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Business, Featured - Written by on Saturday, June 28, 2008 14:01 - 9 Comments

Wikinomics Report Card: General Motors

Can Wikinomics Keep the 77 Year Streak Alive?

This week’s edition of the Wikinomics Report Card will focus on General Motors Corporation (GM). In case you missed my first report card about Major League Baseball, you can find it here. Like last week, I will be evaluating GM on the Wikinomics principles of being open, peering, sharing, and acting globally.

Company Background: GM was founded in 1908 and is the world’s largest automaker and leader in global sales for the last 77 calendar years. It manufactures cars and trucks in 35 different countries under the brands Chevrolet, Buick, Cadillac, Pontiac, and many more. Under the strength of Alfred Sloan’s revolutionary corporate structure and leadership, GM was once one of the world’s most profitable companies peaking in the early 80’s with a U.S. market share of 45%. However, the legacy costs and complex accounting systems associated with the Sloan era have hindered GM’s efforts to create a more lean manufacturing process. Stiff foreign competition from companies like Toyota and poor strategic decisions like focusing on SUVs and light trucks in a rising fuel market has led GM to one of its weakest points in its history. Yesterday, its stock reached a 53-year low after Goldman Sachs changed it status to “sell”. GM is hoping that it can weather this storm long enough to introduce its new line of alternative energy vehicles like the Chevy Volt and reclaim some of its former glory.

Being Open: Traditionally, GM has been a very closed organization. Even internally, its different brands acted with a silo mentality. In the Alfred Sloan era, GM used espionage tactics to quell union uprisings and in the mid 20th century, GM was blamed for killing American public transportation in the Great American Streetcar Scandal. In the 1990’s GM was accused of killing the electric car so that it could sell its high margin SUVs and trucks. GM had a fully functional electric car with the EV1, but scrapped the program entirely in 2003. Despite an offer of $1.9 million for the 78 EV1s already produced and a waiting list of customers, GM stripped the car of its recyclables and crushed them. However, in recent years, GM has made great strides in opening up. GM’s chairman and CEO Rich Wagoner admitted that the worst decision of his tenure was “axing the EV1 electric-car program and not putting the right resources into hybrids. It didn’t affect profitability, but it did affect image”. GM’s R&D chief Larry Burns said that “if we could turn back the hands of time, we could have had the Chevy Volt 10 years earlier.” Admitting this mistake is a big step in being open and acting with integrity in the new era. GM has started by being very public and transparent about its production plans for the Chevy Volt. Also, GM is one of the few car companies to have higher executives and “Car Czar” Bob Lutz blog on a regular basis. GM continues to act more openly, it should be able to repair its damaged reputation.

Grade: D+

Peering: Although peer production of automobiles is very difficult with today’s technology, GM has been able to leverage peering very well in its marketing efforts. From our paper on the 8 Net Gen Norms:

Net Geners are also helping develop advertising campaigns. GM invited consumers to a newly built Web site that offered video clips and simple editing tools they could use to create ads for the Chevy Tahoe SUV. The site gained online fame after environmentalists hijacked the site’s tools to build and post ads on the site condemning the Tahoe as an eco-unfriendly gas-guzzler. GM didn’t take ads down, which caused even more online buzz. Some pundits said GM was being foolhardy, but the numbers proved otherwise. The Web site quickly attracted more than 620,000 visitors, two-thirds of whom went on to visit Chevy.com. For three weeks running, the new site funneled more people to the Chevy site than either Google or Yahoo. Most importantly, sales of the Tahoe soared.

This hugely successful campaign generated a lot of buzz for GM at a very minimal cost. With GM’s negative operating margins, cutting down advertising expenses through peering could greatly reduce costs and improve the bottom line.

Grade: B+

Sharing: GM has done a great job involving itself in joint ventures and collaborative efforts over the last few years. GM is the majority stakeholder in the Korean automaker Daewoo, and has collaborated with many of the world’s auto manufacturers. This includes product, powertrain and purchasing collaborations with Suzuki Motor Corp. and Isuzu Motors Ltd. of Japan, advanced technology collaborations with Toyota Corporation and BMW AG of Germany and vehicle manufacturing ventures with several of the world’s automakers including Toyota, Suzuki, Shanghai Automotive Industry Corp. of China, AvtoVAZ of Russia, Renault SA of France, and most recently, UzAvtosanoa of Uzbekistan.

More importantly, GM has decided to outsource its battery development for its future cars like the Chevy Volt whereas Toyota has decided to develop their battery technology internally. Toyota’s closed attitude and lack of collaboration could eventually lead to a technology gap between itself and GM. While Toyota has profited from selling its superior hybrid software and technology, they may lose out to GM in the future if they remain on this path.

Grade: A-

Acting Globally: GM’s ceo Rich Wagoner expects that 75% of its car sales will be outside the U.S. within a decade. GM is the largest overseas automaker in China and is GM’s second largest market after the United States. After growing sales by 27% each year for 5 years, the GM’s China sales grew 19% last year. This success is largely due to the success of their joint venture between them and Shanghai Automotive. GM is building a new research centre in Shanghai focused on hybrid technology. This is GM’s first venture that is completely separate from Shanghai Automotive. The announcement coincided with the Chinese Government’s powerful National Development and Reform Commission disclosing that it would provide subsidies to alternative fuel vehicles under certain conditions. One major condition was that critical parts must be manufactured in China. While Toyota assembles its cars in China, the critical parts are manufactured and shipped from Japan. This should give GM a big head start in selling hybrid vehicles in China. If GM can repeat its success in China in other emerging markets, it may be able to keep up with Toyota’s sales in the future.

Grade: A-

Overall Verdict: GM is in a very deep hole right now. They are losing around $2 billion a month, and even the new initiatives outlined above won’t act as a quick fix. However, they are building quality cars once again, and seem to be making a lot of great moves. Since the stock is at a 53 year low, this (more like a year from now) may not be a bad time to invest in some GM stock. If the Chevy Volt goes into production on schedule in 2010, high gas prices should propel its sales, and more importantly GM’s corporate image. If 10 years from now, 75% of GM’s sales come from outside the U.S., and its legacy cost issues are solved, they could reclaim the crown from Toyota.

Overall Grade: B

What are your thoughts? Could you see yourself driving the Chevy Volt (above) in 2010?



9 Comments

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Brendan Dunphy
Jun 29, 2008 5:20

“More importantly, GM has decided to outsource its battery development for its future cars like the Chevy Volt whereas Toyota has decided to develop their battery technology internally. Toyota’s closed attitude and lack of collaboration could eventually lead to a technology gap between itself and GM. While Toyota has profited from selling its superior hybrid software and technology, they may lose out to GM in the future if they remain on this path.”

I admire your optimism but I think this decision is driven by economics rather than strategy as GM does not have the dollars to invest in developing a solution but Toyota does.

Battery technology is THE key differentiator in electric vehicles and GM is in danger of having the same solution as everyone else as a result of this decision, a poor platform to succeed.

You need to be careful about suggesting Open = good and Closed = bad.

Innovation theory suggests that it makes sense to develop proprietary solutions (ie closed) when outsourced (ie open/modular) ones are currently ‘not good enough’ and this is certainly the case with battery technologies today. This is because a proprietary solution attracts a premium in the market and the Apple iPod is a good example of this theory in practice today.

It is possible to develop proprietary solutions collaboratively as Apple have and Toyota are, but the result is a proprietary and differentiated solution. The result can then also be made available under license to competitors such as GM (another possible scenario here).

I think this decision reflects the dire state GM is in and no matter how you twist it this decision does not look good but rather pragmatic!

Bob Griffin
Jun 30, 2008 0:47

I recently visited a Chevy dealership. It was such a strange experience for me, since I have owned Toyota products exclusively for the last 15 years. But I was curious. I asked to drive their mid-level Malibu, since I had read good things about it and decided to test the vehicle first hand. I was not expecting much, frankly.

I was shocked. The car is beautiful, inside and out. It is very quiet, it performs responsively and with plenty of power, gets reasonably good gas mileage, and had numerous bells and whistles that are appealing. I had a very good driving experience. I wish that it was E85 worthy, since ethanol is finally coming to a station near me. Still, for the first time in decades, I had my head turned by a Chevy. If it used alternative fuels or better, were a plug-in hybrid vehicle, I’d consider it instead of the Toyota or Nissan plug-in hybrid I’ll probably buy in 2010. But it is a great car, just a decade too late to make a difference in the automotive world we find ourselves in.

Bob Griffin
Jun 30, 2008 1:04

What about the Volt? If it impresses me as much as the Malibu did recently, I might pay the anticipated premium dealers will tack on to buy it. But I’m going to be cautious. Toyota has been building the Prius for years and its new PHEV will build on that experience. So I’m more likely to buy Toyota’s experience and longstanding quality first. If the Volt and its successors succeed in the market and don’t have a high incidence of problems, I would move to the GM product later, since I’d like GM to survive. I’m inclined to let someone else explore their new product efforts first.

Ben Letalik
Jun 30, 2008 10:22

Very interesting comments:

@Brendan: You bring up an interesting discussion. Around these parts, it is often assumed that open = good and closed = bad. However, I think in this case it is true.

While GM’s approach to their battery development may be more cost effective, I don’t think cost is their primary reason. GM actually increased its R&D budget from $6.6 to $8.1 billion last year despite losing $1 billion a month in cash.

As you say, their open solution may result in having a similar platform to everyone else but I think a lot more goes into developing these cars than either you or I think. The only company (to my knowledge) that has announced a plug-in hybrid electric vehicle by 2010 is Toyota. However, Toyota has had a very late start in developing lithium-ion batteries as they recently switched from nickel-hydride. I personally know very little about how this technology works, but I recommend Matt Jansen’s blog on techblorge if you are interested in comparisons between GM’s Volt and Toyota’s Prius. One post on the blog says that Toyota may be developing a battery that blows GM’s lithium-ion batteries out of the water. If this is true and comes to market relatively soon (before a hydrogen network can grow), then Toyota’s closed approach may prove very effective.

Also, I think GM’s battery development probably falls into the “developing proprietary solutions collaboratively” category. The Volt’s solution is different enough from current offerings as it no other car can run purely on electricity for as long as the Volt promises to. Although the details on Toyota’s plan are still murky (a function of them being more closed), it seems to involve a close partnership with Panasonic’s electronics supplier with a factory built in central Japan. As I stated in my original post, this does not bode well for selling its future electric vehicles in China.

However, only time will tell which approach will prove to be more effective. I think the Volt is poised to do very well in North America with its sleek, muscled design combined with its practical implications.

P.S. I really enjoyed reading your innovation blog.

Ben Letalik
Jun 30, 2008 10:37

@Bob: Thanks for sharing your experiences with the Malibu. From what I’ve read, the Chevy Malibu has been getting great reviews so far. Just think, this is a car that wasn’t even originally designed as a hybrid vehicle. The Chevy Volt has been designed as an electric vehicle from day 1, and gets great gas mileage even when running fully on gasoline. Its price, while high, may be more reasonable than you think. GM originally targeted a $30,000 USD price tag, but it’s looking like it might be more in the range of $35,000. Of course, this is before possible government subsidies. Matt Jansen, who I mentioned above, does a great Volt vs. Prius price comparison which shows that the Volt may pay for itself quickly.

There is already a 10,000 name long list of people who will buy the Volt, so I think your strategy of wait and see will work out well. Also, I think a lot of Americans share your sentiment about wanting GM to survive. Therefore, if the Volt delivers on its promises, it could go a long way to digging GM out of its hole.

Wikinomics » Blog Archive » Wikinomics Report Card: Blizzard Entertainment
Jul 4, 2008 15:02

[...] gaming companies. In case you missed my last report card about General Motors, you can find it here. Like my previous entries, I will be evaluating Blizzard on the Wikinomics principles of being [...]

jordan
Jul 4, 2008 18:02

you picked a very interesting company, at a very interesting time to write a report card on. if you haven’t heard, gm stock closed at around $10 today, roughly half what it was worth less than 3 months ago, and a quarter what it was about a year ago. it’s unfortunate to see gm struggling, as its success clearly affects the entire industry, case in point is progressive moulded products announcement to slash 2000 jobs in response to gm plant shutdowns.

the whole issue regarding the chevy volt and its potential success is enough for its own case study. although there are names written down who would purchase a chevy volt, its success is dependent on more than just product hype, and consumers who may potentially be full of just as much hot air as bob lutz. this is essentially gm’s last chance at delivering a solid, innovative product.

another point of interest the “new” chevy camaro. i see it as a huge marketing fiasco. what began as a vehicle with arguably as much attention as the chevy volt has calmed down to mere whispers, as consumers await its arrival. heck, i think the concept was first presented in 2006. transformers came out a year ago, presenting the perfect marketing platform, and yet, the camaro still isnt out.

the next couple months are going to be very interesting. i think a follow-up article in a couple months on gm and its attempt at recovery would be a very interesting read.

D Staples
Aug 1, 2008 22:26

With the rising profit drops in the automotive sector
when will they cry for a bailout just as the airlines andbanks have done.
these sre may union workers, and work is slowing.
Is GM and the others going to file bancruptcy
Or will the decline continue.

GM posted a 15 billion dollar loss, others are posting large losses and no gains.

A bailout will change the aspect of American Automobiles

Kyle Billing
Nov 23, 2009 17:29

I believe that the volt, and only the volt should be GM’s car production this year, the cost of the car itself would be substantially less due to the fact that they would be produced everywhere. If GM can make an all electric vehicle that doesn’t require the mining of fossil fuels, then why don’t they make all thier vehicles electric, wouldn’t this be a good thing for the economy, and the planet?

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