General Motors Is Better Off at No. 2

Toyota is poised to outsell GM again in 2012.

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A General Motors dealer displays a banner promoting a staying in business sale at it's premises in Santa Monica, Los Angeles on May 27, 2009. General Motors was skidding toward bankruptcy after bondholders rejected a plan to swap a large portion of the troubled automaker's debt for equity in the firm. GM said it failed to get enough participation in a plan to exchange 27.2 billion dollars of its notes, which had been required under GM loan agreements with the US Treasury and the company's own 'viability' plan.

In Detroit, it felt like a mournful moment when Toyota first outsold General Motors in 2008, after GM had spent 77 years as the world's largest auto maker. The gap got even bigger in 2009, the fateful year that GM declared bankruptcy and would have collapsed without more than $50 billion in government aid.

GM recovered in 2010 and surprised the auto industry in 2011, when it reclaimed the title of global sales champ. But it seems unlikely to last. Toyota is on a pace to sell about 9.7 million vehicles worldwide in 2012, while GM seems headed for sales of about 9.3 million. So for the fourth time, GM will end the year as the world's No. 2 automaker.

Being No. 1 generates bragging rights and a kind of institutional swagger, since other automakers benchmark themselves against the sales leader in many ways. Toyota dealers in particular may find it motivating to remind customers that they're No. 1.

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But being the biggest can be problematic--especially for a sprawling company such as GM, which has struggled before with the mantle of world's largest automaker. In fact, GM is arguably better off when it's not in the lead.

In the years leading up to its 2009 bankruptcy filing, GM's sales edge over No. 2 Toyota inexorably slipped, creating the accurate impression that Toyota was ascendant while GM's best days were in the past. That harmed GM's image as much as dowdy models or quality problems. GM appeared to be a wounded goliath, desperately holding on to a lead that everybody knew was disappearing.

GM also spent far too long protecting its market share--a proxy for size--instead of focusing on profitability. It insisted for years that it really needed a lineup of eight brands, when the next biggest automaker, Toyota, only had three. The folly of that strategy became apparent after GM declared bankruptcy and killed four of its eight brands--Hummer, Pontiac, Saturn and Saab. The company shrank, and lost market share, but that helped it become profitable again. Getting smaller was good for GM.

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The automaker may have to get smaller still. Its Chinese operation is growing sharply and its North American sales have stabilized, but GM's money-losing European division is still a mess that needs radical surgery. GM has vowed to make the division profitable within a couple years, a promise that will probably require closing some factories and dealerships rather than protecting market share at any cost.

Toyota isn't all that comfortable in the No. 1 spot, either. In its second year at the top of the sales chart, Toyota endured a withering series of crises related to loose floor mats and other problems that led to stuck accelerator pedals on some models--and terrifying bouts of random acceleration. Subsequent investigations found that Toyota had dismissed customer complaints that should have tipped off the company to problems, and steamrolled U.S. safety regulators.

Customers bolted, which is one reason GM regained the top perch in 2011. Toyota's own probe cited corporate arrogance as one cause of its woes, and the company spent two years making amends to customers and regulators. Its resurgence in 2012 indicates those problems are now behind it.

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Still, it's often better to be the feisty runner-up than the lumbering giant, since size itself is no guarantee of profitability in the brutally competitive auto industry. What's more important is artful scaling that relies on the fewest number of product "platforms" for models sold all over the world, something Ford has been particularly good at lately. A strong brand identity helps too, something BMW excels at.

Meanwhile, GM and Toyota may both end up knocked from the top sales spot at some point over the next couple of years. Volkswagen has an aggressive growth strategy, and it's already one of the top producers in China. If its market share in the United States and some developing nations rises as expected, VW could be No. 1 before long, with GM falling to third. That may not be a desired position on the race course, but in a tough business like autos, it can be a winner.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.