GM — the new Government Motors

How Detroit’s Automakers went from Kings of the Road to Roadkill

The following is adapted from a speech delivered by Joseph B. White at a January seminar (2009) on the topic, “Cars and Trucks, Markets and Governments.”

I’d like to start by congratulating all of you. You are all now in the auto business, the Sport of Kings — or in our case, presidents and members of Congress. Without your support — and I assume that most of you are fortunate enough to pay taxes — General Motors and Chrysler would very likely be getting measured by the undertakers of the bankruptcy courts. But make no mistake. What has happened to GM is essentially bankruptcy by other means, and that is an extraordinary event in the political and economic history of our country.

GM is an institution that survived in its early years the kind of management turbulence we’ve come to associate with particularly chaotic Internet startups. But with Alfred P. Sloan in charge, GM settled down to become the very model of the modern corporation. It navigated through the Great Depression, and negotiated the transition from producing tanks and other military material during World War II to peacetime production of cars and trucks. It was global before global was cool, as its current chairman used to say. And it was the world’s largest automaker until just a year or so ago.

How does a juggernaut like this become the basket case that we see before us today?

GM (and Ford and Chrysler) relied too heavily on a few, gas-hungry truck and SUV lines for all their profits — plus the money they needed to cover losses on many of their car lines. They did this for a good reason: When gas was cheap, big gas-guzzling trucks were exactly what their customers wanted — until they were not.

In hindsight, it’s apparent that the gas shocks of the 1970s hit Detroit at a time when they were particularly vulnerable.  It took the spike in gas prices — and the economic disruptions it caused — to really open the door for the Japanese automakers.

The Detroit automakers believed the Japanese could be stopped by import quotas. They initially dismissed reports about the high quality of Japanese cars. In any case, they figured that the Japanese would be stuck in a niche of small, economy cars and that the damage could be contained as customers grew out of their small car phase of life.

They were wrong on all counts.

There were Cassandras—plenty of them. At GM, an executive named Alex Mair gave detailed presentations on why Japanese cars were superior to GM’s — lighter, more fuel efficient, and less costly to build. He set up a war room at GM’s technical center with displays showing how Honda devised low-cost, high-quality engine parts, and how Japanese automakers designed factories that were roughly half the size of a GM plant but produced the same number of vehicles.

Another person who warned GM early on about the Japanese challenge was Jim Harbour. In the early 1980s, he took it into his head to try to tell GM’s executives just how much more efficient Japanese factories really were, measured by hours of labor per car produced. The productivity gap was startling—the Japanese plants were about twice as efficient. GM’s president at the time responded by barring Jim Harbour from company property.

It is likely that if no Japanese or European manufacturers had built plants in the U.S. — in other words, if imports were still really imports — the Detroit carmakers would not be in their current straits, although we as consumers would probably be paying more for cars and have fewer choices than we do. The fact is that the Detroit Three’s post-World War II business strategies were doomed from the day in 1982 when the first Honda Accord rolled off a non-union assembly line in Ohio. After that, it soon became clear that the Japanese automakers — and others — could build cars in the U.S. with relatively young, non-union labor forces that quickly learned how to thrive in the efficient production systems those companies operated.

Being new has enormous advantages in a capital-intensive, technology-intensive business like automaking. In testimony before Congress this December, GM’s CEO Rick Wagoner said that GM has spent $103 billion during the past 15 years funding its pension and retiree health-care obligations. That is nearly $7 billion a year—more than GM’s capital spending budget for new models this year. Why wasn’t Rick Wagoner making this point in 1998, or 1999, or even 2003? Even now, GM doesn’t seem willing to treat the situation like the emergency it is. Under the current contract, the UAW will pay for retiree health-care costs using a fund negotiated in last year’s contract—but that won’t start until 2010. GM is on the hook to contribute $20 billion to that fund over the next several years — unless it can renegotiate that deal under federal supervision.

Quality is Job One

Rick Wagoner told Congress: “Obviously, if we had the $103 billion and could use it for other things, it would enable us to be even farther ahead on technology or newer equipment in our plants, or whatever.” Whatever, indeed.

This is a good place to talk about the Detroit mistake that matters most to most people: quality. By quality, I mean both the absence of defects and the appeal of the materials, design, and workmanship built into a car. I believe most people who buy a car also think of how durable and reliable a car is over time when they think of quality.
The failure of the Detroit automakers to keep pace with the new standards of reliability and defect-free assembly set by Toyota and Honda during the 1980s is well known, and still haunts them today.

Even though objective measures of defects and things gone wrong showed new Detroit cars getting better and better, customers still demanded deep discounts for both new and used Detroit models. This drove down the resale value of used Detroit cars, which in turn made it harder for the Detroit brands to charge enough for the new vehicles to overcome their cost gap.

GM, Ford, and Chrysler compounded this problem by trying to generate the cash to cover their health care and pension bills by building more cars than the market demanded, and then “selling” them to rental car fleets. When those fleet cars bounced back to used car lots, where they competed with new vehicles that were essentially indistinguishable except for the higher price tag, they helped drive down resale values even more.

What Happened to the Electric Car?

The recent spectacle of the Diminished Three CEOs and the UAW president groveling before Congress has us focused now on how Detroit has mishandled adversity. A more important question is why they did so badly when times were good.

At least GM didn’t use the cash it rolled up during the 1990s boom to buy junkyards, as Ford did. But GM did see an opportunity in the money to be made from selling mortgages, and plunged its GMAC financing operation aggressively into that market. Of course, GM didn’t see the crash in subprime mortgages coming, either, and now GMAC is effectively bankrupt.

GM’s many critics argue that what they should have done with the money they spent on UAW legacy costs and bad diversification schemes was to develop electric cars and hybrids, instead of continuing to base their U.S. business on the same large, V8 powered, rear-wheel-drive formula they used in the 60s—except that now these vehicles were sold as SUVs instead of muscle cars.

But they did so for understand-able reasons. These were the vehicles that consumers wanted to buy from them. Also, these were the vehicles that government policy encouraged them to build.

One irony of the current situation is that the only vehicles likely to generate the cash GM and the others need right now to rebuild are the same gas-guzzlers that Washington no longer wants them to build. Even New York Times columnist Thomas Friedman has now come to realize that you can’t ask Detroit to sell tiny, expensive hybrids when gasoline is under $2 a gallon. We have two contradictory energy policies: The first demands cheap gas at all costs. The second demands that Detroit should substantially increase the average mileage of its cars to 35 or even 40 miles per gallon across the board. How the Obama administration will square this circle, I don’t know.

Thinking Anew

So now, where are we? GM has become Government Motors. With the U.S. Treasury standing in for the DuPonts of old, GM is going to try to reinvent itself.

Since 2001, GM’s marketing strategy has come down to a single idea: zero percent financing. This was the automotive version of the addictive, easy credit that ultimately destroyed the housing market. Cut-rate loans, offered to decreasingly credit-worthy buyers, delayed the day of reckoning, but it couldn’t delay it long enough. The house of cards began tumbling in 2005, and I would say it has now collapsed fully.

But old habits die hard. Within hours of clinching a $6 billion government bailout last month, GMAC and GM were back to promoting zero-interest loans.

One thing to watch as GM tries to restructure now will be what assumptions the company makes about its share of the U.S. market going forward. If they call for anything higher than 15 percent, I would be suspicious. Since all of you are now part owners of this enterprise, I would urge all of you to pay close attention, since what’s about to unfold has no clear precedent in our nation’s economic history. The closest parallels I can see are Renault in France, Volkswagen in Germany, and the various state-controlled Chinese automakers. But none of these companies is as large as GM, and none of these companies is exactly a model for what GM should want to become.

As I have tried to suggest, it’s hard enough for professional managers and technicians — who have a clear profit motive — to run an enterprise as complex as a global car company. What will be the fate of a quasi-nationalized enterprise whose “board of directors” will now include 535 members of Congress, plus various agencies of the Executive Branch? As a property owner in suburban Detroit, I can only hope for the best.

Joseph B.White is a senior editor of The Wall Street Journal. Mr. White is co-author of Comeback: The Fall and Rise of the American Automobile Industry, and won the Pulitzer Prize for reporting in 1993. Reprinted by permission from Imprimis, a publication of Hillsdale College.

1 Comment

  1. Notmytaxes77

    April 1, 2009 at 12:42 am

    What can be made of this debacle called General Motors? Will they survive or wont they? Will saving GM save Jobs?

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