Businessweek Archives


Cover Story


Karen M. Tibus ought to be delighted. While her rivals are offering steep discounts to move their metal, Tibus, a Plymouth (Mich.) Saturn dealer, is able to charge full price. The problem is, she can't keep her showroom stocked. In early August, she had just four Saturn subcompacts on hand, instead of the usual 200. She has already sold the nine demonstration models her sales staff was driving. Says Tibus: "It's very frustrating."

It's also very common. Saturn dealers across the country are staring at empty lots. After a slow start, General Motors Corp.'s import-fighting small cars are so hot right now that the Spring Hill (Tenn.) factory can't keep up with demand (charts, page 88). Boasting a high-quality reputation and revolutionary no-haggle sales tactics, Saturn dealers in July sold 22,305 cars--an average of 115 apiece. That's twice the rate per dealer for the nearest competitor, Toyota Motor Co., and "far outstrips our expectations," says Donald W. Hudler, Saturn Corp.'s vice-president for sales.

Saturn's sudden blast up the sales charts is heartening for its troubled parent. Former GM Chairman Roger B. Smith conceived the project as a laboratory in which to reinvent his company. While GM has so far failed to take full advantage of Saturn's many innovations, the success does suggest that there's hope for the world's largest carmaker.

BIG FIGHT. As foreign rivals continue to flood the market with new models, Saturn is meeting them head-on. Almost overnight, Saturn has become the highest-quality American-made brand, with as few defects as Hondas and Nissans. It's stunningly successful at satisfying the customer, trailing only Lexus and Infiniti, according to researcher J. D. Power & Associates Inc. (table).

So the auto maker clearly has a winner on its hands. Now, the question is: Will GM know what to do with it? Saturn's growth spurt is forcing some tough decisions at GM's Detroit headquarters. To keep up the new division's momentum, GM's top brass will have to pump in more money, even though the burden of Saturn's $5 billion initial investment means it is losing some $500 million a year and probably won't turn a profit until the mid-1990s. Already, Saturn President Richard G. "Skip" LeFauve is clamoring for money to increase Spring Hill's assembly capacity, to 500,000 cars a year, and to design new, larger models for the late 1990s.

He isn't going to get it without a big fight. After last year's disastrous $7.5 billion loss from North American operations, GM's purse strings are drawn tighter than ever. Every dollar spent on Saturn means less support for struggling divisions such as Chevrolet, which desperately needs to update its outmoded models (page 90). And with GM set to close 10 assembly plants, any announcement that it is building a new factory for Saturn will set off a fire storm of protest from unions and local governments around the country. "It's an incredibly tricky situation," says analyst Maryann Keller of Furman Selz Inc. in New York.

Saturn is at a crossroads. Started from scratch, it was coddled with time and resources and kept well removed from tradition-bound GM. But its very success--and GM's mounting problems--mean that the nine-year-old venture will no longer be cosseted but must begin fending for itself. "The great social experiment is over," says consultant James E. Harbour, a former Chrysler Corp. manufacturing executive. "Now, Saturn's got to compete for money."

OUT WITH THE OLDS? GM Chairman Robert C. Stempel, for one, isn't convinced Saturn deserves more investment just yet. He first wants the unit to squeeze as much production as possible out of its existing plant, where capacity now is 325,000 cars a year. He also wants it to start making money. "We don't need to add any capacity," he says. "We're going to build Saturns at Spring Hill, Tenn.--period."

That may not be the final word, though. John F. Smith Jr., who was installed as president by GM's board in April with a mandate to get the carmaker rolling again, is still trying to figure out how Saturn fits into his vision for North American operations. He may lay out his plan for the board in October, and there is some indication he may opt to increase Saturn capacity by converting an existing GM plant. That's a choice that would please many investors. "I'd very much like to see them put money into Saturn and maybe close up another division," such as Oldsmobile, says the research director at one of GM's bigger shareholders.

A GM decision to delay any new investment could have dire effects on the Saturn project. In many cities, buyers are already waiting as much as six weeks for delivery. At the end of July, Saturn dealers had a scant 10 days' supply of cars on hand--only one-sixth the normal stock. If the demand continues to strain supply, annoyed customers may begin scurrying to competing brands. That could cause ripples far beyond Saturn's income statement: If Saturn's current momentum flags, it will be a lot easier for GM's vast bureaucracy to ignore the upstart's innovations. "How this growth is managed is crucial," says David E. Cole, director of the Office for the Study of Automotive Transportation at the University of Michigan.

Obviously, the cheapest way to go is to lean on Spring Hill for more production, as Stempel wants. There is definitely room for improvement in productivity, but the company must be careful not to push too hard. When workers and equipment are overtaxed, quality suffers--and Saturn's employees know it. Their pay is tied to quality targets, and they have already demonstrated that they won't compromise quality. Last October, after managers pushed through a production increase that wound up raising the number of defects, line workers staged a slowdown during a Stempel visit. Saturn managers eventually eased off on their production goals.

Now, LeFauve is about to ratchet up again, trying to lift production to meet demand without compromising quality. He is adding a third crew to boost capacity 44% and get Spring Hill running at full tilt. That should happen by next March, three months earlier than planned. To ease the pressure until then, Hudler has asked dealers to delay for up to six months the opening of more than 25 new outlets.

With an extra $1 billion to bring Spring Hill's capacity to 500,000, LeFauve could turbocharge Saturn's growth. He would have plenty of capacity to meet demand for Saturn's new products: a four-door wagon and an entry-level coupe coming this fall, and an additional two-door model originally due in 1994 but delayed because of GM belt-tightening. Plus, he could expand Saturn's modest stable of 195 dealerships, extending the product's reach into the nine states where it's not yet available. Saturn's sales could quickly rival those of the Buick Motor Div., GM's third-largest unit. Chevy and Pontiac are No. 1 and No. 2, respectively.

DEATH RATTLE? With a further $1 billion or so to develop a larger Saturn model, the company's potential would really start to mushroom. As the value-conscious baby boomers who are now buying Saturns grow older, they'll be looking to move up to cars with more room, comfort, and features. Mimicking the tactic that Japanese manufacturers used so successfully to gain market share in the 1980s, Saturn plans to grow along with them, offering a larger car late in the 1990s.

Saturn will also need fresh models to keep pace with technical advances by the Japanese. So far, however, GM hasn't committed funds for Saturn models beyond 1995. And since it takes at least three years to design a new car, delays now can be deadly later. GM's hesitation makes one top United Auto Workers official nervous: "I'm worried about GM's long-term commitment to Saturn."

Stempel argues that today's Saturn buyers can graduate to existing GM brands that traditionally cater to older buyers, such as Cadillac, Buick, and Oldsmobile. But Saturn buyers aren't the same as GM's customers of the past. Many of them are former import buyers, and they like Saturn's nimble, Japanese-like feel and its more contemporary design. Saturn's research shows that 70% of its buyers would have purchased a non-GM product if they hadn't selected Saturn. Fully half of them would have bought Asian models. "Buicks are not going to appeal to baby boomers when they're 50 years old," says E. F. Hutton analyst Joseph S. Phillippi.

It's not that GM has no money to spend on new cars. It plans to shell out some $13.5 billion on new models through next year. But Stempel has vowed to shift GM's focus away from market share and toward profits. For that reason, much of the new-product money will probably go toward developing trucks and big cars. These vehicles, with gross margins of up to $8,000, offer quicker profits than Saturns, which should have margins of around $2,500 by the mid-1990s.

If GM decides to expand Saturn, many believe it will retool an older plant. The obvious advantage is cost: Converting a factory should cost about $200 million less than building a new one, although the final cost depends on which plant is selected. It's also a lot more appealing politically, since such a plant could employ workers who might otherwise become unemployed or be forced to relocate to Spring Hill. Some observers are pushing for a plant that has been closed for several years. At such a factory, the thinking goes, more of the ex-workers would have found other jobs. Saturn's rigorous hiring process would thus be less disruptive than at a more recent shutdown.

GLITCHES. Converting a plant wouldn't be easy, though. The UAW could block such a plan, for one. Saturn's UAW contract, which puts everyone on salary, including line workers, is a radical departure from GM's pact. It gives workers a voice in all management decisions and will link 20% of pay to quality, productivity, and profitability. Union leaders, doubting the depth of GM's commitment to Saturn-style labor relations, say they won't adopt the contract elsewhere. "We've seen lots of fads come and go at GM," says a union spokesman. "Now we have the Saturn fad."

Using an older plant and its established work force also flies in the face of Saturn's winning strategy of starting from scratch and carefully choosing employees. Saturn selects blue-collar employees entirely from within the GM ranks--but only those it considers adaptable, able to work well in teams, and possessed of good communications skills. Any new plant would have to follow exactly the same procedure or suffer from a lack of common visions and goals. Logistics could give Saturn's system fits as well: The company would have to coordinate the shipment of tons of major components such as engines to a new plant, something it doesn't have to worry about at the integrated Spring Hill site.

Even Spring Hill hasn't been without glitches. The plant runs one of the tightest just-in-time inventory systems in North America. Yet almost two years after production began, the $1.9 billion complex hasn't reached full speed. Just before workers shut down on July 20 for a two-week vacation, they were cranking out about 1,000 cars a day--20% below Saturn's initial target.

Bottlenecks persist in the plant. Some manufacturing experts say Saturn tackled too much at once, making it hard to get production running smoothly. The drivetrain operation is having trouble meeting unexpectedly high demand for automatic transmissions. And the paint system produces uneven quality. The Band-Aid solution: Spare plastic body panels are on hand so that workers can quickly replace blemished ones.

Because Spring Hill is so highly integrated, a minor delay in one part of the plant can shut down the whole operation. The company is scrambling to ensure that glitches are less likely to knock everything off track. During the two-week shutdown, maintenance workers added space for more inventory between departments as a buffer. For instance, they made room for 20 additional instrument panels, so snags in that part of the factory would be less likely to halt the main final assembly line. "If they're just now recognizing those problems, somebody ought to be canned," storms consultant Harbour. LeFauve says that most of the wrinkles are now out of the system and that it will be glitch-free by fall, with two shifts running at full speed.

Whatever the hitches, Saturn has already done a lot right. Its high quality ratings are due largely to the revolutionary labor agreement that makes partners of Saturn's blue- and white-collar workers and gives everyone the authority to solve quality problems. Line workers who encounter defective parts, for example, often phone the supplier to recommend a fix. The 14-member door team recently suggested rearranging machinery to improve quality and productivity. The moves also cut out two people, who then transferred to another part of the plant. "You can trust the people you're working with. So if I come up with an idea, I won't be worked out of a job," says team member Gregory L. Arthur, a 20-year GM veteran.

Saturn's folksy, offbeat advertising, created by San Francisco's Hal Riney & Partners, has done much to establish its image as an unusual car company. The ads focus on Saturn buyers' lifestyles as much as on their cars, making the ads easy to relate to. They play up product themes that baby boomers hold dear, such as safety, utility, and value. The almost-instant result is one of the most sharply focused brand images inthe auto world. "Their advertising ought to be a lesson for everyone," says Keller.

NO HAGGLING. The company's novel approach to retailing has also set a new standard for the industry. Its cars carry no rebates and are priced aggressively, starting at $9,195, even after an average 8% hike for 1993 models. Dealers get large territories, so they compete with rival brands instead of each other. Courses in Spring Hill instruct managers and salespeople in low-pressure, haggle-free selling techniques. They learn how pampering customers can create the word-of-mouth that's the most effective kind of advertising (BW--Aug. 3). Saturn's success is "one of the most astonishing proofs of simple, back-to-basics marketing I've ever seen," says Laurel Cutler, a former Chrysler vice-president and now vice-chairman at ad agency FCB/Leber Katz Partners.

The combination of a good product and top-notch service makes Saturn owners among the happiest on the road. Dan Bitcon, a New Jersey video producer, recently plunked down $9,700 for a Saturn sedan. Since then, staffers from both the dealership and Saturn headquarters have called to find out how the car is doing and how he likes it. They also sent him a questionnaire. "Knowing that it was a General Motors company, I didn't expect such service," Bitcon says.

Buyers' complaints have been fairly limited. At the outset, Saturn had two recalls, one for defective seats and another for corrosive engine coolant. Some early owners also complained of insufficient headroom and noisy, vibrating engines. Last year, Saturn began installing rear seats that are half an inch lower than the initial design. To muffle noise and vibration, Saturn redesigned the engine mounts and added more insulation under the hood.

Now, GM's rivals are starting to learn from Saturn's successes. Chrysler partly modeled its new $30 million dealership-training program on Saturn's. In April, Ford Motor Co. began selling its subcompact Escort models at one low price. The program, which discourages haggling but does not ban it, has been such a hit that Ford has expanded it to other models. Even Japanese companies, leaders in small cars for more than a decade, are taking notice. "We are watching Saturn closely," says Hideyo Miyano, engine research head at Honda Motor Co.'s R&D unit. "We are very worried, and that's not simply flattery."

One company that could pay more attention to Saturn's innovations is GM. Some outsiders are pushing it to implement Saturn-style training programs. Others want to see more GM divisions adopt rewards for high customer-satisfaction ratings. But so far, with the exception of antilock brakes developed for Saturn and now used in some other makes, there has been little cross-pollination. "I don't know anybody who is satisfied with the pace," Stempel concedes. "We've really got to get this place going."

Many critics believe bureaucratic inertia keeps GM from learning good lessons from Saturn--or anywhere else, for that matter. The company has applied very little of what it learned from NUMMI, its Fremont (Calif.) joint-venture factory with Toyota, the world's most efficient carmaker. Nearly a decade after the companies began building cars together in a former GM plant, using unionized former GM workers, GM's overall quality and productivity still lags far behind the competition's. GM has been slow to adopt ideas from its highly successful European operations, too. "One of the things GM does very poorly is spread improvements across the system," says Donald Ephlin, formerly a UAW vice-president heading the GM department. "The arrogance of GM makes it difficult for them to learn from anybody."

Saturn's reputation as a pampered child hasn't helped. GM is trying to overcome it by moving a few Saturn executives to key corporate jobs. Guy D. Briggs, former Saturn vice-president for manufacturing, is now GMC Truck's director of operations. Alan G. Peritton, formerly Saturn's director of materials management, is now head of GM's North American purchasing operations.

In time, Saturn may have more influence on GM. After all, the company has been building cars for less than two years, and only lately have its lofty ideals begun to translate into dramatic sales growth. But a payoff--in profits or innovation--will never materialize if Saturn is allowed to run out of gas.David Woodruff, with James B. Treece, in Detroit, Sunita Wadekar Bhargava in New York, and Karen Lowry Miller in Tokyo

The Epic Hack

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

blog comments powered by Disqus