Archive for December, 2008

The Ghosts of GM’s Past: Where today’s crisis began

It is unfair and plain ludicrous to blame GM’s current management for the condition of the company. If anything, Rick Wagoner and his team have had more positive effect on GM’s fortunes than any CEO in the last 50 years. He’s stuck with the job of undoing decades of mismanagement, and frankly, he’s done a lot so far.

 

Turmoil at the Milestone

It’s ironic that the origins of GM’s 2008 Centennial Crisis lie in events the corporation’s 1958 Semicentennial year. Despite a deep national economic recession and sales slump, GM was far and away the worldwide industry leader.

 

So, while 1958 sales were poor following a decade-long boom, General Motors the corporation ostensibly never looked better, gifting the nation with a two-hour 50th Anniversary TV extravaganza starring dozens of contemporary celebrities. Of course, the real stars were the all-new 1958 Cadillacs, Buicks, Oldsmobiles, Pontiacs and Chevrolets – considered by many to be the ugliest GM lineup ever. The company that innovated the very idea of production car design had excreted a lineup whose unifying theme seemed to be a Jell-O mould amalgamation of all the tailfins, chromed castings and saturated pastel colors. The ‘58’s were the pinnacle of planned obsolescence, which was never a GM policy, but in fact the signal failure of GM’s policy-making principles.

 

The paradox between the slick, Emmy-nominated TV Gala Celebration and the egregious new line-up was emblematic of the corporate carnage that had afflicted GM for a decade. Externally, anti-trust rulings against DuPont Company, and rumblings of action against GM itself, had contorted the governance structure that had made GM such a dynamic enterprise. Internally, a rift had long polarized GM’s New York governance and Detroit operating staffs.

 

GM’s War with Itself

Du Pont had rescued GM from bankruptcy in 1920, taking a commanding stock position, and setting the young company on the course to industrial ascendancy as the first truly modern large enterprise. As GM chairman, Pierre du Pont recognized Alfred Sloan’s brilliant management innovations, and the steady Du Pont dominance in the boardroom backed Sloan’s methods of managing for the long term. While the government’s 1946 anti-trust suit against du Pont had not proven a restriction of trade in the automobile industry, the courts nonetheless determined to end the relationship between the industrial giants. In 1953, DuPont was ordered to divest itself of GM stock by 1958.

 

Following World War II, GM underwent a series of expansions which had yielded record sales and earnings results, which Sloan had initially supported, but the growth of which had thrown his carefully balanced relationship between finance and operations out of balance. The Detroit product men saw in the post-War era an opportunity to quench demand that had been building since 1929. They itched to commercialize wartime technology and design innovations. The Depression-bred finance staff saw only an uncertain economic outlook and a threatening legal environment that demanded prudent use of scarce capital.

Detroit was right, and sales of GM sales soared, generating huge profits that effectively liberated Detroit from New York’s grasp of GM’s purse strings. But after a peak year in 1955, the runaway train was going off the rails. Price wars and a natural decline from a new sales peak hit earnings, and hasty cost savings took a toll on product quality.

 

At the same time, GM’s management was undergoing a generational turnover that was remarkable not so much for the new executives it installed, but for the older ones whom it eclipsed. Alfred Sloan retired as Chairman in 1956 at 81 years-old (he acted as Honorary Chairman until his death in 1966). Sloan’s basic achievement – making GM the most powerful and admired company in the world – seemed set to simply accelerate on the course he had set it. But his absence was an incalculable loss at the top.

 

And while the company kept Sloan as long as God allowed, knives were drawn behind another of the corporation’s “founding fathers.” Harley Earl had essentially invented production automobile design in 1927, giving General Motors its most compelling long-term market advantage. By 1956, he had forged among the untethered production side an unofficial policy of complete yearly redesigns – seen by New York as the embodiment of the out-of-control Detroit operations.

 

Coup de Corporation

It all came to a head in 1958. Milestones often compel organizations to make symbolic changes, and perhaps that got the ball rolling. But the sales slump, along with an objective decline in product quality gave the New York governance staffs the ammunition they needed to move against the Detroit operations. With Sloan no longer in position to act as referee, and as the DuPonts abdicating their anchoring presence on Board of Directors, the time was perfect for a Coup de Corporation.

 

The 1958 reorganization effectively subordinated operations to a regime composed of finance staff and general counsel, backed up by like-minded new board-members. They were in no position to stop the 1959 model line – considered iconic today, but over-the-top when they bowed. But they immediately started nibbling costs at the edges, leading to such decisions as deleting a chassis stabilizer-bar on the upcoming Corvair model.

 

To the public eye, GM was largely unchanged. It produced some of it most memorable products in the 1960s, but the product side was riding on past glory. Declining investment led to technical stagnation and badge-engineering. Most importantly, increasing centralization gave non-automotive staff control of product, resulting in platform proliferation that destroyed GM’s defining brand-differentiation policy. By 1968, central management was imposing designs, production methods and technical restrictions upon the divisions, resulting in the disastrous Chevy Vega, chronically eroding quality, and inability to respond to the 1974 gasoline crisis.

 

Finally, Progress

There have been some successes in the last 50 years at GM, but they were never built upon, and GM lost it industry leadership in terms of offering advanced products and meaningful brands decades before falling to second place in worldwide sales in 2007. Rick Wagoner, alone among all of the GM CEOs since 1958, has restored product to the top of the priority list, mainly by recruiting Bob Lutz and giving him real authority. The results are apparent in a new generation of competitive GM products. Thus GM’s survival into a second century begins not with removing today’s management, but with continuing the Wagoner policy of restoring balance within GM management.

Sloan on Wagoner: 51% Hero

“If you do it right 51% of the time, you will end up a hero.” – Alfred P. Sloan, Jr.

And Rick Wagoner has done it right at least that much. The problem is that he has been working against a 50-year legacy of preponderantly wrong decisions by his GM CEO predecesors. These include bad labor deals, sqaundering brand equity, failure to maintain product quality, failure to innovate, failure to compete globally, among an endless litany that is nicely summed up in “Roger and Me.”

Rick has put his shoulder against all of this, and by the beginning of this year, GM had a growing line of competitive cars, was a leading player in emerging markets, was developing a breakthrough propulsion system (Volt), had negotiated a competitive labor cost structure, and had built some of the world’s most productive and environmentally-friendly plants.

He has made some mistakes. The Hummer. Launching the two-mode hybrid system in the big SUVs. Partnering with Fiat. As far as the failure to prune the thicket of GM nameplates, brands and dealers, these were battles that couldn’t be fought at the same time as those with the UAW (win), the Kerkorian/Ghosn attempted takeover (win), the Delphi bankruptcy (still fighting), and the other dozens of constantly erupting firefights where Rick has been ever at the trigger.

His mistakes have not been out of ego or stupidity. They were poor, but not uninformed, decisions. The good decisions are vastly more numerous and strategically more significant. Rick’s major failing has been the lack of a vision for the North American market, and that is more the fault of an institutional legacy of putting financial men alone at the top of the company since 1958. Knowing that, he can get plenty of good help to turn that around — and he is magnanimous about giving good people authority to do their job.

Chris Dodd blames Wagoner for GM’s plight? That’s tantamount to attributing Dodd with the responsiblity for the economy because George Bush’s grandfather, Preston Bush once held Dodd’s senate seat.

Alfred Sloan

Auto industry key data

 I. Chart comparing Big Three auto makers to Toyota and Honda

Source: Big Three Auto ProCon.org

    A. B. C. D. E. F.
    GM Ford Chrysler Big 3 Total Toyota Honda
1.
US Market Share as of:
- Oct. 20081
19.9% 15.3% 11.3% 46.5% 18.1% 10.3%
  - Dec. 20072 23.4% 15.6% 12.6% 51.6% 15.9% 9.4%
2.
Global Sales:
- 2008 Year to Date3
$118.8 billion $117.1 billion ? ? $143.9 billion $66.7 billion
 

- 2007 total 4

$181.12 billion $172.45 billion ? ? $202.86 billion $94.11 billion
3. Global Cars Sold:
- through Sep. 2008
5
6.63 million
? 1.18 million ? 8.91 million ?
  - 2007 total6 9.37 million 6.55 million 2.68 million 18 million 8.52 million 3.65 million
4.

Employees:
- Direct (US
)7

96,000

80,000

66,000

242,000

36,632

25,000

 

- Indirect (US)8

340,000

?

?

2.5-3 million 

?

?

5.

Revenue per Employee9

$680,910

$1,837,925

$500,217

$830,043

$670,697

6.

Average Hourly Wage and Benefits10

$73.26

$70.51

$75.86

$73.21

$48

$48

7. Union Employees?11 Yes Yes Yes No No
8.

# of Legacy Employees12

see footnote see footnote see footnote see footnote see footnote see footnote
9.

Annual Cost of Legacy Employees13

$6 billion see footnote see footnote see footnote see footnote see footnote
10.

CEO
(since)14

Rick Wagoner (2000)

Allan Mulally (2006)

Robert Nardelli (2007)


Katsuaki Watanabe
(2005)

Takeo Fukui
(2003)

11.

CEO 2007 Compensation15

 

 

 

$14.4 million

$21.7 million

 

 

 

$1 salary; full comp. not disclosed

 

 

 

-

 

 

 

$900,000

 

 

 

see footnote

 

 

 

12.

# of Plants (US)16

75

36

23

134

8

4

13.

# of Brands (US)17

8

5

3

16

3

2

14.

Income Before Tax 200718

-$5.73 billion -$3.75 billion ? ? $21.96 billion $7.60 billion
15.

Federal Income Taxes Paid/Refunds Received in 200719

$37.16 billion -$1.29 billion ? ? $7.61 billion $2.41 billion
16.

Net Profit or Loss 200720

-$38.73 billion -$2.7 billion
? ? $13.93 billion
?
17.

Non-Auto Related Assets (millions)21

? ? ? ? ? ?
18.

Links to 2007 Annual Reports 22

GM Report
5.3 MB
Ford Report
6.2 MB
Daimler Report
3.7 MB
Toyota Report
3.3 MB
Honda Report
5.7 MB
19.

Links to SEC Filings:
- Last Quarterly Report23
(filing period)

10-Q (9/30/08)
1.1 MB
10-Q (9/30/08)
516 KB
Daimler 6-K (10/08)
1.2 MB
6-K (10/08)
77 KB
6-K (10/08)
80 KB

- 2007 Annual Report 24
(filing period)

10-K (12/31/07)
2.1 MB
10-K (12/31/07)
(960 KB)
Daimler 20-F (12/31/07)
4.3 MB
20-F (3/31/08)
(4.2 MB)
20-F (3/31/08)
(488 KB)
    GM Ford Chrysler Big 3 Total Toyota Honda
    A. B. C. D. E. F.
 

Memo to Wagoner from Alfred Sloan

To:       Rick Wagoner

 

From:   Alfred Sloan

 

Allow me to express my admiration for your congressional appearance, as only the latest example of three years of strenuous effort on your part to put the company on a more competitive footing, with considerable success. You are executing the CEO’s role as I conceived it, and if I could affect the matter today, you would have my support. I believe you have the vision and confidence to complete GM’s turnaround.

 

GM has been on the brink before

I know something about playing the hand you’ve been dealt. At the edge of bankruptcy in 1921, we were fortunate that the DuPont company recognized GM’s enormous potential. I can only hope that the American people come to recognize the same thing today, and instruct their representatives to make an appropriate investment. I also had to contend with a 71% sales collapse in the Depression, which required painful changes to save the situation.

 

These are new times, and I won’t impose my era’s ideas upon your actual circumstances or try and influence your generalship of the current battle. But I must urge you to focus beyond the plan you recently presented, and conceive a vision of how General Motors will, upon regaining financial viability, distinguish itself in the automobile market and resume a leading role in the industry.

 

Every successful enterprise needs a Concept of its Industry

Cutting brands, headcount, and your own salary are painful gestures that will indeed reign in spending. A lean structure with good products is a worthwhile emergency objective in the, but it doesn’t suffice as competitive strategy. Beyond your plan, General Motors needs a concept of its industry, an essential principle of enterprise that I define in my book, My Years with General Motors.

 

A concept of industry is simply a universal market principle that imbues your product with essential qualities that are valuable to buyers. Toyota’s concept of its industry is to produce vehicles which are thoroughly reliable, and thus minimize the costs of ownership; Honda’s is to produce vehicles engineered for efficiency, which accomplishes the same end. Every one of the vehicles they produce expresses their particular concept, which serves as a foundation upon which competitive features attract buyers based on individual desires.

 

GM’s Concept of its Industry 1921 – 1970s

In My Years, I describe how in the 1920s we conceived General Motors’ concept of its industry, and then activated it to overcome Ford’s commanding 60% share of the market. We began by reviewing our existing strategic assets, the most significant being: Fairly large volume spread across a variety of established brands; capability for technical innovation among some of the brands; and our new organizational idea of coordinated decentralization. We perceived the customer’s expectations to be for improved products and for choice among products. Our collection of assets was not unique, nor was our notion of customer expectations. It was our arrangement and activation of them that yielded a distinct GM concept of its industry, and which was quickly vindicated.

 

The GM concept of its industry we arrived at was to combine the advantages of volume, variety and innovation to offer a continually improving range of products. It superseded Ford’s concept of leveraging volume to continuously lower purchase price on a single, unchanging product. Whereas the Model T concept had since 1908 aligned with the nation’s technical priority of motorization, the GM concept responded to an evolution of that priority – by the 1920s, the nation wanted modernization. GM soon displaced Ford as the top producer, and became the world’s largest industrial enterprise. The principle of constant improvement remains vital, but GM’s failure to consistently adhere to and develop it stands as the essential cause of the current emergency

 

GM needs to seek out a new Concept

General Motors’ needs a new concept of its industry to be more than just viable beyond 2012. To thrive for a second century during which the idea of personal transportation will be transformed but no less in demand, GM must present itself as a vehicle for achieving not just America’s, but the entire world’s 21st Century cultural priorities as they relate to transportation.

 

What are the assets that GM can apply today? Let’s not allow nostalgia to cloud the issue; for example, multiple brands are no longer an asset in themselves (read why I wouldn’t hesitate to dispose of Pontiac). To my mind, GM’s current assets are an excellent technical infrastructure on the verge of a major breakthrough, several still-iconic brands, and a flexible manufacturing system. These, I believe, are adequate to underpin a concept of industry that might be expressed as “freedom from carbon,” and which will be manifested first in The Chevrolet Volt when it launches in 2010.

 

As you can see, conceiving a concept of industry isn’t all that complicated, but activating it requires a coherent policy of management, which I believe your GM does not have. This is a primary failure of governance, and achieving such will have to be the first order of business by the new Board of Directors; I strongly urge the entire current Board resign as soon as Congress authorizes the emergency funding.

 

A resource you should utilize

To guide the vital task of developing a new organizational policy that can effectuate GM’s new concept of its industry, management must isolate some of the DNA that in the past made the company great. I’m not suggesting that you revive any specific historical policy such as the coordinated decentralization principles I worked under, but to reinvigorate the general principles of long-range focus, fact-seeking, and flexibility that were once the hallmarks of General Motors management. I suggest you revisit my book.

 

The point is that, viability is still only a short-term objective. GM needs to define itself to thrive in its second century. If you have the opportunity to continue as CEO of General Motors, I hope that you will consider these suggestions.

 

Warm regards,

Alfred P. Sloan, Jr.