Why Falling to No. 2 Would Be Good for GM

[Mr. Wyndham]

Why Falling to No. 2 Would Be Good for GM
January 23, 2008 11:38 AM ET
Newman, Rick


Rick Wagoner has got to be tired of hearing the question—and it looks as if he'll have to keep answering it a bit longer. For months, people have been asking the General Motors CEO what will happen if Toyota knocks GM out of the No. 1 spot and becomes the world's biggest carmaker. Wagoner usually puts on his game face and insists that GM isn't yielding anything to Toyota. But this has been the most predictable dethroning in all of business.

The two auto giants, however, will apparently share the platform for a spell before Toyota bumps GM to second place. GM says that in 2007 it sold 9,369,524 cars worldwide—9.37 million, if you round up. Toyota also sold 9.37 million vehicles in 2007—and hasn't yet broken out its figures to a full seven digits. So for now they're tied. Let's call in the lawyers and demand a recount.

It's inevitable, however, that GM will lose the perch it has held for 77 years. Toyota's sales and market share have been surging, with the company raking in billions of dollars in profits. GM lost $12 billion over the past two years and has been shrinking in its core market, North America. Yet the new automotive order will be good news for GM. Sure, falling behind Toyota will mean a loss of pride, but executives at both companies know that being No. 1 would pose fresh risks for Toyota, while being No. 2 would give GM some welcome advantages. Here's why:

It's profitability, stupid. Being the biggest might convey certain bragging rights, but it's profitability, not size, that keeps shareholders happy and workers employed. Toyota has achieved remarkable profitability—its net income was $14 billion in the latest fiscal year—driven largely by aggressive growth worldwide. That's because Toyota has been building the kinds of cars people want, at plants that are the most efficient in the world. At GM, by contrast, size has become a liability—it has too many factories producing more cars than there's demand for, especially in North America. That practice drives down prices and profit margins while keeping costs high—which is why becoming smaller and more productive is actually a core part of GM's restructuring plan. Wagoner and his lieutenants have known for a while that GM would have to forfeit the top spot in order to get healthy. Soon they'll be able to stop acting otherwise.

The pressure will fade at GM. It still has tough profit targets to meet, but the GM deathwatch has been underway for so long that it will be a relief to many execs in Detroit to finally have the monkey off their back. At one time, the big story was the risk of bankruptcy, which GM seems to have averted. But once GM drops to No. 2, the story line could very well shift to the company's advantage: Suddenly, the huge automaker will seem like an underdog, which can make modest improvements appear to be big successes.

The pressure's on at Toyota. Being the leader puts you in the spotlight, a position where Toyota isn't always comfortable. Toyota has been extremely clever about building its muscle in the U.S. market without beating its chest or triggering a political or cultural backlash. Producing the new Tundra pickup truck in Texas, for example, gives Toyota a bit of all-American credibility, even though nearly half the cars it sells in the United States are still built in Japan.
But when you're the front-runner, there's nobody else ahead of you to deflect unwanted attention. That could magnify problems that might otherwise escape widespread notice, like the recent defection of two top Toyota executives, one to Ford and one to Chrysler. Toyota's famed quality has also slipped recently, as highlighted by ranking organizations like Consumer Reports and J. D. Power. Toyota is known for a prickly streak, and if journalists and analysts start to pick on the company, Toyota could get defensive, and the honeymoon might end quickly.

The crown could change hands again. The Toyota-GM horse race will persist for years. Toyota's rise to No. 1 showcases its success in North America, where its market share has been rising and GM's falling. But GM is performing well overseas, especially in key growth markets like China—where it sells more Buicks than in the United States and holds a sizable market share lead over Toyota. To become consistently profitable, GM must reclaim lost turf in its home market. But if it does that, strong positions in Europe, Latin America, Asia, and other developing regions could boost GM unambiguously to No. 1 once again.

Neither company will fall to No. 3. No matter which company sells the most cars, GM and Toyota are likely to be the only two auto companies with the global scale and depth of talent to compete across the board and around the world. Other automakers will be able to compete in profitable niches—like luxury and performance cars, styling standouts, and value-based economy cars—but the Big Two will drive most of the industry's technological change. There may also be a wave of consolidation, as second-tier manufacturers like Chrysler and Nissan seek partners and scale. Such a trend could favor GM, since it already has partnerships with Honda, Ford, and half a dozen others. But let's allow Toyota to enjoy its ascendancy for a few days, before starting to predict the new leader's downfall.

</H1>So...am I the only one who has secretly hoped GM would step down to no.2? Oh, damn...did I just say that outloud?!!

[The_Stache]

Honestly who sells more cars is redundant to me. I'm not buying 9 million cars, I'm not even buying 1 car per year. For me its all about the actual unit not the units representation.

[GTAHVIT]

Good Article.

Other than Jeeps and our Mazda (which we traded a jeep for - 11 mpg vs 33 mpg), I've never owned anything other than a Chevy. I'm obvioulsy concerned that GM is a profitable/healthy company. But I could care less if they are number one or not. I just want the quality to stay up and the cars to be reasonably priced. Luckily for me the Camaro should be the last car I buy for a long time.

[DGthe3]

I think that it is possible for GM to retain its top spot and then grow. They have several new models that were catching alot of attention towards the end of last year. That will help sales. And with Toyota's recent quality issues, their growth will probably slow a bit. From what I've read, Toyota had a better first half of last year and GM finished strong and that momentum will continue this year. It is possible for Toyota to get the top spot for total annual sales this year? Of course. But I see it being 50/50 right now.

[80Zedder]

Gm did lose the top spot to Toyota breifly about a year and a half ago for a very short period. It was huge news inside and outside the plant. news covered it and all. Whether it was 100% accurate i am not sure but it was in every daily truck talk when i was in truck plant.

[TAG UR IT]

Actually, I don't want GM to lose the #1 spot. I mean, I see the reasons above and read them. But, I'd rather have all the "full" factories which are over staffed and building cars that aren't selling, actually running 24/7 w/ three shifts pumping out millions of cars per year which ARE SELLING....meaning more growth for GM, more employment for GM (healthcare, retirement, etc). This helps US....you and me. Because when someone buys an American made car, that money going to pay for the car pays for the worker that put it together. That person just turned around with their paycheck buying groceries at your supermarket, a TV from your electronics store, gas from the pumps at your gas station, clothes from your retail store, etc. I'm not trying to throw this thread off once again, but...where do you want YOUR money to go?

[GTAHVIT]

The company I work for just went public. And now we are a "efficient, well oiled machine." Before we could buy what we wanted when we wanted. Do charity events and cool stuff like that. Now, we have a toilet paper quota and can't buy a new computer until an existing one breaks. The Business Unit president who is responsible for near a quarter of a billion in revenue approves any purchase over 1K... Sure the value of my stock is up and up but when we have to hand a new employee a 3 year old laptop and say welcome to the company. Get to work and don't use too much toilet paper it bums me out.

I just think it's unavoidable for companies to slim down. My working quality of life was much better when we weren't as "efficient" and "lubricated" (feels like lubricated on, sometimes.) But either way we know our money will go to GM and stay at home. And I'm sure GM will continue to set high expectations for their status in the global market. I kinda see it like going on a diet. Most of us need to do it a couple times in our lives...