GM Measures “The Lutz Effect”

The Corvette roars onto the track, blasting through a series of tight turns. Finally, its tires smoking, the sports car screeches back into the pits, the driver’s door swinging open, almost before it has come to a complete stop. The driver pops out, yanking off his helmet to reveal a thick head of silver-white hair and, despite his 72 years, a charmingly boyish grin. On a warm September afternoon at the Formula One track near Nice, France, there was no question that Bob Lutz is in his element.

A one-time Marine pilot, Lutz holds the formal title of chairman at General Motors Corp, but his informal designation is far more revealing. The septuagenarian executive is GM’s “car czar,” charged with transforming the automaker’s product development system, and the vehicles it rolls out.

Once able to dictate everything from design to pricing, GM is no longer the industry trendsetter. Its share has tumbled by half since the late 1970s, and it’s now, as often as not, in the position of having to follow the lead of its import and domestic rivals. The decision to hire Lutz over the summer of 2001 reflected the pragmatic recognition that high-tech factories, slick marketing campaigns, even lavish rebates couldn’t turn things around for the long-struggling automaker. Only an array of world-class products would reverse the steady decline.

Yet in an industry with lead times measured in years, the first of the cars and light trucks with the Lutz stamp are just beginning to reach market. Earlier this month, GM offered a select group of automotive journalists the chance to experience some of them — products such as the redesigned Corvette and new Pontiac G6, as well as other vehicles produced by GM subsidiaries around the world.

Devine intervention

More than two dozen senior GM executives — including not only Lutz, but chairman and chief executive officer Rick Wagoner, chief financial officer John Devine, and various regional managers — took part in a background briefing intended to show that the automaker has finally learned the lessons from a long-running crisis that nearly drove it into bankruptcy a dozen years ago.

There’s no doubt of the pecking order at GM. Wagoner is the corporate ringmaster, reigning in a far-flung empire that long operated like a bunch of autonomous fiefdoms.

That’s an unacceptable situation in an industry, declared Wagoner, where “ever-tougher competition” is driving down prices and profits “everywhere in the world.” Even before he assumed the chairman’s title, Wagoner’s central theme was to get GM “increasingly acting as one company,” a manufacturer creatively leveraging its global resources to support its regional operations.

Nowhere is that more obvious than in South Korea, where the former Daewoo Motors — now GM Daewoo Automotive Technologies, or GMDAT — is rolling out an array of small and midsize products that are being sold under a variety of GM nameplates around the world. Come next January, GMDAT products will be marketed in Europe under the Chevrolet badge, Chevy to serve as a new entry-level brand beneath GM’s well-established Opel marque.

The idea is not to produce bland world cars, cautioned Wagoner, “but vehicles tailored to regional and local markets.”

N.A. is critical

Nowhere is that more critical than in the home market, where GM has lost an average of nearly one point of market share annually since the last oil crisis in 1979. With its share currently around 28 percent, the automaker remains by far the giant of the American industry, but “We know that leadership is not our birthright,” declared Lutz during the session in southern France.

There’s no question that Lutz has had a significant effect on GM over the course of his three-year tenure. He’s abandoned an ineffective emphasis on brands over products, streamlined engineering operations and empowered GM’s once-authoritative design center to take the lead in product development.

Yet as one well-placed source complained, the automaker is “like a hydra,” and not much more manageable. Even the simplest details have a tendency to slip out of control. When GM designed the new Corvette, it originally planned to use expensively grained, low-gloss plastics for the center console. By the time production began, suppliers were shipping a cheaper material that looked like it came from a discount store’s bargain rack.

Lutz growls in frustration when such matters are pointed out. His critics question whether there will ever be the “Lutz Effect,” the holy grail of product development that will transform products into truly world-class competitors.

“I’d have to tell you the Lutz effect is going to be gradual,” the former Chrysler Corp. president candidly admitted. It’s beginning to appear in products like the Corvette and STS, he insists, but Lutz contends the products hitting market for 2005 were already under development when he got there, so, “It’s going to be another year or two before you see the all-new products created under my leadership.”

Saturn gets a nod

Perhaps the big test of the Lutz Effect will be seen at Saturn, the troubled GM division that has long been starved for product. The automaker has announced plans to more than double the number of market segments Saturn competes in over the next three years.

But Saturn isn’t the only chick in the nest. GM will need to spread its resources around a global empire that is becoming more desperate than ever for product as the competition shortens product development cycles and as the industry fragments into more and more distinctive vehicle segments.

Wagoner’s global strategy should help Lutz feed the product development machine. So will the gains made on the manufacturing side. Less than a decade ago, GM was the least efficient of all the automakers operating in North America. Today, many of its plants rival the best of the Japanese, with three of the top four assembly lines in the latest Harbour Report, a study of manufacturing productivity. The typical North American vehicle requires 23 hours of labor, said North American President Gary Cowger, down from 40 in 1999.

Cutting manhours by nearly half is a significant achievement, but there’s a dark side to GM’s efficiency drive. In the U.S., the automaker now has about 150,000 employees — and another 1.1 million retirees and their dependents collecting benefits. Last year, the automaker had to come up with a hefty $20 billion to cover an underfunded pension program.

But health care is “today a bigger and more serious issue,” according to CFO Devine, and one that is adding several thousand dollars to the cost of each car GM builds in North America. “We’re spending as much on U.S. health care in North America,” he noted, “as we spend on capital” expenditures. And with health care growing at a roughly double-digit rate, the problem is only getting worse, warned Devine.

Though the situation may not be quite so severe, the fact is that each of GM’s regions has problems of its own. Even in China, where sales and market share are growing at exponential rates, GM has no guarantee of leadership.

Yet there’s no question that the automaker is, today, in significantly better shape than it has been in decades. Leadership clearly is not a birthright. There are plenty of challenges ahead, but based on insights offered by corporate leaders during their four-day background session, GM is taking many of the necessary steps to regain its position as one of the auto industry’s global trendsetters.

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