Why Falling to No. 2 Is Good for GM

Michigan Gov. Jennifer Granholm (red dress) marches with auto workers and dignitaries behind a Chevy Volt electric vehicle during the introduction of General Motors' vehicles during the press preview for the Detroit International Auto Show.

Last year at this time, the drama was thick among auto analysts as General Motors and Toyota announced their total global sales for 2007. GM had been the world’s biggest automaker for 77 years, but it seemed inevitable that Toyota would bump the fading giant from its perch. When both automakers said they had sold 9.37 million cars in 2007, analysts had to scrutinize decimal points the automakers don’t usually break out. The unsatisfying outcome was the equivalent of a technical knock-out in favor of Toyota.

Now we have more convincing numbers. GM’s global sales in 2008 plunged by 11 percent, to 8.36 million. Toyota’s fell too, but only by 4 percent, to about 9 million vehicles. So it’s official, without any asterisks: Toyota is now the world’s biggest automaker.

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We could interpret this as an example of “the nagging fear that America’s decline is inevitable,” as Barack Obama said in his inaugural speech. But it’s also good news for GM. Here’s why:

It’s humbling. And GM can use the humility. For years, the huge automaker has assumed that Americans will buy whatever cars it produces. Falling to No. 2 is one more tangible reminder that GM was wrong.

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For GM, smaller is better. To fix its problems and return to profitability, GM has to get smaller, not bigger. For years the automaker defended its sprawling portfolio of eight brands, even though half of them have been money-losers. It built more cars than people wanted to buy, and ended up offering huge incentives to move the metal, or selling to fleets at tiny profit margins. GM has finally agreed with critics, and said it needs to shrink or offload its Hummer, Saab, Saturn and Pontiac divisions, while focusing on the stronger Chevrolet, Cadillac, Buick and GMC lineups. That's easier as No. 2 than No. 1.

It makes GM an underdog. The folks at GM are competitive, and falling to No. 2 will only make them more so. Some will want to reclaim the top spot from Toyota. That’s motivating.

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It shifts the focus to profitability. The true measure of any company’s success isn’t how big it is - it’s how profitable. Size has been a distraction at GM for a long time. Hopefully, no longer. The only figure GM needs to maximize now is its bottom line.

Rick Wagoner can tell the truth. Up until the last few months, GM’s embattled CEO insisted – when asked - that GM had no intention of relinquishing the top spot to Toyota. But he was only saying what he had to. Wagoner and everybody else in the business knew that Toyota would eclipse GM in global sales eventually: Toyota’s share in key markets has been rising, while GM’s has been holding steady or falling. But if Wagoner had acknowledged that, it would have sounded defeatist, in an industry where machismo still matters.

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Wagoner no longer has to defend an indefensible title. At some point, he’ll have the opportunity to change the storyline from the rise and fall of GM, to the fall and rise. But first he needs to fix a lot of problems, like plunging sales, vast overcapacity, and near insolvency. Once he does that, he can worry about bragging rights.