bizzXceleration: Performance, Value and Profit

The Death of GM

A Saga of Decline and Denial Once, General Motors was Microsoft and Apple and Toyota all rolled into one. GM set the standard of how a company should be run, how utilitarian products could be made cool and how they should be sold. It helped win a world war, drive American prosperity and reinvigorate business-school curricula. "Nobody else could cover the whole range of the marketplace like GM, not Ford, not Chrysler," said Gerald Meyers, a former chief executive of American Motors Corp. and now a professor of business management at the University of Michigan. In the end, though, GM was a victim of its own success -- its path to bankruptcy paved with the very management, marketing and labor practices that made it the world's largest and most profitable company for much of the 20th century. Strategies that had once been deemed innovative "became a millstone on the whole company," said Mr. Meyers. At the beginning of 2005, GM's business began unraveling. Years of heavy sales incentives had gutted its profit margins, and the company warned a significant loss was likely that year. By March, there were signs that some people inside GM might be having doubts about the brand strategy. At a conference of financial analysts in New York, Mr. Lutz described Buick and Pontiac as "damaged brands" that had suffered as a result of too little investment in new models. GM ended up reporting a loss of $8.65 billion for 2005. In 2006, Mr. Wagoner faced off in a boardroom battle with billionaire Kirk Kerkorian and his adviser, Jerome B. York, who had publicly called on GM to eliminate some brands and for a time had a seat on GM's board. Mr. Wagoner eventually prevailed, and by the end of 2006 Mr. Kerkorian sold his stake and Mr. York left the board. GM's smaller brands, meanwhile, weren't gaining enough critical mass to generate returns. Between 2003 and 2007, Saturn, Saab and Hummer together averaged annual pretax losses of $1.1 billion a year.

• Filings Reveal Depth of Problems
• From icon to bankruptcy, a timeline
• Track changes in GM's sales and share price
• Review the many lives affected by GM

How GM Wasted 'a Good Crisis' A great American institution has died. Mark June 1, 2009 as the tragic end of General Motors as a viable entity. Like a grade B movie wending toward its inevitable conclusion, 30 years of management insularity and incompetence at General Motors led to Monday's bankruptcy filing. GM will emerge from bankruptcy in some form, but it will never again be the king of the road that once produced one out of every two automobiles on American highways. Italian philosopher Niccolo Machiavelli once advised his followers, "Never waste the opportunities offered by a good crisis." For three decades General Motors management refused to face the reality that its autos were not competitive with foreign vehicles. This led to steady loss of market share, triggering a series of crises. The latter were always treated as short-term events to get through, rather than as opportunities to transform the company. Rather than acknowledge its mistakes, management preferred to blame external factors and hope that halfway measures, passage of time, or government protection could solve its problems. Avoiding reality never works. At the outset of a crisis, leaders have many options they can deploy to address their problems. Like the early spotting of a cancer tumor in one's body, early action to surgically remove the problem can enable the body to get healthy once again. Over time, the options narrow or wither away. Then management is forced to ask someone else to save it. In GM's case, management has frequently turned to the U.S. government when it needed help. On several occasions when GM faced difficulties, its executives boarded their company planes to lobby the U.S. government to help the company out. Past efforts included imposing import quotas on foreign-made vehicles, fighting against safety improvements such as seat belts and air bags, delaying federally mandated increases in fuel efficiency, or lobbying the government to take over its health care benefits. GM had powerful allies in these campaigns, including the United Auto Workers and Michigan politicians. The lessons from this tragedy are all too evident: leaders are paid to build healthy enterprises by facing reality and using crises to strengthen their competitive position. Three decades of GM leaders failed this basic test, and millions of lives are being negatively impacted.

Ingrassia: How GM Lost Its Way Decades of dumb decisions helped send General Motors to a bankruptcy court yesterday, but one stands out. The year was 1998, and the United Auto Workers was striking at two factories in Flint, Mich., that made components critical to every GM assembly plant in the country. The union was defending production quotas that workers could fill in five or six hours, after which they would get overtime pay or just, you know, go home. Most strikes are forbidden during the life of a labor contract, so to provide legal cover the union started filing grievances. GM lawyers contended the walkouts violated the contract anyway and drafted a lawsuit -- the first by the company against the UAW in more than 60 years. But GM's labor-relations department freaked out because the lawsuit would antagonize the union. Just think about that. The union had shut down virtually all of GM, costing the company and its shareholders billions of dollars, and yet the company's labor negotiators were afraid of giving offense. After heated internal arguments, the suit was filed and GM seemed on the verge of winning. But the company settled just before the judge ruled. UAW members marched victoriously through downtown Flint. GM executives who advocated a tougher stand got pushed out of the company. The picture of a heedless union and a feckless management says a lot about what went wrong at GM. There were many more mistakes, of course -- look-alike cars, lapses in quality, misguided acquisitions, and betting on big SUVs just before gas prices soared. They were all born of a uniquely insular corporate culture. By and large, Mr. Obama's automotive task force has done its job pretty well, forcing the companies and the UAW to make difficult decisions that they should have made themselves long ago. GM will shed four of its eight U.S. brands -- Saab, Saturn, Pontiac and Hummer -- thousands of dealers, 11 factories, and much of its debt. It is no small irony that a Democratic administration brought in a bunch of private-equity types to impose rational management on big business. That said, a couple of aspects of the GM and Chrysler bailouts could come back to haunt U.S. taxpayers and the Obama administration. The answer will depend on the success of GM, which in turn will hinge on whether the new company can cast off the culture of the old one. One encouraging sign is that, thanks to the labor contract amendments imposed by the Treasury's task force, UAW members will be required to work 40 hours a week before getting overtime pay. Less encouraging is that workers still will be allowed six unexcused absences before being fired. It doesn't take that many at a Honda plant. As for management, not long ago a group of executives was reviewing a prototype new Buick model, about the size of a BMW 3 Series, at GM's design studios. The sporty styling had been developed in China for sale both there and in the U.S. But the company's cautious product planners suggested conducting customer clinics to gauge reaction to the design and possibly changing both the front and back end. It would have delayed the project and cost tens of millions of dollars. CEO Fritz Henderson wisely said no. But the very next day the product planners were charging ahead with their clinic plans anyway, just in case the boss wanted to see the results of their research. Maybe the new Buick should be named the CYA. Neither billions in losses nor the brink of bankruptcy, it seems, have been enough to change many traditional ways of doing things at GM. Heaven only knows what will be enough. But a company with a cautious, slow-moving management and a union committed to defending ridiculous work rules won't have a chance of succeeding. Perhaps everyone remaining at the new GM will realize that. The rest of us can only hope for the best.

The Quagmire Ahead On Jan. 21, 1988, a General Motors executive named Elmer Johnson wrote a brave and prophetic memo. Its main point was contained in this sentence: “We have vastly underestimated how deeply ingrained are the organizational and cultural rigidities that hamper our ability to execute.”  On Jan. 26, 2009, Rob Kleinbaum, a former G.M. employee and consultant, wrote his own memo. Kleinbaum’s argument was eerily similar: “It is apparent that unless G.M.’s culture is fundamentally changed, especially in North America, its true heart, G.M. will likely be back at the public trough again and again.” These two memos, written by men devoted to the company, get to the heart of G.M.’s problems. Bureaucratic restructuring won’t fix the company. Clever financing schemes won’t fix the company. G.M.’s core problem is its corporate and workplace culture — the unquantifiable but essential attitudes, mind-sets and relationship patterns that are passed down, year after year. Over the last five decades, this company has progressively lost touch with car buyers, especially the educated car buyers who flock to European and Japanese brands. Over five decades, this company has tolerated labor practices that seem insane to outsiders. Over these decades, it has tolerated bureaucratic structures that repel top talent. It has evaded the relentless quality focus that has helped companies like Toyota prosper. As a result, G.M. has steadily lost U.S. market share, from 54 to 19 percent. Consumer Reports now recommends 70 percent of Ford’s vehicles, but only 19 percent of G.M.’s. The problems have not gone unrecognized and heroic measures have been undertaken, but technocratic reforms from within have not changed the culture.

The bankruptcy of General Motors SINCE the start of the year it had seemed probable, and for several weeks inevitable. General Motors’ application on June 1st for Chapter 11 protection from its creditors, triggering the biggest industrial bankruptcy in history, was nonetheless a momentous event. Yet as recently as the autumn of 2007 Mr Wagoner’s stock had been high. There was hope both inside GM and among industry commentators that after three years of huge losses and painful downsizing the carmaker was at last on the road to viability. In some ways, GM’s problems can be traced to its origins a century ago. Between 1908 and 1920, its founder, Billy Durant, bought 39 companies including Cadillac, Pontiac, Oldsmobile, Chevrolet and several parts-makers, but ran them as separate entities. In 1923, after narrowly avoiding bankruptcy, Alfred Sloan, a ball-bearing magnate, took over the running of GM. Sloan imposed tight financial controls and brought order to the chaotic model line-up. Yet even as GM expanded abroad, establishing factories in 15 countries and buying Vauxhall in Britain and Opel in Germany, Sloan made little attempt to forge a unified company at home. The different divisions were run almost as independent fiefs that fought among themselves and against any interference from the centre. By the early 1980s it had begun to dawn on GM that the Japanese could not only make better cars but also do so far more efficiently. A joint venture with Toyota to manufacture cars in California was an eye-opener. It convinced GM’s management that “lean” manufacturing was of the highest importance. Unfortunately, that meant still less attention being paid to the quality of the cars GM was turning out. Most were indistinguishable, badge-engineered nonentities. As the appeal of its products sank, so did the prices GM could ask. New ways had to be found to cut costs further, making the cars still less attractive to buyers. When GM emerges from bankruptcy, it will have shed some of its burdens, but the damage done by decades of mismanagement and union intransigence will still weigh heavily. The new GM will not be quite as new as either it or the government would like Americans to believe.

• General Motors 1989
• The bidding for GM Europe
• Blue-collar America
• Saving GM Europe
• Supreme Court asked to block Chrysler sale to Fiat

Detroitosaurus wrecks  THE demise of GM had been expected for so long that when it finally died there was barely a whimper. Wall Street was unmoved. Congress did not draw breath. America shrugged. Yet the indifference with which the news was received should not obscure its importance. A company which once sold half the cars in America, employed in its various guises as many people as the combined populations of Nevada and Delaware and was regarded as a model for managers all over the world has just gone under; and its collapse holds important lessons about management, about government and about the future of the car industry. The problem in the 1970s was not really the arrival of better, smaller, lighter Japanese cars; it was GM’s failure to respond in kind. Rather than hitting back with superior products, the company hid behind politicians who appeared to help it in the short term. Rules on fuel economy distorted the market because they had a loophole for pickups and other light trucks—a sop to farmers and tool-toting artisans. The American carmakers exploited that by producing squadrons of SUVs, while the government restricted the import of small, efficient Japanese cars. If Detroit had spent less time lobbying for government protection and more on improving its products it might have fared better. Sensible fuel taxes would have hurt for a while, but unlike market-distorting fuel-efficiency rules, they would have forced GM to evolve. As for the health and pension costs which have helped sink GM, the company and the government bear joint responsibility for those too. After the war GM rejected a mutual scheme that the unions wanted because it smacked of socialism; and around the same time, the company agreed to give retired workers full pensions and health care for life. But if successive administrations had dealt with America’s expensive and inadequate health care—a problem with which Barack Obama is now wrestling (see article)—the cost of those union demands would have been far lower. GM’s demise should not be read as a harbinger of doom for the car industry. All around the world people want wheels: a car tends to be the first big purchase a family makes once its income rises much above $5,000 a year, in purchasing-power terms. At the same time as people in developing countries are getting richer, more efficient factories and better designs are making cars more affordable. Yet although the long-term prospects for sales growth look excellent overall, the car industry has a problem: it needs to shrink dramatically. At present, there’s enough capacity globally to make 90m vehicles a year, but demand is little more than 60m in good economic times. Even as the big global manufacturers have been building new factories in emerging markets, governments in slow-growing rich-world markets have been bribing them to keep capacity open there. For all its peculiarities, the car industry is no dinosaur—Toyota, for instance, is a byword for manufacturing excellence. But the unevolved GM deserved extinction. Detroit employed so many people and figured so large in American culture that governments felt they had to protect it; but in doing so, they made it vulnerable to less-coddled competitors from abroad. By trying to keep their car industry big, America’s leaders ended up preventing it from becoming good. There is a lesson in that which all governments would do well to learn.

GM's dismantling opens doors for foreign carmakers Roger Penske is inventing a new business model on the ruins of General Motors Corp. The auto racing magnate and mega dealership owner is snapping up Saturn and opening his expanded sales network to foreign automakers looking to sell cars to Americans. The deal announced Friday is another example of how the cataclysm that hit Detroit's three carmakers is reshaping the global automotive landscape in profound ways, reducing their worldwide influence and -- if Saturn turns out as Penske envisions -- opening new markets to smaller companies. In the shake-up, well-known brands are changing flags quicker than an oil tanker in pirate-infested waters. Italy's Fiat SpA is waiting for U.S. courts to approve its acquisition of Chrysler LLC's assets. GM has worked deals to turn its German subsidiary Adam Opel GmbH over to a Canadian auto parts company with Russian backing. And Hummer may be going Chinese, although state media there reported Friday that the deal has hit regulatory hurdles. Yet industry experts are doubtful that the flurry of mergers and alliances will be any more durable than failed marriages of the past, proving to be just one big distraction from the underlying issue that made them so vulnerable in the first place: making more cars than people can buy. Still, Penske, who already runs Penske Automotive Group Inc., the second-largest U.S. dealer network, thinks his business model is different enough to be successful. GM and Penske expect to close the Saturn deal in the third quarter, with the wounded Detroit automaker continuing to build three models for Saturn to distribute. Key to its success, though, will be the ability to sign on other global manufacturers to make cars for Saturn, giving it a diverse portfolio of vehicles that will sell whether gasoline prices are high or low. But by opening the door to automakers not now in the U.S., such as France's Renault, Penske could alter the market here, allowing smaller automakers to compete against Detroit. For years, the U.S. auto manufacturing base has been too large for the market, forcing automakers to overproduce to keep plants running and flooding the market with vehicles. As a result, the Detroit Three especially have been forced to discount vehicles to sell burgeoning inventories. But Penske said the continued restructuring by Chrysler, GM and Ford Motor Co. should solve that problem, at least in the U.S.

• G.M. in Deal to Sell Saturn to Penske

Brief Incursion Into the Not-So-Big Two It is hard to recall an instance in which government officials have been as deeply involved in negotiating and, at key junctures, dictating the terms of a union contract or a company's business plan and financing scheme. Nor has so much taxpayer money ever been committed to assure the survival of two private firms. If this were happening in France or Venezuela, we wouldn't hesitate to call it nationalization. But this is not France, it is not Venezuela, and we have not embarked on a new course for American capitalism. This is simply an extraordinary intervention at an extraordinary moment driven by both economic and political necessity -- economic in the sense that the economy is in no shape to withstand the sudden collapse of General Motors, Chrysler and their supplier network, and political in the sense that their sudden demise would be a mortal blow to national pride and undermine other vital recovery efforts. Like Bush v. Gore, the auto bailout represents a distasteful policy decision that even its authors hope will set no precedent. As I suggested last year, a pre-cooked, accelerated bankruptcy process was the only realistic way to restructure companies that had been so badly mismanaged for so many years. As is appropriate in a capitalist system, shareholders have been wiped out and lenders forced to suffer for their bad judgment. It is the job of the bankruptcy court to ensure that these financial creditors receive at least as much from any restructuring plan as they would have from a long and messy liquidation -- and they will. But there is nothing in the bankruptcy law, or the common law, requiring a government volunteering to finance a bankruptcy restructuring to divide its largess evenly or fairly between bondholders and assembly-line workers. That is a political choice that properly rests with the government. In the coming months, the Obama administration will need to resist the temptation to use its newfound control over Chrysler and GM to try to solve the energy crisis, revive the Rust Belt economy and bring an end to income inequality. It will also need to find ways to insulate itself from taking responsibility for how every dollar is spent at the two companies, lest every bonus and first-class airline ticket be turned into a taxpayer scandal. As it has been up to this point, the Obama administration's role going forward is to be ruthless and impatient about the restructuring of these once-great American companies so they can emerge from the current recession profitable and competitive.

Ford's reversal of fortune For much of the last year, Ford Motor has been the strongest U.S.-based automaker. But with Chrysler already out of bankruptcy and General Motors possibly six weeks away from its own exit from bankruptcy, Ford could soon find itself in the weakest position of the traditional Big Three. The problem for Ford is that its strength was only relative to the greater problems at GM and Chrysler. Ford built its cash reserves not through profits, but by mortgaging most of the company's assets before the credit crisis of 2008 cut off funding for the other automakers. That pile of cash gave Ford (F, Fortune 500) the ability to ride out the sharp plunge in auto sales without turning to the government for help -- at least so far. But it also left Ford with about $32 billion in debt on its books at the end of the first quarter. With GM (GMGMQ) and Chrysler using the bankruptcy process to shed much of their own debt cheaply and quickly, Ford has gone from the automaker with the most cash on hand to the one with the most debt on its books. GM will have only about $17 billion in debt if it can follow its planned emergence from bankruptcy. Chrysler left bankruptcy with about $11 billion in debt, and a new partner, Italian automaker Fiat, it did not have previously have. Ford also hasn't been able to cut its manufacturing capacity or its bloated dealership network as Chrysler and GM through bankruptcy reorganization. Ford officials insist the company remains in a strong competitive position against its Big Three rivals -- despite all the help they got from the government and the bankruptcy courts.Other auto industry experts say that even if Ford can manage its debt level, it will soon find itself in need of a bailout or possibly bankruptcy if auto sales don't start to rebound in the next year. "Leverage is a concern, but it's not the primary concern. The greater concerns are low sales and underused capacity," said Gregg Lemos-Stein, credit analyst with ratings agency Standard & Poor's, which rates Ford's corporate credit as CCC+, deep into so-called "junk bond" status. Lemos-Stein said while the company still has a better cash position than its rivals, "they don't have an indefinite supply of cash, especially since we expect the outflows of cash to continue." Still, some experts believe Ford's future looks brighter than its rivals because it has a better lineup of vehicles in the showroom and its pipeline. While GM is busy shedding weaker brands and Chrysler is shifting away from trucks towards smaller cars, Ford has already adapted to changing demands from customers. "They've managed their product portfolio pretty well. That's very important," said Tom Libby, president of the Society of Automotive Analysts. Libby said that product development at GM and Chrysler took a hit as the companies rushed to slash costs in recent months. That could leave Ford with newer, more attractive products for at least a few years.

Fiat: restructuring of auto industry necessary Fiat, which has recently taken a controlling stake in Chrysler, called Thursday for a "serious restructuring" of the auto industry, saying the global crisis has worsened the problem of production overcapacity. Chief Executive Sergio Marchionne also laid out plans for car production in Italy, confirming no plants will be closed but that from 2011 one facility will switch from making autos to other types of production. Marchionne held a meeting with the Italian government and unions at the premier's office in Rome to illustrate the group's mid-term program. Premier Silvio Berlusconi attended the talks. Earlier in June Fiat took on most of Chrysler's assets in exchange for technology and management know-how. The alliance created the 6th largest automaker worldwide, according to Fiat. "The global crisis has further aggravated the problem of production overcapacity that has been plaguing the automotive industry for years," said a statement released by Fiat after the talks. "A serious restructuring of the automotive industry is now absolutely necessary if it is to be economically viable." Fiat officials said the restructuring would include measures to cut costs and increase efficiency. Fiat also said that "far-reaching strategic measures are necessary to achieve an adequate level of critical mass, increase volumes produced for each platform and expand geographic presence." It said the deal with Chrysler was part of that strategic approach. Marchionne said ecological incentives to stimulate demand and temporary layoff schemes were important tools.

• Chrysler's Sergio Marchionne: The Turnaround Artista
• What Fiat Could Do for Chrysler (and Vice Versa)

China's Carmakers Are Gaining on Foreign Rivals Nissan (NSANY) skipped Detroit's North American International Auto Show last winter, and several companies are expected to stay home from the Tokyo show this fall. But no major automaker dared to miss April's auto fest in Shanghai. That's because global automakers see China as their best hope for growth this year.Yet, for GM and other global automakers, the optimism about China may be short-lived. True, the market is booming: It's on track to grow up to 10% this year, vs. an expected 23% plunge in the U.S. and a 15% decline in Europe, says London-based consultant Intelligence Automotive Asia. But local automakers are grabbing market share from their global rivals. In the first quarter of 2009, Chinese brands boosted their market share to 30%, from 26% during the same period in 2008.That represents a shift. Foreign carmakers have been China's market leaders ever since the government invited them to form ventures with local partners two decades ago. But increasingly, "Chinese automakers have the critical mass and momentum," says Ashvin Chotai, managing director of Intelligence Automotive Asia. One reason: Chinese brands benefit more than foreign competitors from new government tax incentives, which encourage consumers to purchase small, fuel-efficient cars. Chinese carmakers tend to make mainly small vehicles, while foreign companies dominate the larger end of the market. Local automakers are also winning customers by offering more features than before—at a still low price. That's why Xu Xingang, 32, a Beijing demolition worker, chose a $11,685 BYD Auto F3 with an automatic transmission over the Nissan Tiida, Honda Fit, and Hyundai Elantra Yuedong. The BYD wasn't luxurious, but the price was right. "The interior is anything but fine, but I'm satisfied," he says. "The BYD has the best cost performance."

•  Should GM Import from China?

Small Carmakers Benefit From Detroit’s Woes Many smaller automakers are gaining a bigger share of the market, most notably Hyundai and Kia.Together, the two Korean brands, which are both owned by Hyundai, hold 7.3 percent of the American market, the same as Nissan, which ranks sixth in American sales, behind G.M., Toyota, Ford, Honda and Chrysler. Last year, Hyundai and Kia had 5 percent of the market.Their gains appear to be a replay of what occurred four decades ago, when upstart automakers from Japan started selling cars in the United States. At the time, American carmakers dismissed them, but today they control nearly 40 percent of the American car market.Analysts see two main reasons that smaller companies are capitalizing on the auto industry’s downturn. One is that the shrinking of the overall market — the current selling rate is about 10 million vehicles a year, down 40 percent from two years ago — has created opportunities for carmakers that do not need to sell millions of cars to make money.Second, he said, buyers have become much less focused on brands and more on the quality of the vehicles themselves.“There are so many good cars out there to choose from. Everybody’s building a good car right now,” Mr. Pinelli said. “The average person who punches out of work and picks up some fast food and goes home to watch reality TV is oblivious to which auto brands are owned by which corporation.”