Share this story
Close X
Switch to Desktop Site

GM zooms toward high-technology orbit. Hughes tie, other overhauling moves augur new US industrial revolution

General Motors' entry into aerospace may position GM as the premier high-tech industrial company of the 21st century. In the process, GM could force not just Ford and Chrysler, but the rest of industrial America, to restructure itself.

``Roger Smith, [GM's chairman], is changing forever the way manufacturing companies do business, equivalent to what Henry Ford did when he started mass production,'' says Ralph G. Colello, manager of the automotive unit at Arthur D. Little Inc., a consulting firm.

About these ads

``The auto industry is the largest industry in the world, and when the largest industry restructures, the No. 2, 3, and 4 industries have to follow.''

The world's biggest automaker won its bid for Hughes Aircraft Wednesday, beating out Ford and the Boeing Company. The $5 billion-plus purchase, one of the biggest mergers outside of the United States oil industry, will give GM access to aerospace technology considered vital to making the American cars competitive with the Japanese.

Acquisition of Hughes also puts GM squarely in the defense-contracting business. And it gives GM and its data-processing subsidiary, Electronic Data Systems, a shot at becoming one of the world's largest telecommunications companies.

Auto companies have long recognized that advanced electronics will shape the future of their business and that a quick way to catch the wave is to buy an aerospace company. Ford, whose Aerospace & Communications Corporation already gives it some avionics technology, tried to win Hughes for itself. It has some $5.9 billion in cash, and some analysts think Ford is looking for another aerospace company to buy.

On a ``Chryslerized scale,'' the No. 3 carmaker is getting aerodynamics, electronics, and composite-materials technologies through Gulfstream Aerospace Corporation. Last week Chrysler said it had purchased an option to buy 20 percent of the aircraft manufacturer for about $127 million and may buy the rest.

Two key areas where aerospace technology merges with auto production are electronics, both on the assembly line and in the car itself, and advanced materials such as composites.

Hughes know-how in making laser range finders and missile guidance systems, for example, could be used on GM's assembly line, as laser-guided robots inspect parts and car assemblies. The car of the future could apply aerospace electronics in its comfort controls, suspension systems, transmission, even internal maps that use satellites when you find yourself helplessly lost. Hughes has made more than half the communications satellites orbiting Earth today.

About these ads

Materials such as ceramics and composites could boost fuel efficiency by up to 30 percent, according to some estimates, in allowing the engine to run at a higher temperature. Some of the materials, which are lighter and stronger than steel, have already been used in the US shuttle, missile nose cones, fishing rods, engines, and machine tools.

``The auto industry gives new technologies a mass outlet to drive down the cost of developing them and make them competitive in the world market,'' says Edward Sullivan, a senior economist at Data Resources Inc. (DRI). ``It is key in transforming the US economy from a smokestack economy to a high-tech society,'' he says.

Since Mr. Smith got behind the wheel five years ago, he has reorganized the company, cutting it from five divisions to two. GM has bought shares of four robotics companies and announced plans for an automated manufacturing plant that can run without human production workers. It bought Electronic Data Systems, a leading data-processing company, which can help it lower its manufacturing and service costs.

It has started producing Chevy Novas with the Toyota Motor Company, letting the Japanese partner run the daily operations. And in January it launched its high-tech answer to Japanese subcompacts: The Saturn Corporation, which GM says will parlay its new manufacturing techniques and revised labor relations into better, low-cost cars.

And now there's Hughes, ``possibly the last reservoir of real talent in the scientific community,'' according to John L. Colley Jr., a professor at the University of Virginia's Darden Business School, who used to work for Hughes.

Not everyone is so sanguine about the marriage. The Hughes acquisition ``may stretch the rubber band a little too far too soon,'' says Arvid Jouppi, an automotive analyst and president of Arvid Jouppi Associates. GM's management is spread pretty thin right now -- what with integrating EDS, launching the Saturn project, and ``chasing Ford around the world,'' he says. Ford now sells more cars than GM overseas (and, unlike GM, makes money at it).

Besides, Hughes did not come cheap. ``Is it worth paying 20 times earnings for Hughes?'' asks David Eisenberg, an analyst at Bernstein & Co. ``It seems that the payoff would be awfully distant.''

Even though the two major auto companies are flush with cash -- GM may still have $4 billion lying around -- they should not go on a spending spree, cautions DRI's Mr. Sullivan. The industry still needs a cushion from its business cycles. The purchase of a Hughes Aircraft or of a high-tech company of Ford's choosing would not offset those cycles, he says, because the acquisitions are too small. He notes that just before the recession in the second half of 1979, GM's net working capital was $7.9 billion. By 1983, it had fallen to a thin $1 billion.

As for Chrysler, analysts say that it should rein in its urge to diversify. ``I'd rather see them [Chrysler] husband their funds'' and concentrate on the carmaking business, says Malcolm Salter, a Harvard Business School professor.

Sullivan agrees, saying Chrysler can still benefit from GM's technological moves, because ``most technologies permeate industry within a few years.''

Details about Hughes Aircraft are harder to come by, because it has been owned by the Howard Hughes Medical Institute since its origins 40 years ago. It has been funding research and development from its own profits, says Dr. Colley at Virginia, so GM's deep pockets will make little difference. He suspects that the Hughes management probably leaned toward GM because ``as an industry leader, GM has the right attitude toward industry leaders.'' He says that GM's hands-off approach to EDS will be mirrored in its handling of Hughes.

``I don't think GM is going to gum up this deal,'' Professor Salter agrees. Graph: The biggest mergers (in billions of dollars) Chevron/Gulf Texaco/Getty Du Pont/Conoco American Hospital Supply/Hospital Corp. of America* Mobil/Superior Royal Dutch-Shell/Shell Southern Pacific/Santa Fe General Motors/Hughes* *proposed

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.