C. Gopinath

Having been at the head of the world auto industry, GM finds it difficult to accept that others may have better ideas about how to compete to win. Instead of a small team to make quick operational decisions, it is gunning for a mammoth alliance. But will that steady the course?

If I was the Chairman of Toyota, I would be getting ready to throw a party. Events that have been moving fairly rapidly over the last few weeks may shake up the auto industry scene. On July 17, the GM board decided to study the prospect of entering into an alliance with Renault and Nissan, which would give the latter possibly a 20 per cent stake in GM and some control. To put it in Japanese terms, GM is entering a process of committing seppuku, the Japanese form of ritualistic suicide.

The story began when GM shareholder, Mr Kirk Kerkorian, proposed a three-way alliance towards June end. Such alliances are ostensibly meant to benefit all the parties involved. Some GM factories that are slated to shut down would survive by building Nissan cars. All three parties benefit by sharing technology and costs of new car development. They may also gain in cost reduction what with a bigger negotiating power with their suppliers.

The pitfalls

Nissan-Renault may benefit from increased access to the US market. Of course, all this is on paper and there are `ifs' for every one of the supposed benefits. If they are going to share technology and save development costs by having common vehicle platforms, then the customer is going to see fewer models from this group and may look elsewhere for variety, hurting sales further. If the size of the purchases GM already makes from its suppliers is not giving it cost advantage, perhaps its purchasing policies need looking into, not just increasing the quantities purchased.

The wild speculation in the market was that Mr Kerkorian wanted to get Mr Carlos Ghosn, Head of Renault-Nissan, as the helmsman at GM. Mr Ghosn is truly a global manager. Born in Brazil of Lebanese parents, Mr Ghosn was sent by Renault, a French company, to run its Japanese subsidiary, Nissan. And he made a big success of it and became a celebrity in Japan.

Mr Kerkorian thought his magic touch was needed for GM. This also means that Mr Kerkorian wanted Mr Richard Wagoner, the current Head of GM, to exit. A rather expensive way to fire a CEO.

Mr Ghosn and Mr Wagoner met on July 14 and agreed to study the three-way alliance. Mr Ghosn reduced some of Mr Wagoner's anxiety by saying that with Renaultnot doing too well, it needed his attention. With Nissan's success behind him, he would not want a failed experiment at GM to mar his glowing resumé.

GM has been on a decline for some years now. It has wavered between profit and loss but its market share has fallen steadily, from 40 per cent in the 1980s to about 20 per cent now. If Nissan-Renault are to get a stake in GM, their shareholders may find it rather strange.

Mr Kerkorian's role in the GM turnaround represents several interesting approaches to corporate control. Managements of companies in decline often move into a mode of insularity. Various top management teams come and go, each proposing a solution.

Some show short-term results and then move on without really fixing the deep-seated problems. It is difficult for an incumbent management to accept that its solution is not working. That is when an external agent can intervene and create a shock or a crisis situation to make the management think out of the box..

Mr Kerkorian has played that role. He first acquired 9.9 per cent equity in GM. This made him the largest individual shareholder in the company. (Three others with larger equity holdings are institutions thatcollectively own 40.4 per cent.) Mr Kerkorian decided to use his clout to get a voice in the company. He got his representative, Mr Jerome York, nominated on the board; Mr York questioned GM's management and suggested other options.

They made GM cut its dividend and directors' pay. Together they discussed the issue of a possible alliance with Mr Ghosn before informing Mr Wagoner and GM's board.

The problem with this method is when we begin to attributemotives to the external agent. Mr Kerkorian does not want to wait for Mr Wagoner's turnaround plan to work, but would like to cash out his investment and move on.

Nothing wrong with that for, extending Adam Smith's argument, Mr Kerkorian's pursuit of his self-interest will help all shareholders if the company is put on a growth path. The only issue with this is that theaim here is not therevival of the company but a rise in the share price in the short run and the two are not the same.

The corporate raider

Mr Kerkorian's track record is that of a corporate raider. His intentions become clear from the way Mr York's compensationis chalked out. Mr York does not get his pay as a member of the board from GM. He has a side-deal that gives him 4 per cent of any gains from Mr Kerkorian's investment in GM. For any $1 increase in GM's share price, Mr York will get $2.2 million (Rs 9 crore), as long as Mr Kerkorian's investment is in the black! So , in essence, there is an extra-constitutional authority sitting in GM's boardroom, influencing actions only with an eye on the rise of GM's stock price in the short run. The company's long-run interests are given the go-by.

Their moves have already paid off. Soon after his acquisition, Mr Kerkorian saw the value of GM shares dive, but when he announced his idea of an alliance, the price rose back to what it was when he purchased his shares. They are now hoping that Mr Ghosn's name would edge it up a little more, then Mr Kerkorian can quit.

Debt-holders happy

Many debt holders who were afraid that GM would file for bankruptcy think they will be better off with the alliance. GM has entered into several alliances over the years. Most recently, it burnt its fingers with its alliance with Fiat of Italy when it had to pay $2 billion (Rs 9,000 crore) to get out of it.

GM's partner in China, Shanghai Automotive Industry, has announced its intention to start making its own automobiles in competition with the alliance.

Mr Ghosn believes that the companies should consider building hybrid vehicles. He is probably unaware that GM had such an agreement with Toyota before it withdrew from it some years ago.

The consensus of auto industry observers has been that the alliance partners have generally benefited more from those alliances than GM. Not having made much of two-way alliances, how far will a three-way alliance work? And a European-US alliance in the auto industry has not had a particularly glowing track record.

Ask the folks at DaimlerChrysler. The market value today is about $42 billion (Rs 1,89,000 crore) less than it was when they tied the knot. Of course, the consultants who promised all kinds of synergies must have collected their fees by now.

Instead of a small-empowered team at the head of GM ready to make quick operational decisions with the confidence of the board, it is gunning for a mammoth alliance, with one more layer of management.

There will be an Alliance Board, with Mr Ghosn and his crew on it, which will have to approve all material transactions between the companies sitting on top of Mr Wagoner or whoever succeeds him, and Mr York down the hallway will continue second-guessing Mr Wagoner's every move.

Now you know why it is time for Toyota to celebrate.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is acgopinat@suffolk.edu)

© Copyright 2000 - 2009 The Hindu Business Line