"General Motors will go bankrupt in the next 10 to 20 years and the US market will become a desert for the automotive industry." This unlikely prediction was made by Li Shufu, chairman of Geely Automobile Holdings, back in 2001 during a heated automotive forum in Beijing.

At the time, Li's words infuriated representatives of both GM and Ford, a number of whom stormed out of the meeting in protest. Just how seriously Li, himself, took his off-the-wall prediction at the time will, perhaps, never be known, however, its accuracy, eight years later, is now beyond dispute.

On June 1, the humiliated US automaker finally filed for Chapter 11 bankruptcy protection to the US government. This historic move made it the largest ever US industrial company to file for bankruptcy and the fourth largest US company overall to make such a move - behind only Worldcom, Washington Mutual and Lehman Brothers.

The company's fall from grace is made all the more spectacular by looking back at its years of almost unparalleled success in the automotive sector. The company was the global sales leader in the sector in for the 77 years from 1931 to 2007.

General Motors manufactured cars and trucks in 34 countries, employed 244,500 people around the world, as well as selling and servicing vehicles in some 140 countries.

Latterly, though, the collapse of the ever-biggest automaker had become to seem inevitable. Zhang Xin, an auto industry analyst with Guotai Jun'an Securities Co in Beijing, represents the views of many: "Even if there was no financial crisis, GM would still have folded. It had simply amassed too many problems during its long history.

"By the time the company woke up to the reality of the problems it was facing, it was far too late for them to be addressed. The successes and failures of GM, however, should be an object lesson for many in China's domestic automotive industry, especially for those in the independent sector."

Irrational expansion

Zeng Zhiling, a senior analyst with Global Insight Inc in Shanghai, blames an irrational and unfettered impulse to expand and acquire as the source of many of GM's woes: "GM's voracious appetite for acquisitions and mergers and its investment in new brands made the company a hugely bloated business, but, whilst it looked big, it was actually far from strong."

During the course of 2008, GM sold 8.35 million cars and trucks globally under its 12 brands of Buick, Cadillac, Chevrolet, GMC, GM Daewoo, Opel, Vauxhall, Holden, Pontiac, Saab, Saturn and Hummer. However, its core assets focused on only four brands - Buick, Cadillac, Chevrolet, GMC. It is these four key assets that it has sought to maintain in its bankruptcy protection filing.

Although it has now reached agreements to sell Saab, Opel and Hummer separately, the prices of the deals has nosedived. The subsequent shortfall in profits, then, is the inevitable outcome of the company's irrational acquisition policy.

Zeng says: "Chinese automakers, with just a decade of trading under their belts, should learn from this and focus on strengthening their own capabilities and optimizing their production structures, rather than rushing into expansion through ill-thought-out acquisitions, especially those involving overseas companies."

A case in point is the recent move by the Sichuan Tengzhong Heavy Industrial Machinery Co Ltd, a small-scale industrial company with no experience in the automotive industry, who have put in a bid to acquire GM's premium off-road brand, Hummer. The proposed deal has already been dogged by speculation that it will be vetoed on environmental grounds and because the purchaser lacks the experience to manage the US-based business.

Commenting in the likely collapse of the deal, Zeng said "Domestic automakers should be very cautious when it comes to mergers and acquisitions. The two sides need to have similar corporate cultures and the same long-term development priorities."

Zhang Zhiyong, the chief auto analyst with SDR Consulting Group, is even more scathing when it come to the current advisability of acquisitions: "The multi-brand strategy makes it easy to confuse a company's overall brand positioning. It also reduces management efficiency as senior staff are obliged to divide their attention, time, and resources across a number of different brands.

"Currently local automakers are tempted by the multi-brands strategy as way to access more market segment. I hope that many of them will learn from GM's failure to make a success of the strategy."

Zhong Zhi, a Beijing-based independent auto analyst, believes Chinese automotive companies are better looking to their Asian neighbors for inspiration rather than to the US: "Chinese homegrown auto producers should learn from Toyota in Japan. They focus exclusively on producing small and economic cars, all under their own brand."

Oil consumption

Statistics show that 20 percent of the world's carbon dioxide emissions are created by the automobile industry - of which US vehicles contribute some 45 percent. Remarkably, GM vehicles alone account for 31 percent of the total US auto carbon dioxide emissions.

Zhong says: "GM traditionally focuses on large, gas-guzzling cars, even though consumers have now changed their preference and are increasingly looking for economic, more environmentally friendly vehicles."

Early in 1978, with the advent of the second global oil crisis, GM's rivals in Japan, South Korea and Germany began to shift their focus toward developing smaller, more oil-efficient cars as a response to the challenges of the energy crisis.

However, GM maintained and even expanded its output of fuel-heavy pick-ups and SUVs. With increased competition from more eco-friendly Japanese and Korean imports, GM's US market share fell from 50 percent to its current low of 20 percent.

Somewhat belatedly, in the late 1990s, GM invested $1 billion in the production of an electric car, the EV1. Despite its popularity in its domestic market, GM pulled the plug on its production in 2000 and it had all but disappeared from US roads by 2004.

Meanwhile, its Japanese rival, Toyota, persisted with the development of its hybrid vehicle, the Prius. It is no coincidence that, in 2008, Toyota finally overtook GM to become the world's largest automobile manufacturer. Looking back, GM's ex-CEO, Rick Wagoner, once admitted that abandoning the EV1 was his biggest regret.

Zhong would agree, seeing GM's fate as inevitably tied in with its inability to match the changed mood of its one-time customers: "Along with increasing oil prices, Chinese consumers pay more and more attention to energy efficiency when they are thinking about buying cars. However, despite this, some homegrown automakers are now developing larger and more luxurious cars, even though smaller and more economic cars are clearly the future of China's auto industry."

Currently, two third of China's refined oil supply is consumed by the automobile industry, a fact that is leading manufacturers to re-assess their future production priorities.

Li Anding, a senior auto commentator with Xinhua News Agency, says: "Chinese automakers need to pay attention to the research and development of new energy sources and new technologies. This will require a huge long-term investment.

"They should learn from Volkswagen and Fiat, companies which now have a distinct focus on the development of practical and feasible green energy solutions, including economic engines, clean diesel, and a dual-clutch gearbox, a low-cost route to cutting a vehicle's oil consumption with not so high cost. There is no need to waste millions or billions of yuan on the development of unpractical technologies with an unclear future."

Such concerns will be paramount among many Chinese automotive companies at a time when the country's industry is already facing a period of change. The Chinese government announced in its auto industry restructuring plan earlier this year that it intends to cut the number of major Chinese auto groups to just ten or less from its current level of 14.

It also wants to see the emergence of two or three mega-manufacturers, with annual outputs of more than 2 million vehicles apiece. Last year the top performer was SAIC, which produced 1.7 million vehicles.

(China Daily June 29, 2009)