SATURN MOTORS in GM Bankruptcy

In 2009, The Lazarus Team actively negotiated with General Motors to purchase the Saturn Motors Division. Articles appeared in the national press including: Detroit News and Washington Post as well as Saturn Fan sites. Additional press articles can be located using Google. Original Washington Post Article

General Motors presented a Restructuring Plan for Long-Term Viability to the United States Treasury Department. We rated GM’s content a C- effort.

The United States Treasury Department responded to General Motors with a less stellar assessment in their Viability Determination. We rated this an A+ response.

Most General Motors brands operated with too many dealers in overcrowded markets, selling too few cars a year, thus operating with very thin operating margins. On top of that, each dealer had high capital costs for site improvements and inventory costs. General Motors optimized their production efficiency by producing cars at a constant rate, regardless of how fast cars were selling on the lots. This excess inventory stuffed every distribution channel dumping too many cars on the rental market and through dealers, resulting in severe price erosion with too many dealers chasing too many buyers. Financing this inventory also crippled GMAC’s ability to finance retail customers since all of GMAC’s financing power was already committed to financing dealer inventory flooring.

In contrast, Saturn dealers had exclusive franchises in metropolitan markets, so they didn’t have to slash margins to sell cars. Each dealer was hand-picked from the best dealers of other GM brands. New Saturn dealerships were also located in the best retail sites, generally in auto malls while older dealerships were generally standalone in the older sections of town. Further, the number of dealers was purposely limited to avoid price and service cannibalization by too many dealers in a limited geographic area.

One of our biggest attractions to the Saturn brand was high customer satisfaction ratings and high conquer rates over competitive brands. In contrast, General Motors customers were for the most part unhappy with service quality and treatment received. Our research showed that dealer profitability is the most important contributor to establish and maintain high service levels to all customers in the long-term. Saturn dealers excelled in customer loyalty and satisfaction ratings, while other GM brands lagged behind. Economically healthy dealers are the front-line creators of brand loyalty, customer satisfaction, and repeat business, so our focus was on delivering a high quality product in sufficient numbers to keep each rooftop dealership open and thriving with their service business.

We reviewed GM’s United States market share results after General Motors closed the Oldsmobile brand. General Motors assumed that Oldsmobile owners would remain loyal to GM by buying Buicks or Pontiacs. In reality, General Motors market share continued to decline at an unattenuated pace. We expect similar results after the closure of Pontiac and Saturn. Pontiac owners will most likely turn to Ford for their next car purchase. Saturn owners, on the other hand, are more likely to turn to Honda or Toyota for their next car. After all, most Saturn buyers were unaware they purchased a General Motors product, so there should be no expectation of brand loyalty to GM.

Toyota dealers sold roughly four times the number of cars compared to GM. In response, General Motors started by slashing their dealer network in half to rationalize the number of dealerships to the number of cars sold. GM failed to realize that dealers add value, not cost. Why cut off dealers that establish and maintain front-line relationships with customers? If Oldsmobile’s results repeat themselves, General Motors sales will decline lockstep with dealer closings, leading to future plant closings, additional dealer cuts and further “right sizing”. Frankly, GM’s decision to close dealers continues a string of short-sighted decisions that don’t anticipate long-term deleterious impacts.

At the other end of the automobile industry is Chrysler. In our opinion, Chrysler should probably have been closed altogether. To prove this point, compare Toyota’s turnover compared to Chrysler’s. In the 4th Quarter of 2006 according to JD Power, Toyota dealers could sell a Prius in just 13 days on average, while it took Dodge dealers on average 230 days+ (or nearly 8 months) to sell a Stratus or a Magnum. Chrysler and Dodge dealerships couldn’t possibly make any money. It took almost an entire model year of manufacturer incentives and dealer price cuts to sell a car that few buyers wanted. In contrast, a Toyota dealer could turnover 48 cars in the same time it took a Chrysler dealer to turnover 3 cars. Overlay sales turnover with the fact that Toyota dealers could sell their cars at a tidy profit with buyers packing their showrooms compared to Chrysler and Dodge dealers hoping to sell a car before their cost of financing exceeded their potential profit.

Chrysler is discontinuing their larger trucks, and even the PT Cruiser to cut R&D costs and discontinue slow-selling models. Chrysler is banking on the Fiat 500, a tiny car by American standards, to meet Corporate Average Fuel Economy (CAFÉ) standards. Trouble is, Americans won’t buy the tiny two doors with a history of questionable reliability. Many still remember the saying, “Fix It Again Tony.” GM’s store closings and Chrysler’s shift to tiny Fiats will accelerate market share losses.

It was hard enough for Detroit’s bloated Big 3 to stay afloat when times were good. High production volume drives profit, which in turn drives investment. Long-term weak production volume coupled with a lack of investment accentuates the weakness of US automakers compared to their foreign competitors.

The Lazarus Team instead planned to sell more cars in each dealership by offering leading edge design with high efficiency hybrid drivetrains. On average, our advanced hybrid drivetrains doubled current fuel efficiency compared to the same size car with just a gasoline engine. Our plan for Saturn was to build the same size cars that appeal to current American tastes with drivetrains that delivered 40mpg in a Saturn Vue to 60mpg in the Saturn Aura. In contrast to an all electric Chevy Volt with a 40 mile all-electric range selling for $40,000, our redesigned Saturn sedan targeted a 25 mile all-electric and 300 mile overall range, delivering over 100mpg under the EPA duty cycle, and selling for under $30,000. Under this plan the market share rotation away from GM and Chrysler would be captured by the New Saturn Corporation.

The Lazarus Team proposed a revolutionary business model for the auto industry. We formulated a pure-play distribution model where Saturn would retain design and marketing responsibilities. We would outsource manufacturing to other auto manufacturers and assemblers with excess capacity. There are many precedents to this business model, particularly in Silicon Valley. Contract Manufacturers like Flextronics, Solectron, and Jabil Circuits assemble circuit boards and finished electronic products. Most chip companies are now fab-less, meaning their designs are manufactured by others. Apple Inc. has created significant shareholder value by combining innovation, creativity, and an outsourced manufacturing model. The Lazarus Team had hoped to overlay this model onto the US auto making industry.

The Lazarus Team assembled $500 Million in private equity commitments, backed by $500 Million in bank financing to support our bid. We talked to senior management at Chrysler to build next generation Saturns in Canadian plants that were scheduled for closing. We also applied to the Department of Energy for grant funding under the Advanced Technology Vehicles Manufacturing Program (ATVM) to design and build 120 prototype electronic and hybrid drive vehicles.

There were other issues as well. Saturn used to offer a 5-car lineup. The Saturn Sky and Pontiac Solstice were manufactured in the Wilmington Delaware plant, which was since closed. GM stopped importing the Astra from Belgium. The Aura shares the same platform as the Chevy Malibu and Chevy Volt, which are due for body changes for the 2011 model year. After all the cuts, GM offered to continue just the Aura and Vue and ONLY for two years. It would take a minimum of two years to take an already designed production car from somewhere else in the world and homologate it to US safety standards. GM’s two year limit on bridge production increased risk enormously. Failure to deliver a new product for the 2011 model year could easily bankrupt the new Saturn.

Unfortunately for The Lazarus Team, General Motors accepted a bid from Penske Auto Group (NYSE: PAG) on June 3, 2009. As widely reported, Penske and GM could not reach a final agreement by September 30, and GM decided to phase out the Saturn brand. Investors now considered the Saturn purchase a “tainted” deal. If a billionaire like Penske who bought Detroit Diesel and Allison Transmission from General Motors and turned them around to profitability can’t negotiate a deal for Saturn, who else can? Those are pretty big shoes to fill. Further, GM ceased manufacturing and importing every vehicle with a Saturn badge effective October 1, 2009 and forced every Saturn dealer to close their doors before the end of October, 2010. Potential car buyers and auto dealers were reconciled to the fact that Saturn was going away, which further complicated the re-launch of a cherished brand. Detroit Free Press Interview – Tom Lasorda

Typically, investment bankers place a tombstone ad to announce their successful placement of an Initial Public Offering (IPO). In Saturn’s case, General Motors senior management drove still another nail into their financial legacy by adding Saturn to the list of failed industry-leading brands that included Oldsmobile, Pontiac, and Hummer.

Excerpt from transcript of Penske Automotive Group 3rd Quarter 2009 Conference Call of October 30, 2009.

May 13, 2011 Update:
As predicted, General Motors fails to keep Hummer, Pontiac, and Saturn customers coming back to GM brands.
Read the Wall Street Journal story here