another without human intervention. The feds have bet that such communication will prevent millions of crashes that result in thousands of fatalities. Last December, USDOT proposed rules requiring that all new cars and small trucks contain technology allowing them to broadcast data to other vehicles within a 984-foot radius about their speed, location and direction.

The proposed rules will standardize how one car talks to another and warns drivers, and eventually autonomous vehicles, about potential dangers. The car- maker determines what to do with the data, be it automated braking or a visual dashboard warning. At an intersection, vehicles would decide if you have enough time to make that right on red and who gets to go next at a four-way stop.

According to the National Highway Transportation Safety Administration, the vehicle-to-vehicle (V2V) equipment and supporting communications functions would cost about $350 per vehicle in 2020. If the rule is adopted, the feds say all new cars would have the technology in four years.

The rule would not require existing vehicles to be retrofitted. As technology evolves, automobiles will likely become more connected to people’s home and mobile devices, and integrated into the internet of things.

Deployment of V2V technologies faces a number of hurdles, such as data security and privacy concerns. If V2V communications get hacked, the possibilities for traffic accidents increases.

Then there is the question of the underlying technology that would enable V2V communication. The feds mandate the use of dedicated short-range communications (DSRC). Many believe DSRC is obsolete and that newer technologies, such as 5G cellular wireless to power smartphone communication, will be released before DSRC market penetration is achieved.

Moreover, critics argue that cellular has already built infrastructure in the form of cell towers, obviating the need to for state and local governments to roll out dedicated short-range receivers on roadside infrastructure.

The other half of the communication network is vehicle-to-infrastructure (V2I). USDOT plans to issue guidance on V2I communications, which in theory should help transportation planners integrate the technologies to allow vehicles to “talk” to roadway infrastructure such as traffic lights, stop signs, and work zones to improve mobility, reduce congestion, and improve safety.

No matter how the technology battle sorts out, the car of the future will be connected. Our transportation system is on the cusp of a transformation, with technology bridging the gap between vehicles and intelligent roadside infrastructure, creating a network that works like the internet and can prevent collisions, keep traffic moving and reduce environmental impacts.

Originally posted: January 21, 2017