General Motors and product development

Let’s start with a chart.  The Economist recently ran this spiffy graphic based on European Commission data showing which companies spend the most on research and development (Research and development Hey, big spender, Nov 20th 2009):

In some ways, the list contains some likely suspects.  Pharmaceutical firms and large technology companies are well represented.  I, however, was a little surprised to see Toyota atop the list by a non-trivial amount.  Further, many other automakers up there as well.  In some ways, this makes some sense.  Developing a new vehicle is very expensive and all of the big car makers are now trying to expand globally.  That means developing a car for [Name Your Favorite BRIC Country] while still tending to home markets.  On the other hand, the last few years have been tough on auto makers.  And look: General Motors is 5th!  How did that happen?  How did a firm that is basically a ward of the state end up investing so much in R&D?

What’s perhaps more surprising is that the New York Times reports that they are getting to spend even more (A Flush G.M. to Lavish Cash on New Vehicles, Dec 7).  AS GM exited bankruptcy, they piled up a stash of cash with which they plan to revamp their product line. Plans range from the electric Chevy Volt to a Caddy to match up against BMW’s 3-series.  In some ways, the focus is as much on speed as volume:

At a meeting last month, directors offered to put another $100 million into the Chevrolet Volt if the company could get the battery-powered sedan into production sooner than its current start date in November, according to people with knowledge of the board’s move. Dedicating more money for the Volt would not necessarily move up its timetable, said Jon Lauckner, G.M’s vice president for global product planning. But it could allow G.M. to build more vehicles for consumers to test-drive before full manufacturing begins. “We have already reduced the Volt’s development time by about seven months,” Mr. Lauckner said in a recent interview. “Our date with destiny is November of 2010, but it could be useful for us to have the money to get some vehicles to consumers earlier than that.”

Beyond throwing around money like a sailor on shore leave, the company is taking a different tack with its suppliers:

The new Cadillac will also benefit from what [CEO Ed] Whitacre hopes is a big change in how G.M. works with its suppliers.

In the past, the engineering team would produce specifications for parts and then turn them over to the purchasing staff to get the lowest price.

Now, the engineering and purchasing executives are meeting together with important suppliers to stress that G.M. will pay top dollar if it gets the most advanced technology before other automakers.

“With the BMW fighter, the steering in that vehicle is going to be absolutely critical,” said [Mark] Reuss [head of G.M.’s North American operations]. “In the past we would have gone to the lowest cost source, but not anymore.”

I found this last quote quite interesting.  Long ago, I wrote a case about GM’s attempts to revamp its purchasing under José Ignacio (“Inaki”) López de Arriortúa.  López had worked under Jack Smith (who by the way, replaced Lloyd Reuss — ie Mark Reuss’ dad — as President of GM) at GM Europe and was brought into revamp (i.e. scare the bejesus out of) GM’s North American supply base.  He ultimately jumped ship to Volkswagen and faced charges of corportate espionage.  But in his tenure at GM he brought a fanatical focus on cost.  Some of this was long over due.  For example, he forced GM’s division to consolidate purchasing of commodities and parts that were not critical to performance or consumer evaluation of the product (e.g., windshield washer reservoirs).  At the same time, he also made some suppliers a little leary of GM.  When researching the case, I had one exec of a large supplier say that if he had some spiffy new technology, GM would not be the first buyer he would call.  He just didn’t trust them to treat his firm fairly in developing and implementing the technology.  It will be interesting to see whether the “new” GM can actually maintain good supplier relations over the longhaul without backsliding.

Suppose that GM is successful in launching some wonderful and exciting vehicles.  Will that bring success in the market?  Maybe not.  The problem is that GM and Ford as well as Chrysler/Fiat are all targeting the same parts of the market that are currently domianted by Asian firms (U.S. small-car rush may create oversupply, Automotive News, Dec 9):

Globally, automakers and governments are estimated to spend about $428 billion a year by 2020 under a worldwide push for promoting greener transportation, CSM said.

Increasing competition in the subcompact and compact segments, which have long been dominated by Asian automakers, may also hamper Detroit automakers’ goal of making money on selling small cars, CSM said.

CSM CEO Craig Cather said, “It is very possible that U.S. automakers will not achieve their objectives of selling small cars at a profit.”