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[Music]
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and we're here today with John Paul
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McDuffy of the Wharton Management
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Department John Paul good to see you
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again thanks Steve good to be with you
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the uh the IPO uh for the new General
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Motors um raised about $20 billion for
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the company uh through the sale of those
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shares in the new GM um how will that
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help position GM to compete globally now
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against Ford and Chrysler and all of the
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other major automakers around the
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country around the world rather well GM
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has been already competing uh globally
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with considerable success uh in some
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ways more successfully outside the US
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than in the US in in recent years I
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think what the IPO does above all else
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is it allows them to move away from the
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perception of being a troubled company
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that needed government bailout money to
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the next stage of the story they very
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much want to tell which is that they're
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a reborn company that's uh on the move
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that has a lot of exciting new products
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to offer consumers that's doing very
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well globally and that's on its way to
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being fully independent again so I think
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that's the biggest gain that's a gain in
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consumer perception it's a gain in
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public perception I think it's probably
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a boost for the morale and spirits of
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GM's own employees and why is it that
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the US government still owns a pretty
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big chunk of GM what is the rationale
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behind that it all goes back to the
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industry bailout which is exactly what
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GM I think has felt created some some
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stigma for them but at the time it was
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absolutely essential or they would have
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likely ended up in Chapter 7 bankruptcy
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and and liquidation the government made
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a judgment call in the fall of 2008
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spring of 2009 that this crisis was not
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just a crisis of of one company but it
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was actually an industry crisis that
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General Motors and Chrysler both of whom
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were in the worst shape uh if they
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failed that it would take down most of
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the supply base which would uh make it
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impossible for Ford to produce cars or
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for many of the foreign automakers that
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are building cars in the US that it's an
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industry with a lot of interdependency
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in the supply base and so in order to
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avert an industry disaster with uh
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potential job losses of 1 to three
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million from various estimates they
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decided to step in and rescue GM and
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Chrysler forcing them to make a whole
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set of changes and putting them through
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a very rapid bankruptcy process so they
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could emerge as new companies okay and
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the uh the bailout then if since it was
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good for the industry as a whole um just
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to reiterate your position on the
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bailout itself was it a good thing for
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all concerned for the unions for for
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corporations for the corporations
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themselves and for shareholders do you
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think well nobody is happy about the
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bailout having happened or needing to
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happen and there's a big concern I think
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politically about the government
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rescuing companies that may be too big
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to fail that's part of the negative
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association to the bailout that that
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certainly is a big concern to GM my view
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is that this was uh perhaps once a
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century once a 34 Century event uh that
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the Great Recession that we've been
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through is uh was only exceeded by the
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Great Depression that was the last time
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there was uh any kind of similar scope
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of of government action in involvement
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in the private sector and so I wouldn't
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want this to be a a regular occurrence
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but I think it was warranted under under
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these conditions Ford of course did not
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take any funds from the government that
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I believe has benefited Ford in a number
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of ways although it's left them with
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more debt to manage uh as GM and
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eventually Chrysler go back to being
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private companies the government will be
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paid back will they get all their money
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back that's still uh an open question
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shares sold last week at $33 a share in
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order for the government to have its
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stake fully repaid stocks GM stock would
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have to be selling for about $53 a share
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so that's still quite a gap but uh both
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GM and the government felt that it was
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important to do a sale as soon as
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possible of at least some of the stock
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to signal that the government doesn't
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wish to stay in the business of owning a
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private company and GM by no means
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wishes to stay Award of the state okay
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now Ford uh Ford's market cap as of
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today uh November 22nd is about 50
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$6 billion and GM's market cap is about
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51 billion um does that sound about
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right to you for for the market cap of
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those companies to be what they are
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given the relative strengths of Ford and
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General Motors do you think well that
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certainly marks a reversal because for
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most of the the last century except for
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the very early years of the Auto
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industry General Motors was the larger
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uh company with a larger market cap over
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over Ford and uh it reflects the fact
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that is now a much smaller company it
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also reflects the fact that Ford has
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been receiving a very positive response
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uh in the stock market lately and uh I
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think not only because of not having
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received bailout funds but because in
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some ways it's uh recovery and some of
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its current strengths have been evident
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for for a while now those include uh
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several very strong new products uh
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quality levels that are much higher and
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seem to be quite cons consistently High
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across the product line some refocusing
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on automobiles uh on on cars as opposed
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to Just Trucks and SUVs and on keeping
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the the margins the selling prices for
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those vehicles uh high enough to keep
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them in a financially sustainable
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position so Ford's done a lot of of uh
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of the right things lately and they've
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seen the benefit from that in their
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stock price and more importantly in the
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public uh consumer perception um you've
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talked about this before of course but
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uh all of the US companies for many
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years have had a reputational issue to
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deal with concerning the quality of
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their cars yes um from what I understand
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in most respects that those negative uh
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views of those companies uh if they
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haven't gone away in the minds of the
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public they perhaps should have because
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the cars are much better quality now I
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think but do you think GM still has a
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reputational problem going forward will
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it have to do anything special to
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convince consumers that not only are we
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back uh but we have good excited
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quality uh reliable automobiles to sell
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to you well this issue is very much in
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the eyes of the consumer and there are
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Lag effects uh in terms of reputation
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I'm sure it's very frustrating for for
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GM for Ford to see some perhaps
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lingering perceptions of quality
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problems from the past uh they probably
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benefited in the early years of their
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quality slipping from some carryover
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reputation uh that preceded that so it's
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it's just the nature of of of the way
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things are I think the key has been uh
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for Ford improving
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quality quite consistently across the
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product line uh GM for a number of years
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has had certain models that have been
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very successful with quality they've
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gotten Awards and the like but they've
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also had other vehicles that have still
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had a lot of quality problems and so all
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it takes to keep that reputation alive
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is hearing from a friend or a neighbor
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or a colleague about a bad experience
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with a GM product and then it reinforces
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whatever negative perceptions you have
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so and that consistency is is tough it's
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tough uh to keep it across all products
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uh obviously a lot of these products
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have supplied parts that come from
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suppliers all over the world so it's not
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that it's all completely under your
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control these are very complex Supply
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chains to manage but that's the that's
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the uh you know that's the test that
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every automaker has to pass these days
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do you think GM has exciting new
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vehicles in its pipeline um that will
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get consumers excited in the years to
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come uh and secondly do they does the
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company currently have any Vehicles
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perhaps The Vault or the cruise that
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might get people excited about the
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company and to begin looking at GM cars
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again there's a number of of GM models
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that I think are are are very promising
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in that regard and and they almost
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occupy different different categories or
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different spaces uh for Buick to start
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having some products that people are
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excited excited about like the lacrosse
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is uh is uh a bit of a change because
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while they had some loyal consumers they
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were mostly seen as as being more
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conservative and having conservative
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tastes and there wasn't much that was
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seen as as really new in the Buick line
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and that's starting to change Buick of
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course in one of the interesting uh
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International ironies about brands has
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been GM's top selling brand in China for
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a long time uh they have a crossover
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vehicle which was a space that us
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companies were a bit slow to move into
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so car-based SUV car platform based SUVs
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uh the Equinox which has uh gotten rave
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reviews and is selling very well and
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then you mentioned the volt and the
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cruise the cruise uh competes in a very
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tough segment against uh Toyota and
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Honda products and is getting very good
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reviews and the vold of course is this
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new electric vehicle which has a bit of
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a unique design and uh everybody's
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waiting to see it the buzz on it is
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certainly great uh the price is going to
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be high the demand is uncertain but it
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helps GM as it would help any company to
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uh be perceived as having some products
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that are at the technological Edge the
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uh the the IPO created of course a lot
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of Buzz about the company um but what
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exactly has changed why is how is the
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new GM different from the old GM aside
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from the government ownership part of it
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but I mean internally management and
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it's perhaps it's management structure
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management style has anything changed
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from from The Old Company to the new
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that's
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significant well many things changed as
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a consequence of the of the bankruptcy
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so GM shed a number of Brands uh
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including Pontiac and and Hummer and
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Saturn they uh closed a lot of plants
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there's a old GM which exists now as a
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separate company which consists entirely
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of assets which are being slowly sold
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off and one way or another so they in
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one Fell Swoop had some of the least uh
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productive or useful assets shifted off
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of their balance sheet they've had a lot
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of management changes of course they
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have their second uh new CEO since the
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bankruptcy ended well first there was an
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interim CEO Fritz Henderson who was a
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long timer and then Ed Whitaker and now
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Dan Akerson uh a number of new board
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members and that was one of the primary
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ways that the new shareholders the I
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mean the new owners the the government
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and the unions uh exerted some
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governance uh control was through
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appointing new members of the board and
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uh so I think those are all the new
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things that's an overlay on the fact
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that there were a lot of things a lot of
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areas where GM had made improvements
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over time in their Manufacturing in
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their product design in uh in their
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management of suppliers and many of
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those things uh the goal has been to
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continue a positive trajectory so it's
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it's kind of a mix of some of the good
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things that were happening already that
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were somewhat you know thrown for a loop
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by the financial and Industry crisis uh
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the bankruptcy which caused a lot of
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restructuring of the sort that we see
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often in a a private Equity based uh
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workout and then finally a lot of
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management changes to uh to set a new
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tone and take the company in a New
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Direction and I guess that's what I'm
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asking really is there any way to know
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whether management is even is is
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thinking differently now about how to
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approach the marketplace I mean it used
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to be that and correct me if I'm wrong
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that the General Motors and and the
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other big two automakers used to
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basically produce product and then hope
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they would I mean to kind of meet the
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needs of their production
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lines and hope that there would be
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enough customers for them and clearly
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that didn't work out very well so is the
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is upper management s has they is there
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any way to know whether they've
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seriously began to rethink how they look
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at the whole business and how it's
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changed globally Visa its competitors
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and what its customers want and that
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sort of thing do we know that yet we can
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we can only look for some telltale signs
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and and and keep an eye on uh a broad
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array of indicators but one of those
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might in fact be uh kind of the the the
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production levels the use of heavy
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discounting and incentives to sell
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products in order to keep the volume
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levels High uh GM used to do that a lot
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arguably they had uh primarily fixed
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cost situation in many of their
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factories because of both uh you know
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inflexible manufacturing facilities but
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also because of the the labor costs and
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the Legacy uh costs associated with that
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that was argued to be a reason why they
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had to keep the factories full and then
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use incentives to sell but you know when
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you're when you're getting almost no
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margin on your products sometimes even
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selling at a loss uh that's no recipe
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for for survival so so far we see more
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focus
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on smaller number of of vehicles that
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are more uh intensively marketed and
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sort of holding the line on incentive so
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aiming for higher selling prices all of
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the brand building all of the reputation
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building around quality and around new
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technologies are to help sustain that uh
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the reduction in the number of De
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dealerships while quite controversial
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and still somewhat politically fraught
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also means they don't have as many
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dealers competing with each other in a
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close proximity to you know to to to be
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the one who gets the customer so that
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helps in terms of the the uh the price
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cutting as well what is the relationship
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now how would you characterize the
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relationship between the UAW and the
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company and what should that
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relationship look like in the years to
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come the it's a a long and complic
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complicated history of course uh another
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thing that I think is sometimes lost in
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the retelling of the recent uh history
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is that the union and General Motors and
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and also the union with with Ford and
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Chrysler had reached some Landmark
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agreements in uh 2007 that would
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completely restructure how healthc care
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and pension costs were handled in the
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future uh that is now largely
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implemented it it was unable to be
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funded in its original form because of
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the crisis but the resolution through
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the bankruptcy has has allowed that so
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they had made progress towards finally
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solving what had been one of their most
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uh persistent and and and difficult
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problems coming out of the bankruptcy I
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think and having to work through so many
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things has left the the companies and
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the unions and the union working uh
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quite well together I think the big
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question on everybody's mind if GM
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returns and is highly profitable is will
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the Union want to revisit some of the
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concessions that they've made and what
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will the company's stance be to that I
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think the company's position would be
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this was a necessary resetting of some
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of their labor costs and and shouldn't
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be you know uh viewed as a temporary
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concession to be negotiated away the
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union feels that they uh that they made
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an awful lot of of sacrifices to help GM
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survive in in this period including
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becoming uh one of one of the owners as
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as part of the agreement for how to fund
00:16:28
these these Healthcare and Pension funds
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and finally the um as you well know the
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the pressure on every publicly traded
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company to perform quarter to quarter is
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immense um yes what will what will wall
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Street's view of GM be now will will
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will GM feel that pressure quarter to
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quarter to show profit after profit
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after profit will will institutional
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investors give the company a break
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because it's coming out of uh bankruptcy
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and and therefore we'll give it some
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time to get it land on its feet and get
00:16:59
SE legs and and and work through some
00:17:01
issues or not how do you see that
00:17:02
relationship going
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forward well we don't we don't know of
00:17:06
course uh I suspect that the Goodwill
00:17:10
and the you know the the openness to
00:17:13
kind of giving Jam a chance will be
00:17:15
relatively short-lived the feeling will
00:17:18
be they have to continue to prove
00:17:19
themselves uh there's several things
00:17:22
which I think make it likely that GM
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will be able to keep uh keep investors
00:17:27
satisfied for a while
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some of it is has to do with the uh
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return gradually of the US Auto Market
00:17:35
to closer to Historic levels of sales so
00:17:39
um in the crisis that level had been
00:17:42
around 15 thou 15 million a year 15 16
00:17:46
million sometimes reaching as high as as
00:17:48
as 17 plus in the crisis sales plunged
00:17:51
to 9 million so a 40% Plunge in sales
00:17:55
within a couple of months this year it
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looks like they'll be about 12 million
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the uh historical trend on replacement
00:18:03
volume in other words how many people
00:18:05
replace their their vehicles each year
00:18:07
is about 13 million of course a car you
00:18:09
can hold on to for a while if you need
00:18:12
to and that's what a lot of people have
00:18:13
been been doing so you know as sales
00:18:16
return 13 million seems likely to happen
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very soon and then we may be back to 14
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15 million um there's a lot of upside
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for GM for Ford for Chrysler for all of
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the companies in the US market to uh to
00:18:31
be getting a part of that uh those sales
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uh GM also is selling very well in
00:18:36
emerging economies where more of the
00:18:39
growth is so in the US it's a recovery
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but to what will be a relatively low
00:18:44
level of growth in these emerging
00:18:46
economies like like China and Brazil and
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and and Russia and India there there's a
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lot of growth and GM is quite well
00:18:52
positioned in those markets so between
00:18:56
the recovery of Us sales and the global
00:18:59
sales and the current strong products I
00:19:02
think uh things look good for them for a
00:19:04
while but of course they will have to
00:19:06
particularly with the the stream of
00:19:08
successful new products have to keep
00:19:10
that going and I think they'll also have
00:19:12
to show good management of uh their
00:19:16
Global scope in finding ways to turn it
00:19:19
to their advantage John Paul McDuffy uh
00:19:23
professor of management here at the
00:19:24
Wharton School thank you very much thank
00:19:26
you Steve my
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pleasure for
