Government Motors

It is fascinating that we, the people, are investing over $50 Billion to own a failed corporation, but seem to have no notion or interest in why it failed. Oh, there are plenty of sages that enjoy pointing at declining sales and profits over the last decades and declaring, simplistically, that GM stopped making "cars that people want". As if one day, this company that was the largest and most profitable in the world, just woke up in 1985 and said: "let's stop being successful."

The Wall Street Journal had an op-ed recently that continued down this logic path with bit more depth by referencing Elmer Johnson's (former general counsel of GM), observations about GM's resistive culture. It is resistive and resilient. But no one, including Mr Johnson or Roger Smith or Michael Moore or Rick Wagoner or Barack Obama has ever taken the time to understand why it is the way it is. This seems important to know if you are going to invest billions and hope to recover the investment. I mean, we do want our money back, with interest, don't we?

No. General Motors didn't wake up one fine morning and decide it should begin its decline. So, what happened? To understand, it's necessary to know some arcane US history that is a combination of economics, social science, and politics. Back in the late 1950's, when there were really only 3 automobile manufacturers, GM, Ford and Chrysler, GM was more than dominant. It towered over the industry. It set styles, industry rules and, most importantly, prices. Ford had been a rival and had ruled the roost leading up to WWII, but it stayed a privately held company well into the '50's. By the end of that decade, they were in full decline. The US had its first recession since the war in '58 and, Ford which had been forced to go public to raise money and stave off bankruptcy in 1956, had wasted millions on the failed Edsel and had little left for future products. In 1960, the king, GM, went from dominant to untouchable.

It's rarely mentioned today, except in trade talks, but in the middle of the last century, monopoly and anti-trust were part of the political and social lexicon. DuPont had been named in several major anti-trust law suits brought by the federal government, including one involving that company and GM where they were told they could keep ownership of 63 million share of stock, but couldn't vote the shares. DuPont had been a major shareholder in GM since the 1920's. Another significant suit involving DuPont dealt with DuPont having a monopoly of the manufacturer of synthetic fabrics. They lost and were required to create a competitor by building a manufacturing plant, equip it, staff it and then sell it for $1 to the newly formed competing corporation. Obviously, businesses in the US were frightened and wary of any accusation of monopolistic or anti-trust behaviors.

GM was long on the government's radar for anti-trust activities. Dealers in Indiana successfully sued the company for anti-trust policies involving GMAC back in the early '30's. The War interrupted the case, so it wasn't resolved through a consent decree until 1952.

Now in 1960, the talk in the business world was about a declining Ford and a GM that appears poised to monopolize the car business. Dealers were concerned and went about getting strong franchise laws enacted in their states specifically aimed at GM. Ford and Chrysler naturally felt vulnerable and anywhere that they had assembly plants or significant employment, representatives were hearing concerns. It didn't take long for the Senate Banking Committee to open hearings on GM and its threat to monopolize the car industry.

The hearings lasted months and were a lead story many nights on the evening news. GM was still trying to avoid the resentment that Charlie Wilson's misquote of "As GM goes, so goes the country", generated. Clearly the hearings were more than troubling. The concept that was being tossed around Washington was to force GM to spin off Chevrolet into a completely independent company. Everyone in GM was worried. GM was seen by the feds as a recurring actor in anti-trust activities. It had essentially been found guilty in the Indiana case. DuPont's interest was seen as further evidence of how a single big corporation could control industry. And trust-busting was still a term that voters liked. GM executives were paraded before the committee and probed more and more to admit to monopolistic activities. As the prospect of a Chevy spin off began to look more likely, GM used its political contacts, still big in Washington, to cut a deal. GM would not allow itself to control more than 60% of domestic auto sales, if the fed would allow the company to remain intact.

The deal was essentially a consent decree, without the formality and legal documentation. Some said it was self-regulating. Whatever its form, it was an agreement in fact that immediately became one of the core tenants of General Motors operating behaviors. The Board of Directors, executive committee and the operational executives immediately began making decisions through the filter of how might an action, recommendation or innovation change GM's market share too positively. Think about this for a second. A corporation that is supposed to be dedicated to increasing profit through expansion of sales, is afraid to be too successful.

As counter-intuitive as this notion sounds now, it made perfect sense to those who thought they were simply protecting the company. Consequently, the idea that the company might fail or make poor decisions soon disappeared. Executives were certain that anything they considered doing would be successful. The only problem was to make certain it wasn't too successful. So if DeLorean and the guys from Pontiac came up with the concept of taking a compact Tempest and stuffing a 389 cubic inch engine in it and creating the GTO, that was OK, but production would have to be limited so the market share limitation wouldn't be exceeded. Each such initiative would be evaluated similarly. Production schedules were tweaked to allocate sales percentages between the divisions that would keep dealers happy, market share controlled and profits stable; thus the heyday of GM, the mid sixties.

Then the obvious weakness in this notion of limiting market share began to surface. How is this self-regulation culture applied when the decisions and considerations have to deal with challenges that had never been experienced before? In 1968, the fed began to regulate car emissions. Now muscle cars had to deal with something called a positive crankcase valve (PCV), which took exhaust gases, recirculated them into the combustion chamber and re burned them. It diluted horsepower, but it created a cleaner exhaust. A small bump in the road, but it was just the start of a wave of consumer and fed regulations that challenged the physics of automobile manufacturing. In just six years, auto manufacturers had to make a bumper that could withstand a 5 mph collision without damaging the bumper; invent a system that required seat belts to be fastened before you could crank you engine; and reduce tailpipe emissions. Increasingly, as these requirements were layered on (and often scraped by subsequent regulators) GM problem solvers considered the solutions through the prism of their solutions will, of course, work and market share was taken for granted.

But 1974 presented a challenge no one had considered. Something called OPEC cut oil shipments to the US because of its support for Israel. Now in addition to increasing regulation on safety and emissions, a thing called cafe was invented. Vehicles had to be reinvented. Responses included front wheel drive, elimination of cast iron frames and use of plastics all were introduced to save weight and improve gas mileage. But all of these were applied with the now ingrained culture that GM's solutions will be successful, regardless. Styling took a backseat (pun intended). Fit and finish were of less concern. Positive consumer reactions to changes were taken for granted, and by the eighties, GM was producing cookie cutter front wheel drive products that allowed Ford to ridicule GM products in ads by comparing Cadillacs with look-a-like Chevy's.

The rest is better known. By the mid eighties, GM had become a company that lost touch with its market and displayed an arrogance that made it a target for everyone from Ralph Nader to Desmond Tutu. The company was staffed by a management and administration that, for 25 years, had trained itself to expect success, not consider failure and negotiate internal debates from a point of view that the pie is fixed and we all that is needed for everyone to cooperate to make certain no other part of GM gets bigger.

Today, GM has become Government Motors and again the experience teaches managers that failure can't happen. The UAW's clout with democrats is too significant; their political dollars and organization too important to be driven out of existence. GM will be even more insulated from its market with a Board of Directors created by Congress, the president, Canada and the UAW. Decisions will be filtered through a matrix of not what will beat Toyota or Honda, but how can we keep this plant open; which union local will get to manufacture this car; how will layoffs impact the election of the next congress; will the Sierra Club allow production of trucks, etc.

Government interference did not cause GM's failure. GM management's response to government interference did. But ignoring how GM came to failure only invites future failure. The same $50+billion could have been provided as loans conditioned with cultural changes had the problem been understood. Then we would have had an independent GM that had a chance to be a competitor. Now we have the prospect of producing Yugo's for the good of the people.