As the 1960s began, GM began decades of reacting to competitors rather than showing the way. As the European car makers introduced smaller cars, GM introduced the Chevrolet Corvair. This car later was attacked by Ralph Nader, who wrote the book Unsafe at Any Speed, which led to congressional auto safety hearings. Speed took precedence over safety. GM continued to maintain its worldwide dominance through the 1960s into the 1980s. New car controversy plagued the company during these decades. Every decade, a major new product line was launched with defects of one type or another showing up early in their life cycle. In every case improvements were eventually made to fix the problems, but the resulting improved product ended up failing in the marketplace as its negative reputation overshadowed its eventual quality. Again, Lee Iacocca’s wisdom went unheeded at GM.
In the end, all business operations can be reduced to three words: people, product, and profits.Renaissance Center – GM Headquarters
(Image source: Wikipedia)
GM forgot that superior products developed by superior people lead to profits. The 1970s were marked by more disastrous product launches. Who could forget the Vega? Quality was not job one for GM. The last major strike by the UAW also occurred in 1970. After that, management continually gave in to the union demands in all future contract negotiations. They promised tremendous pension benefits, lifetime healthcare benefits, huge pay increases, and onerous work rules that gave management no flexibility. GM evidently didn’t have any bean counters who could extrapolate past a five year horizon. If they had, they would have seen that they would eventually have an unsustainable cost structure with more retirees being paid than workers on the assembly line. The troubling facts were ignored because GM still had a 45% market share during the 1970s. GM's U.S. employment reached 618,365 in 1979, making it the largest private employer in the country. Worldwide employment broached 853,000. It has been downhill ever since.
In 1983, in an epilogue to 1946’s Concept of the Corporation, Peter Drucker wrote: "GM may, within a decade, develop into a true transnational company that integrates markets of the developed world and their purchasing power with the labor resources of the Third World." And "while it is much too early even to guess what GM's labor relations will look like," he added, "the assembly line, that symbol of industry during the first half of the century, will, by the year 1990 or the year 2000, probably have faded into history." Mr. Drucker underestimated the lack of vision and foresight of GM management. They continued to follow the old ways until it was too late. Japanese carmakers arrived like a freight train during the 1980s and have never let up. GM has essentially been in a death spiral for the last 30 years. Throughout the 1980s, GM rolled out more duds like the Chevrolet Citation, Chevrolet Cavalier, and Pontiac Sunfire.
Bruce Springsteen touched on the future of the U.S. auto industry in his classic "Glory Days."
My old man worked 20 years on the line
And they let him go
Now everywhere he goes out looking for work
They just tell him that he's too old
I was nine years old and he was working at the
Metuchen Ford plant assembly line
Now he just sits on a stool down at the legion hall
But I can tell what's on his mind
Glory days yeah goin back
Glory days aw he ain't never had
Glory days, glory daysDecline of an Empire
Roger Smith ran GM from 1981 until 1990. During his reign, GM’s market share dropped from 46% to 35%. His biggest claim to fame is being the subject of Michael Moore’s first documentary Roger & Me, which was extremely critical of his laying off of thousands of employees in Flint, Michigan. He took over GM in 1981 while it was losing $750 million, its 1st loss in 60 years. Poor product quality, labor unrest and lawsuits over unsafe vehicle designs affected sales volumes in the early 1980s, which led to GM losing market share at an alarming rate to foreign automakers. In 1981, U.S. Union autoworkers responded to the Japanese threat by bashing Japanese automobiles with sledgehammers. I’m sure this made them feel better, but it was a futile and useless gesture. Smith attempted to institute Japanese manufacturing techniques, but the ingrained bureaucracy resisted change and foiled his efforts. A culture of mediocrity and poor quality led to continuous decline rather than continuous improvement. The acquisition of EDS from Ross Perot in 1984 was a failure. Perot attempted to change the culture of GM, but failed. Perot liked to say that getting GM moving again was like teaching an elephant to dance.General Motors had a chance to take a commanding lead in the mid 1990s. It developed the 1st electric car, the EV1 in 1996. Instead of taking advantage of this opportunity to change the automotive world, GM scrapped this car and destroyed all of the models. It decided the future was in trucks, SUVs, and Hummers. It continued to roll over to the unions every time a contract came up for renegotiation. This ultimately led to an average hourly labor cost of $73.26 for GM by 2006, a 65% premium to what the Japanese pay their autoworkers.
GM sold its soul to the devil of debt and high margin, low mileage vehicles. SUVs generated a profit of $10,000 to $15,000 per vehicle, even with GM’s bloated cost structure. Rather than improve its assembly line efficiency, product design & quality, or solidify its balance sheet, it chose to use its GMAC subsidiary to make loans to subprime borrowers at 120% of the car’s value. After 9/11, GM showed its dedication to the flag by giving cars away with 0% financing. Amazingly, when you provide 0% financing to people with 550 credit scores you can sell millions of Escalades and Hummers. While Rome was burning GM management continued to fiddle. There hundreds of Presidents, Vice-Presidents, and Directors continued to fly around in their fleet of 7 corporate jets. As Rick Wagoner and his top cronies secluded themselves in executive suites on the 14th floor of their palatial headquarters, eating steak and lobster in their executive dining room, served by minions, GM was rotting from within.
Source: Autoblog.com
Giving away cars for free was so successful, GM decided to parlay its expertise into giving homes away for free. It bought Ditech in 1999, just in time to catch the greatest housing bubble of all time. Ditech was a pioneer in offering 125 percent loans, in which the borrower could get more than the property was worth. It specialized in no-documentation mortgages and stated income loans. How could lending someone 125% of a home’s value with no proof of income or assets possibly go wrong? To quote Claude Rains from Casablanca, “I'm shocked, shocked to find that gambling is going on in here!” GMAC surprisingly lost $8 billion in the last two years. Luckily, the American taxpayer has stepped in to provide GMAC with $5 billion of TARP so it can continue to allow GM to sell more cars at a $2,000 loss per car. No need to worry, it's hired some Wall Street wizards from Citicorp who have figured out that they can make it up on volume. Paul Kedrosky recently provided a fascinating look at how two decades of profits could be wiped out in seven months. With 260,000 remaining employees, the end is near for this fallen giant.
Source: Paul Kedrosky Infectious Greed
A corporate governance study at ragm.com sums up the reasons for GM’s decline.
