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Ours to Lose
Remarks by Rick Wagoner
Thank you, Tom [Shaver, Senior Partner, J. D. Power &Associates] – it’s great to be here. This morning, I’d like to talk about the outlook for the U.S. automotive industry – with a decidedly upbeat outlook. Most auto industry speeches these days go something like this: 1.) The economic outlook is uncertain and foreboding; 2.) The competition is relentless, and they are the ones adding to the industry’s excess capacity problem; 3.) Incentives are out of control, and killing all of us; 4.) It is only our incredible strategy, devised by our brilliant management team, that will save the day. Well, while I’d like to make the same comment about GM’s strategy and management team, I come at this subject from a slightly different perspective. I believe that we’re at the beginning of what we will someday look back and call one of the greatest periods in the history of the auto industry. Bob Lutz called it the “Golden Age” a couple of weeks ago at the Automotive News World Congress. In fact, as I think about it, there are two major growth markets in today’s and tomorrow’s global auto industry. The first one is pretty obvious: China. China is the fastest growing vehicle market right now – 40 percent growth last year alone, making it the fourth-largest auto market in the world. And I read the other day one analyst’s prediction that it’ll grow almost 50 percent over the next two years. That’s a little more optimistic than GM forecasts, but in fairness, I sometimes call our forecaster “Dr. Doom.” If projections hold up, China could become the world’s second-largest market by 2010, and maybe even the largest market within my lifetime. Bottom line – I’ll bet my choice of China as one of the two major growth markets over the next decade or so, is no surprise to anybody here today. * * * * * * * My second choice – the United States – is not so obvious. Let me explain. The last time I spoke at a J. D. Power Roundtable was about 10 years ago. That year, 1993, the U.S. industry sold 14 million vehicles. A little low for that era, but for sure we thought 15 million units was a very decent year. Back then, who would have ever thought that we’d run above 17 million units for the last four years in a row. How did that happen? How many more years of 17 million sales before we begin to see it as the norm? Or, even less than the norm? I believe we might be much closer than many people think. Why? A number of reasons – let me give you the two big ones from my perspective. * * * * * * * One is simple demographics, where we see some really important trends in population growth and the baby boom generation. Due to immigration and higher birth rates, the U.S. population is growing faster than many expected. For example, the 2000 Census measured the U.S. population at 282 million – which was some 6 million more people than the experts had predicted. The U.S. is basically the only developed country that has a birth rate close to the replacement level right now. And unlike most other developed markets – including Japan and Western Europe – the U.S. is expected to continue growing – 26 million more people by 2010, and another 26 million people beyond that by 2020. Also, consider that baby boomers – the largest generation in U.S. history – are moving into their peak earning and consuming years. The youngest boomers are just hitting 40, with a lot of potential vehicle purchases ahead of them. And, by the way, the pre-boomers are living longer… and buying vehicles longer, too. * * * * * * * A second major factor in strong future U.S. auto sales would be America’s potential for economic growth. My logic goes like this: The underlying structure of our economy is in its best shape in years – things like low unemployment and very low inflation. More importantly, U.S. productivity growth is very strong – up 5 percent last year. And this productivity growth is leading to commensurate income growth. And higher income growth supports consumer spending – including, of course, cars and trucks. Add to this the fact that, in the post-war era, vehicles have never been more affordable than they are today. But, as real prices have declined, consumers have tended to spend just as much of their disposable income on vehicles as they did before. In other words, they’re moving up-market, or they’re buying more vehicles. Either one of these is okay with me. * * * * * * * So, what does all this mean? Personally, I think it means that the gloom-and-doom reports of the auto industry’s future have been greatly exaggerated. In 10 more years, will we look back and ask how in the world we sold 17 million units? Or will we ask how in the world we sold only 17 million units? I think it’ll be the latter. In fact, GM’s internal forecast is that annual vehicle sales in the U.S. will grow by 1.8 million units over the next decade – the strongest growth since the immediate post-war era. In fact, I believe we’re on the verge of a step change to an even larger industry here in the U.S. Now, it actually might be more a question of what can happen to prevent us from achieving this growth? So, my speech goes something like this:
* * * * * * * In my view, the first thing we can do to screw up a new American auto boom is fail to support the government’s efforts to stimulate the economy. Another way to say this: as a nation, we must take advantage of the tremendous improvements in productivity in recent years to push for faster economic growth. The historical economic model argued that the U.S. economy’s annual growth rate could not exceed 2½ percent, and the unemployment rate could not fall below 6 percent, without triggering runaway inflation. This model clearly no longer applies. Real productivity growth has driven prices down, economic growth up. We have an opportunity now to realize faster economic growth without inflation – we should be shooting for 4 percent annual GNP growth, not 2.5 or 3 percent. So, I think we all need to get out in support of an economic stimulus package – one that focuses on a short-term boost to growth, and tax changes that benefit the economy in the long-run, so we can get the auto boom on the road. And by the way, I strongly believe the way to fix the current budget deficit is to grow the economy and therefore the tax base. We are not going to be able to cut enough spending to achieve a balanced budget in a weak economy. * * * * * * * How else could we screw up a new American auto boom? We can stop focusing on stimulating consumers with great new cars and trucks. Normally, during periods of lower earnings, the industry has cut back on future product program investments. This is clearly not the way to win. But to be honest, after seeing more than 60 new products and concepts at the Detroit Auto Show earlier this month, I’m not sure this is a problem right now. But we can’t let up. The way to do that in a tighter economic period is to keep improving fundamental operating efficiencies and cost competitiveness, vehicle quality and reliability, and use these savings to keep future products on track. * * * * * * * A third thing we can do to screw up a new American auto boom is reduce our commitment to research and development, and our focus on new technology. Let’s take a very important issue for our industry – one that, if not successfully addressed, could significantly cut into the industry’s future sales growth. And that issue is the very legitimate concern over the environmental impact of the automobile. If we address this issue by adding costs to vehicles, or by forcing consumers into vehicles they don’t really want to buy, let’s face it – we’re going to sell fewer cars and trucks. In fact we tried that before. In our view, the only solution to this tough dilemma of improving fuel economy and reducing emissions in the intensely price-competitive and very low-cost-energy environment here in the U.S., is through technology. Put another way, we believe that aggressive use of all our capabilities in R&D and technology to find a good solution to this problem is critical to supporting longer-term strong vehicle sales. Of course, this issue is bigger than the just the auto industry – and will require a lot of support from government. In that sense, we were pleased with President Bush’s announcement this week, in his State of the Union address, of a proposed $1.2 billion research program in support of the development of fuel-cell-powered vehicles and the infrastructure to support a hydrogen economy. We like to see this kind of collaborative approach, and we look for even more of it. And, we in the industry have to do our part on fuel cells, hybrids, and yet better internal combustion engines. * * * * * * * A fourth thing we can do to screw up a new American auto boom is stop being aggressive in the marketplace. Let’s be honest with ourselves – one of the very reasons we’re seeing stronger sales in the U.S. market these days is exactly because of incentives and lower net vehicle prices. Well, lower net prices are nothing new for our industry – we’re now in our sixth consecutive years of negative net pricing. And the fact that lower prices lead to higher sales is no surprise. It’s basic macroeconomics. It applies to computers, home appliances, and lots of other consumer products. In fact, many of those industries face much tougher pricing environments than we do. So, are incentives sustainable? Or, perhaps more to the point, can we continue to live with declining net prices? There seems to me to be an inordinate amount of hand wringing and finger pointing over this matter right now. Well, I say it’s time to stop whining, and just play the game. Look – at GM, we’re going to do what works for us. We fully expect our competitors to make their choices, do what’s best for them, and if they have a different strategy that’s successful, more power to them. What I know is that GM’s strategy is working for us. Last year, we were aggressive in the marketplace, and we were able to help grow the industry, improve our market share, improve the quality of our share, improve our cash flow, and improve our earnings. And, so, guess what? This year, we’re going to keep pushing. So, when will the industry dial back incentives? Well, history tells us that happens when economic growth increases and free-flow demand is more in line with supply. (So now you see why I’m very strongly in favor of a stimulus package to get the economy going!) Would we prefer to reduce incentives? Sure. But not if the price is lower production, lower productivity, lower profitability and cash flow, fewer jobs, declining dealer profitability, and an increased chance of recession for the economy as a whole. That doesn’t sound like winning to me. The question is not really how to increase prices, but rather how to succeed in a negative-pricing environment – and that’s through operating efficiencies, streamlined organizations, better quality and reliability, cost cutting, improved mix – you get the idea. No doubt, GM’s strategy has not been the easy road – but it’s worked for us, our consumers, the auto industry, and the U.S. economy. It’s the best option that we have in today’s economic environment, and we plan to stay with it. * * * * * * * Finally, if we want to screw up a new American auto boom, all of the key constituents in our industry can follow our traditional approach of arguing about how to divide up the same old pie, rather than focusing on mutual efforts to grow the pie for everyone. In his NADA keynote address last year, Jim Press of Toyota talked about the importance of the key constituents in the auto business working together to grow the industry – and I fully agree with Jim. For us all to realize the great growth potential that the U.S. auto industry has over the next decade, I believe we need to spend a lot more of our efforts on working together to grow the industry. As I see it, this doesn’t have to be a zero-sum game. Your gain as a dealer is not necessarily my loss as a manufacturer. My gain as a manufacturer doesn’t have to be your loss as a supplier. When you get right down to it, the interests of OEM’s, dealers, suppliers, unions, and employees are overlapping – or mutually consistent – far more often than not. We need to work together for a strong economy leading to a strong auto market, on responsible automotive regulation to enhance real value for the money, on new technologies to address environmental challenges, on industry standards in areas between OEM’s and dealers or suppliers. These are the kind of things that further all of our interests, and allow us to grow the industry pie. * * * * * * * So, in my mind, these are five big things we could do to miss the opportunity, over the next decade or so, to take our industry to a higher level:
* * * * * * * Now, I don’t want to sound completely naïve. Sure, there are some issues that overhang our economy and our industry, over which we have little control – the situations in Iraq and North Korea… instability in Venezuela and the price of oil… the strength of the dollar (though, frankly, we’re pleased to see some of the recent moves to improve that situation… finally). But we’ve always had those kinds of issues – and we always will. Sometimes I think we psych ourselves out, obsessing over uncertainties that we really can’t control. Sure, we need to have our contingency plans in place. But the fact is, we have to play the game… now… today. And we need to recognize that, someday, the current uncertainties will be resolved – and then there’ll probably be others. But what we know about is today. And what we actually can do is build and sell, every single day, the best cars and trucks – why wish and whine ourselves into a recession? Let’s focus on what we can control – on what we can manage – and make the new American auto boom, a reality. * * * * * * * In 1941, Winston Churchill, speaking to a group of students in England, said, “These are not dark days: these are great days – the greatest days our country has ever lived.” Well, this is not World War II – but it does feel like a dogfight in the marketplace. And I do think the “great days” sentiment is right for our industry today. The fundamentals of our business, and our economy, are sound – and, over the next decade or so, poised for growth. “Great days” for the auto industry are very much ours to lose… or to win. At GM, we plan to win them. And if I’m right in my assessment, there’s opportunity enough for all of us. Thank you. * * * |