By Ronald Ahrens
There was no great “A-ha!” moment. There was no “Mr. Watson, come here.” Not even a “Gentlemen, start your engines!” No, when General Motors Corp. was born 100 years ago, all there was, was some exasperation with the moneymen. Large trusts had already been formed in the steelmaking and farm-equipment industries, and it increasingly made sense that consolidation among leading automakers would reduce the risk of a single, poor-selling line of cars.
The financial panic of 1907 had also commanded wide attention. In the spring of 1908, industry leaders from Ford, Buick, REO, and Maxwell-Briscoe pursued the question of a merger that was to be underwritten by J.P. Morgan & Co. When the deal fell apart, William C. “Billy” Durant, who had made Buick Motor Co. a household name, kept industry consolidation alive. First, he saw possibilities in the struggling Olds Motor Works. Because of the company’s early industry leadership, the Olds name was valuable. As he would do many more times, Durant cooked up a complicated stock swap. Olds’ Frederic Smith said at the time, “Durant did the understanding; the rest of us just thought we understood.”
But no one was there to tell Durant when to stop. Soon after GM’s incorporation papers were filed in New Jersey on Sept. 16, 1908, capitalization was increased from $2,000 to $12.5 million, and Durant went on a buying spree. The new holding company acquired Buick for $3.75 million in stock. Investors in Flint had enormous faith in Durant, who had enriched them while he was in the carriage business before the turn of the century, and again after he assumed control at Buick in 1904. Now Durant rather haphazardly set about assembling the bones of his behemoth. Despite the problem that he might occasionally connect the thigh bone to the jawbone, he established the vertically integrated organization that allowed GM to make just about everything it used. For example, Albert Champion would set up in a corner of the Buick factory to manufacture his advanced new spark plug. And Durant acquired Novelty Incandescent Lamp Co., of St. Mary’s, Pa. (where light bulbs continue to be made in the present OSRAM Sylvania plant at the rate of about 2 million per day).
The previously arranged Olds acquisition was finalized Nov. 12, 1908, for about $3 million in stock. Then Durant picked up the Oakland Motor Car Co. (later to become the Pontiac Division), Cadillac Motor Co., and Reliance Motor Truck Co. and Rapid Motor Vehicle Co., which were ultimately combined to form GMC Truck. GM also expanded to Canada and Great Britain by acquiring interests in McLaughlin Motor Car Co. and Bedford Motors. But there was madness in the method. Cartercar Co., of Pontiac — “No clutch to slip, no gears to strip” — offered a unique vehicle with “friction drive,” which used power-transmission disks made of compressed paper. Alfred P. Sloan Jr. later called such purchases “random gambles.”
Durant saw it differently. “They say I shouldn’t have bought Cartercar. Well, how was anyone to know that Carter wasn’t to be the thing? It had the friction drive, and no other car had it. How could I tell what these engineers would say next?” What the bankers said next became Durant’s real concern.
Intensive Care for Billy’s Baby
General Motors nearly perished in its infancy. In 1910, it offered 21 different models by 10 manufacturers. Buick’s profits had been supporting all this irrational extravagance, but even as production in Flint rose to 30,000 cars, the profits didn’t keep pace. Durant couldn’t meet demands for repayment of loans. Persuaded by Cadillac’s Wilfred Leland, a group of Eastern bankers arranged a $15 million bailout, which included the reorganization of GM’s management. A five-member committee would run the company without Durant’s help.
In the next half decade, GM concentrated on what’s known today as “core competencies.” Many of Durant’s acquisitions were closed down. Viable products were equipped with such technical advances as Charles F. Kettering’s electric self-starter. First offered on the 1912 Cadillac, it eliminated the hand-cranking of engines. The Cadillac V-8 engine roared to life in 1914, with ballyhoo provided by some classic ad copy about the “penalty of leadership.” GM met all of its obligations to the bankers and attracted new investors, most notably Pierre S. du Pont, who within six years would be in for about $50 million, or 43 percent of the company.
But first, Billy Durant, ever the market manipulator, leveraged his interest in the new Chevrolet Motor Co. to corner GM’s stock. Initially listed on the New York Stock Exchange in 1911, its price had fluctuated between $24 and $99 per share. At the beginning of 1915, it was $82, but as Durant kept buying, it soared to an outrageous $558 on Dec. 9, 1915, and he held 71,218 shares, or 44 percent of all shares. By the next spring, he stood the Eastern financiers on their heads and reclaimed control of GM.
Meanwhile, he formed United Motors Corp. as a complement to Chevy; this conglomerate comprised Kettering’s Dayton Engineering Laboratories, Remy Electric, New Departure Manufacturing, and Hyatt Roller Bearing, which brought Sloan into the picture. United Motors became part of GM in 1918 in what Fortune magazine called “the great agglomeration.” The Frigidaire Division was also a newcomer during this period, thanks to one of Durant’s independent ventures. General Motors Acceptance Corp. was formed in 1919 and, within a few short years, 75 percent of all car buyers would be paying in installments. GM was now capitalized at $1 billion, second only to U.S. Steel.
However, after yet another of Durant’s speculations, the Samson Tractor Division, had gulped down $33 million just in time for the next economic recession, he was out for good on Nov. 30, 1920. Du Pont and Sloan were now running the show.
Free Rein for Sloan’s Wizardry
Alfred P. Sloan Jr. was an MIT engineer who had run the Hyatt Roller Bearing Co. in Harrison, N.J. Even after being named GM’s vice president of operations and reorganizing the company, he still carried his lunch to work in a brown bag. One historian contends that Sloan patterned GM after the German army of the late 1800s. To be sure, Durant’s shoot-from-the-hip style was gone. From now on, executive committees would control policies, while divisional managers continued to independently oversee manufacturing, distribution, and sales. GM’s cars would be positioned at the top of six price ranges, “a car for every purse and purpose,” in Sloan’s words, and buyers would stretch to obtain the premium features.
Determining just how many buyers there would be was the job of Donaldson Brown and Albert Bradley. These financial men came up with the concept of standard volume, which intended to keep factories from becoming idle and ensure a profit, even in mediocre markets. Relying on data analysis, Brown and Bradley formed economic models that allowed the company to meet customer demand while ensuring adequate production capacity.
As these executives set the course, it was up to the likes of William S. Knudsen to build more units and improve quality. The former Ford Motor Co. production manager had stepped in to lead the Chevrolet Division. After a few of his simple changes, the 1924 Chevrolet was a big success, and this spawned the dream of besting Ford’s sales. One turkey among the divisions, though, was Oakland. The solution to its troubles was a lower-priced companion, called Pontiac, which featured a six-cylinder engine on a Chevy chassis. Pontiac’s 1926 debut succeeded hugely. Another newcomer, the La Salle, offered V-8 power in the price niche between Buick and Cadillac.
In 1922, GM posted a $60-million profit on sales of more than 450,000 vehicles. Sloan was already mulling a new bonus plan, designed to keep managerial talent from defecting. It allowed the top 80 executives to purchase company stock that soon paid enormous dividends, and the term “golden handcuffs” was coined. Keeping pace with the many other developments, GM’s advertising became more sophisticated, and the nefarious art of public relations also flourished.
As the car had become less a novelty and more a consumer item, engineering research was now emphasized as a way of improving dependability. The annual model change became standard practice, with Sloan shamelessly acknowledging that four or five years would be enough to make a new car look obsolete, even if it wasn’t. Fisher Body Corp. had been 60-percent owned by GM for seven years, but now $118 million was sunk into the remaining portion, and Fisher Body became another of GM’s divisions. Lawrence P. Fisher stepped over to be general manager of Cadillac and brought designer Harley Earl to Detroit to work his magic on the division’s 1927 models. Earl soon joined the company as director of the new Art and Color Section, and styling for the mass market was born.
Anyone smart enough to have purchased $1,000 in GM stock in 1908 would have realized a hundredfold return by 1926. The company had drawn even with Ford in market share and looked to top it. In his Danish accent, Big Bill Knudsen had once said, “I want vun for vun!” meaning he intended for Chevy, by itself, to match Ford’s sales. Chevy was being outsold by eight to one at the time, but by 1928, the division showed a $92-million profit. (The entire corporation posted a $296-million profit.) The 1929 Chevy was intended to out-feature Ford, offering a six-cylinder engine for the price of a four-cylinder engine. (Actually, despite the claim, it was $30 more than the outgoing model.) The two makes would exchange sales leads until the 1937 model put Chevy ahead to stay. In 1939, the division could boast production of its 15 millionth car. Sloan’s vision — and Knudsen’s skinned knuckles — had made it happen.
A Collapse, a Sit-down, and a Call to Fight
Before Black Friday’s stock-market collapse in 1929, GM stock traded at $73 per share, but the price plunged to $8 in just three years. Sales of $1.5 billion dropped by one-third, and 40 percent of the profits plunged over the cliff. Chevy’s output would sink from 1.3 million units in 1929 to 323,100 in 1932, while Cadillac’s fell so low that the division’s future was in doubt. Buick, now a stodgy appliance — “the doctor’s car” — was down by 80 percent; so Buick, Olds, and Pontiac shared parts in a manner that foreshadowed the “badge-engineering” of later decades. Oakland was pared away.
Yet GM continued to expand. In the early years of the Great Depression, it purchased Allison Engineering Co., Bendix Aviation, and North American Aviation. In 1930, Winton Engine Co. and Electro-Motive Co. were brought into the fold for just $7 million; Charles Kettering’s diesel engines would be built in the former and installed in the locomotives of the latter.
After the nadir of 1932, things started to turn around. Harlow H. “Red” Curtice put some zip into Buick for 1936, installing a large engine in the Century, the smallest model, and advertising 100 miles per hour — the same formula that would be applied at Pontiac in 1957, and again in 1964. Over at Cadillac, the low and long 1938 Sixty Special sedan was a masterpiece, eschewing running boards and establishing a new design vocabulary.
But getting GM out of the Great Depression would require more than excellent design and engineering. By 1936, some 20 executives were earning salaries of $50,000 and above, and bonuses could multiply the pay by three times. Another 55 execs earned between $20,000 and $50,000. Al Sloan’s 750,000 shares were worth $26 million in 1939, and in the previous year, he earned almost $2.9 million in dividends. Inside the plants, it was another story. The average wage was $1,600, which was 15 percent above the national industrial average. But GM’s line workers had a long list of gripes, from assembly-line speedups to sudden layoffs. The United Auto Workers was organized late in 1936 and, after Christmas, it struck Fisher Body’s Cleveland plant, the source for Chevrolet bodies. Then it hit two Fisher plants in Flint that supplied body stampings for most other GM cars. “We will have this thing settled in a few days,” Big Bill Knudsen predicted. But the sit-down strike dragged on 44 days, till Feb. 11, 1937. The end was marked by Knudsen’s injunction, “Let us have peace and make automobiles.”
Sloan seethed at the settlement, which did not include a pay increase (one was never demanded) but did recognize the union and promised no retaliation against strikers. A few months later, he became chairman of the board, turning over the company’s presidency to Knudsen. When Franklin D. Roosevelt summoned Knudsen to the White House in 1940 to run the war-production effort, Sloan, a Roosevelt hater, viewed his acceptance as a betrayal and would not allow Knudsen a leave of absence, requiring his resignation and the sale of his GM stock. “They’ll make a monkey of you down there in Washington,” Sloan warned.
GM made its last car on Jan. 1, 1942. “With a speed and flexibility not seen since the hyperventilated years of Billy Durant, General Motors adapted to wartime production,” wrote historian Ed Cray. Where Chevys had been made, 75-millimeter shells were now produced. Pontiac built anti-aircraft guns, while Buick and Cadillac churned out tanks. All the while, Knudsen criscrossed the country, flying 250,000 miles and exhorting manufacturers to out-produce the Germans. When he died in 1948, the Flint Journal said he had “virtually burned himself out in his intense devotion toward victory in World War II.” The Detroit Free Press added, “He, more than any other man, was the leader of Victory, for he made it possible.”
A Real ‘Uh-oh!’ Moment
Not long after the war, the UAW struck again, and this time, General Motors president Charles E. Wilson conceded the generous health and retirement benefits that earned GM the nickname “Mother Motors.” When it was finally time to design and build entirely new cars, pent-up energies were set free. Engineers such as Edward N. Cole and Elliott M. “Pete” Estes, both of whom would become GM presidents, worked on high-compression V-8s for Cadillac and Olds. A performance race was under way, and features were lavished upon GM’s dream machines. Buyers demanded automatic transmissions, air conditioning, hydraulically assisted steering and brakes, and electrically operated windows, seats — even convertible tops. Tri-color paint schemes became common, and “pillarless” hardtop sedans looked as racy as coupes while offering the practicality of four doors. Ed Cole moved to Chevy as chief engineer and designed a lightweight V-8, one of the greatest engines ever. Becoming general manager, he refined the 1956 Chevrolet to such a point that it dominated in a year when “Ford sold safety, Chevy sold cars.”
On one hand, GM was now the most admired company in the country. After Charles E. Wilson was named Secretary of Defense in Dwight D. Eisenhower’s administration, Red Curtice filled in nicely as president and was named Time’s Man of the Year after the magazine credited GM with single-handedly saving the national economy from recession in 1955. The faces of Cole and Frederic G. Donner would also appear on Time’s cover, in 1959 and 1962, respectively.
On the other hand, GM was also beginning to feel some heat. Congress made noises about antitrust actions, and various critics objected to the size and inefficiency of the company’s automobiles. Volkswagen’s success, along with the sporting set’s fondness for zippy British roadsters like the elegant Jaguar XK120, served as counterpoint to GM’s dominance.
Inside the company, another dynamic was at work. Red Curtice was the last president and CEO. GM’s financial men in New York were about to take over. In August 1958, Curtice and Board Chairman Albert Bradley retired, and Executive Vice President Donner, a very austere accountant, became chairman and CEO. From now on, the company president would be chief operating officer. Donner specialized in what John Z. DeLorean called the “unobvious choice,” naming John F. “Jack” Gordon as president. Big Bill Knudsen’s son Semon, who was nicknamed “Bunkie,” ran Pontiac in the late 1950s and, much later, he told author David Halberstam that Donner’s eye was turned toward Wall Street, signaling profit as the objective — not high-quality products. After Bunkie Knudsen moved to the top job at Chevy in 1961, following Cole, he noted in his diary that Jack Gordon would not make a decision without consulting Donner. And Donner did not appreciate disagreement.
Donner initiated a divisional integration program that had multiple aims. In forming the General Motors Assembly Division, he hoped to thwart any governmental attempts to regulate GM’s size — for example, by making it sell off the Chevrolet Division. And he looked at the cost savings to be gained in building three and even four different makes on the same assembly line.
Nevertheless, GM continued to offer some innovative cars. The Chevy Corvette, introduced in 1953, soon had Ed Cole’s hot V-8 engine. The Pontiac Tempest came along in 1961 with an advanced powertrain configuration — engine in front, transmission at the rear — for optimal balance. By then, Cole’s rear-engine, air-cooled Corvair had been on the roads for a year. The sad story of the Corvair begins in 1959 with Donner’s cost-cutting, which trimmed a seemingly insignificant $15 rear stabilizer off the car. But, in fact, without the stabilizer, the Corvair did not handle as well as it should have, and GM soon faced lawsuits as a result.
Not until 1965 was the stabilizer added — just in time for Ralph Nader’s Unsafe at Any Speed: The Designed-In Dangers of the American Automobile. The book might not have caused much of a stir, but GM was spying on Nader, trying to turn up something unsavory. On March 5, 1966, in a real “uh-oh!” moment, Nader blew the whistle to a Congressional committee, and soon James M. Roche, Donner’s unobvious choice to succeed Gordon as president, went to the Capitol and confessed everything. Much of the goodwill GM had enjoyed began to erode.
Cole’s next stroke of genius, the 1971 Chevy Vega, was such a bomb that Pete Estes, retiring in 1981 after his own seven-year term as president, told the Free Press, “Well, there were some models where we didn’t do the kind of job we should have, I guess. The Vega, we made lots of mistakes on.”
Beyond Onslaughts and Imports
GM’s smug management needed an attitude adjustment, and events now conspired to provide one. A couple of huge recalls — one for carbon monoxide leaking, another for faulty engine mounts — were a major embarrassment, but GM’s stonewalling only compounded the problem. When the engine mounts broke, a car could go out of control. But in response, Ed Cole said, “A person driving a car should be a skilled driver, and if he can’t manage a car at under 25 miles per hour, he shouldn’t be driving.”
GM’s cars in the 1970s further eroded the public’s admiration for the company. The Chevy Chevette — about whose quick development Pete Estes had bragged — was a laughable little toad, proof that imports weren’t being taken seriously. (As early as 1960, Cole had predicted the “leveling off” of imports in a few years.) The well-designed “X-body” compacts, introduced in 1980, were poorly engineered and vanished after five years in showrooms. The Olds diesel V-8 and Cadillac’s “8-6-4” engine, which saved fuel by selectively shutting down combustion in up to four of the eight cylinders, were busts. The 1930s might have looked easy compared to this.
Yet, just as in the 1930s, GM expanded, although this time it didn’t go as well. It picked up Electronic Data Systems Corp. in 1984 for $2.5 billion, then paid another $700 million to make EDS founder Ross Perot go away. GM then acquired Hughes Electronics Corp., in 1985. Both EDS and Hughes have since been sold.
Peak U.S. market share of 50.7 percent was achieved in 1962. There followed reorganizations, experiments with brand management, and overdependence on badge-engineering that resulted in look-alike cars. GM thrashed around like a shark with its eyes gouged out. The Saturn Division, Roger Smith’s import-fighting instrument, has never added up to much. The last Oldsmobile rolled off the line in 2004. This spring, GM’s U.S. market share fell to just 19.1 percent, and Toyota is closing in.
So what’s next? Stricken by high gas prices that have severely dampened demand for large pickups and SUVs (along with sizable profits), GM recently acquired interests in two biofuel companies. If the investments pay off, GM and the rest of the country won’t be as beholden to Big Oil and overseas politics. There’s also the promising Chevrolet Volt, a nifty hybrid that runs on batteries and is backed up by a gasoline- or ethanol-powered engine. Will biofuel replace gasoline? Will the Volt be a hit? Will GM still be around? Check back in another 100 years and we’ll let you know.
The Road Ahead
By Paul Eisenstein
There’s nothing like a birthday to put you in the mood to celebrate, and when General Motors Corp. marked its Golden Jubilee, back in 1958, it pulled out all the stops — creating a circus-like atmosphere in Flint, its birthplace. There were parades and speeches, and an opportunity to see the products that had transformed a collection of small, struggling brands into a global industrial powerhouse.
Five decades later, GM is preparing for an even more auspicious event as it comes up on its centenary on Sept. 16, a mark only the rarest of corporations will ever reach. And, as you might expect, the automaker is once again preparing for a lavish celebration. Of course, there won’t be many festivities in Flint, a city that has virtually vanished, in recent years, as it has lost most of its plants and corporate offices. Nonetheless, a fete is clearly called for. But don’t be surprised to see the mood a little more somber than originally intended.
What started out looking like a grand and glorious corporate turnaround — what better way for a corporation to celebrate, after all, than making money? — has apparently taken a wrong turn. Citing “negative headwinds” ranging from record oil prices to the rapidly rising cost of basic commodities such as steel, rubber, and the palladium used in catalytic converters, GM Chairman and CEO Rick Wagoner has been forced to take a sharp knife to corporate operations. Jobs by the thousands are being cut, plants are being closed, product lines have been eliminated, and the fate of some of the automaker’s best-known brands is up in the air.
Yet despite Wagoner’s aggressive actions, analysts and investors seem reluctant to participate in the GM party. If anything, they’re handing the automaker the sort of birthday presents it would probably prefer to return to sender. Panicked by a Merrill Lynch analyst’s warning that “bankruptcy is not impossible,” stockholders drove GM shares down below $9 a share in intraday trading on July 15 — the lowest level since 1954, before the 50th anniversary — indeed, before tailfins were even a gleam in the eye of Cadillac designers.
What’s gone wrong and what will it take to fix the troubled carmaker? Those are questions being asked repeatedly at GM’s Renaissance Center headquarters, and on Wall Street. GM’s long-term viability is also a matter of concern for American motorists. With ever more import offerings to consider, they’re asking whether it makes sense to invest their hard-earned cash in products that, rightly or wrongly, they fear might not be backed up by a company on the verge.
This isn’t to say all’s gone wrong for the world’s largest automotive manufacturer. In fact, had it not been for the perfect storm of setbacks, the company might be looking good at its birthday bash. A new contract with the United Auto Workers promises to resolve matters like health care costs and productivity, while a closely-watched measure of factory floor efficiency, the annual Harbour Report, shows GM gaining on its arch-rival, Toyota. Other studies indicate GM is catching up on quality, too — something that’s long been an import advantage.
Yet for every foot of ground GM gains, it seems to be blown several feet backward. And despite its best efforts, it can’t seem to shake the “B” word from the language of those who watch its performance for a living.
In the Face of Reality
One can question when the first signs of trouble appeared. Perhaps it was when a boatload of early Volkswagen Beetles landed on the East Coast. Maybe it was the passage of safety and emissions laws in the mid-1960s. Then again, it might have been the coming of age of those hard-to-please baby boomers, who were ready and waiting to embrace Asian imports when the first Mideast oil crisis shocked the nation in 1973.
That was the first clear sign the established automotive order might be getting tarnished. Even so, after the gas lines started to fade, buyers, by and large, went back to the familiar. Detroit’s Big Four (recall American Motors) convinced themselves they’d dodged the bullet. But the ricochet delivered a direct hit with the second oil shock. In record numbers, American motorists raced to trade in gas-guzzling Detroit iron for imported compacts and subcompacts.
Yet again, when the gas lines vanished and prices stabilized, Motown put on a show of bravado, backed by a brief surge in sales and profits. “We’re going to drive them back into the sea,” proclaimed one senior Detroit executive, sounding like a bad John Wayne impersonation. But this time, the beachhead was too well-established. The trend line was clear. It was just a question of time before the tarnish turned to rust.
The damage came through a thousand little cuts.
Segments of the market that once seemed synonymous with Detroit, notably midsize sedans, suddenly went import. Coming out of the second oil crisis, GM’s CEO at the time, Roger Smith, ordered one of the most aggressive investment programs in automotive history, spending tens of billions of dollars on new products — and the factories needed to build them more efficiently, such as Cadillac’s Poletown Plant, officially the Detroit-Hamtramck Assembly Plant.
Unfortunately, things didn’t work out as planned. One of GM’s first attempts to fight back came in the form of new, front-drive models collectively known as the X-cars. Strong early sales collapsed under the weight of quality and safety issues. In the biggest battle ever between federal regulators and the auto industry, the courts ultimately rejected government demands to recall the X-cars to repair defective brakes. But the controversy killed the cars in the marketplace.
If one model failed, GM was ready with another. Smith and his colleagues seemed convinced not only of the company’s manifest destiny, but of the seemingly unlimited depths of the corporate bank account. Yet nothing seemed to stick. True, the other domestic makers were suffering, as well, but the company that once controlled more than half the American market had the most to lose, and it was losing fast. It seemed almost too absurd to believe, especially if you worked for GM. Several months before his retirement, former GM President Jim MacDonald was confronted by a prediction by the highly regarded auto analyst, Maryann Keller. The forecast: The company’s U.S. market share would drop to 36 percent, from 42 percent the prior year. Other analysts proffered even more dire outlooks. But MacDonald didn’t want to hear it. Asked to respond to the critics, he offered this: “I’d tell them they’re smoking opium.”
Skeptics might have wondered what was being discussed on the 14th floor executive level. Every quarter, Smith and his handpicked team would issue glowing forecasts, outlining the billions they claimed to be saving, and damn the decline in sales and profits.
It took yet another crisis in the Mideast to burst their bubble. The day after a new CEO, the much-liked and respected Bob Stempel, replaced the retiring Smith, Iraqi troops marched into Kuwait. The global economy fell into turmoil, and GM’s house of cards came tumbling down. A newly-emboldened board of directors began asking harsh questions. They didn’t like the answers. Stempel and second-in-command, Lloyd Reuss, were reluctant to make the sort of samurai cuts many saw as essential. Under increasing pressure from outside, the board first cut Reuss loose, then Stempel.
An all-new management team was brought in, guided by the legendary John Smale — longtime head of the consumer goods giant, Proctor & Gamble, and longtime GM board member — who would now serve the automaker as nonexecutive chairman. Day-to-day operations would be managed by Jack Smith, who, with his unmistakable New England accent and easygoing demeanor, was considered an outsider among GM lifers. But things were only going to get worse, at least for awhile.
Déjà Vu All Over Again?
The savings promised by Roger Smith were entirely delusional. Slowly and meticulously, the company worked out its problems by largely unwinding what Roger Smith, who died late last year, had put in place. Plants were rebuilt, even replaced. Products went through massive updates. And Jack Smith outlined a series of sharp cuts in manpower and production capacity. He also, belatedly, recognized one of the most significant shifts in American automotive history, committing billions — and the bulk of GM’s product development resources — to ramp up production of a fleet of new vans, SUVs, and pickups.
While light trucks might have been the products environmentalists hated, consumers loved them, snapping up as many as GM could build and finally frustrating the Japanese, who struggled to crack the code in segments they’d never entered before. Even Toyota seemed perplexed by minivans, pickups, and SUVs, rolling out a series of costly failures.
But as GM had demonstrated before, success is a powerful narcotic, making it far too easy to ignore impending problems. Example in point? The latest oil shock, which has impacted truck and SUV sales considerably, no matter the automaker.
Nancy Jaksich, who owns a Chevrolet dealership near Portland, Ore., still hopes trucks will rebound, once gas prices stabilize. People who switch out of larger vehicles are going to miss their “big, comfortable, safe truck and the activities that go along with that,” she insists. But something in her tone suggests wishful thinking, whistling away the demons as the dealership is forced to cut back with layoffs of its own. The current fuel price crisis, she concedes, “is a consumer wake-up call, and definitely a Big Three wake-up call.”
Four-dollar-a-gallon gas would be a serious enough problem considering GM — like Ford and Chrysler — now has the capacity to build far more cars than trucks. But that gets us back to those “negative headwinds,” and lately, they’re blowing at hurricane force. The list of problems is a long one. Start with the sharp U.S. economic downturn, worsened by a housing-inspired credit crunch; add steadily tougher foreign competition; and mix in stiff increases in the cost of raw materials, such as steel for body panels, rubber for tires, and the palladium needed for catalytic converters. It all adds up to hundreds, even thousands of dollars, in higher costs for the average American car, truck, or crossover. GM recently bumped up the price of the typical vehicle by about $500, but that doesn’t cover it all.
What’s more, the U.S. market is in near freefall, with June sales averaging out to 13.6 million vehicles annually. Most observers expect a bit of a recovery, but only to the mid-14 million range, certainly not to the 17-million-plus figures the industry enjoyed earlier in the decade. And while virtually every maker — even the once-invulnerable Toyota — is feeling the pinch, Detroit is getting slammed the hardest, and GM in particular. Only a few years ago, employees at the RenCen proudly wandered the halls wearing “29” buttons, a reference to the market share the automaker was aiming for. That was a far cry from the numbers former GM President MacDonald scoffed at, but the figure looks awfully nice at a time when 21 percent may soon be the automaker’s reality.
So, even as its materials costs are soaring, GM is suffering from a sharp downturn in sales. And that’s compounded by the fact that its highest-profit products — pickups like the Chevy Silverado, and SUVs such as the Cadillac Escalade — are in freefall. In a recent conference call with automotive journalists, GM sales, service, and marketing chief Mark LaNeve noted that 11 of the carmaker’s last 13 launches were either cars or crossovers. And the executive pointed out that a number of the newest products are showing positive signs in the marketplace. But it’s critical to recognize that passenger cars have typically delivered a fraction of the profits of a truck. Indeed, for decades, GM has struggled to minimize the money it loses on every sedan and coupe it sells in the U.S.
If you compare the situation today to what happened in 1992, says former GM Chairman Stempel, “the ’90s were a cakewalk. That was just a cyclical downturn, and there was no doubt in anybody’s mind that we were going to get out of it.” While Stempel says he’s skeptical when “a bunch of 28-year-old analysts pile on,” he concedes the situation is nonetheless dire.
But How Was the Play, Mrs. Lincoln?
It’s easy to paint a fatalistic image, and certainly it doesn’t help when Merrill Lynch starts raising the specter of bankruptcy. But CEO Wagoner, who has developed remarkable skill at projecting a sense of both optimism and urgency, isn’t hearing any of it. “Under any scenario we can imagine,” the executive argued during a mid-July appearance in Dallas, “our financial position, or cash position, will remain robust through the rest of this year.”
There are reasons to see some positives working in GM’s favor. First, it might help to point out that the percentage of GM’s unit sales rung up overseas has risen, in just a couple of decades, from 25 percent to 50 percent. Vice Chairman of Global Product Development Bob Lutz, who has spent many years in his long career abroad for automakers including BMW and Ford, expects it to reach 75 percent in the relative near-term.
If Jack Smith deserves credit for nothing else, it was standing up to the vociferous naysayers and going ahead with GM’s first big investment in the booming Asian continent. China has become the automaker’s fastest-growing market — no mean feat in a land where a slow year delivers increased sales well into the double-digits. Other emerging markets, like India and Russia, are generating big sales numbers, as well. In fact, GM’s operations in the heart of the former Soviet Union are helping reverse years of decline in the overall European market. For the first half of 2008, volumes rose about 3 percent, to 1.16 million, over year-earlier numbers.
As part of GM’s ongoing transformation, Lutz has ordered a global consolidation of product development. Nowhere is that more apparent than at Saturn, which is working in tandem with the European Opel subsidiary on products like the new Astra subcompact. For decades, the various global regions of this vast empire operated like individual fiefdoms, effectively reinventing the wheel over and over again. Lutz is quick to point out that under the new system, there will still be distinct regional differences between products, from sheet metal styling to the level of standard equipment. Considering that a major new product can cost $500 million to more than $1 billion to bring to market, however, the savings are enormous.
The redesigned Chevrolet Malibu is a grand example of the new system at its best. Longtime industry watchers may recall the Fortune magazine cover from the mid-’80s that depicted four virtually identical GM models, distinguished only by their nameplates. Gone is this “badge-engineering.” The Malibu is distinctly different from its Saturn counterpart, the Aura. And it’s generating not just rave reviews — it was named North American Car of the Year by a panel of 50 U.S. and Canadian auto writers — but strong sales.
What’s equally significant is that the Malibu and some of GM’s other new products are topping the quality charts, according to the latest consumer surveys by the likes of J.D. Power and Associates. The U.S. maker is nudging — and, in many cases, exceeding — such traditional quality benchmarks as Toyota. All the more impressive, according to Power’s Dave Sargent, is that first-year products have traditionally lagged, as makers shake out last-minute problems. But Malibu was named best-in-class in the tough midsize segment of the 2008 Initial Quality Survey.
In turn, GM received good news last September when it reached an agreement with the UAW on a contract that effectively takes health care costs off its books. The settlement created a new, two-tier wage structure for many non-core jobs, and, in general, is expected to eliminate “about two-thirds” of the cost gap between GM and the “transplant” assembly lines operated by foreign-owned makers. Other contract changes have helped GM — and its domestic brethren — rocket up the productivity charts, according to the 2008 Harbour Report.
Would the Real GM Please Stand Up?
It’s easy to see why GM officials, all the way up to Wagoner, entered the new year with a good bit of optimism. Most signs suggested the automaker was finally getting a grip on its problems and would soon be back in the black, stabilizing and possibly even regaining market share.
But just past the mid-year mark, Joseph Amaturo, an industry analyst at Buckingham Research, rated the automaker’s stock as “Underperform.” If anything, he may be among the kindest of his peers.
Suddenly, it could be argued, everything is going wrong. With sales of products like the Silverado and Escalade plunging, Wagoner has been forced to shutter four truck plants, and more could follow. Earlier this year, tens of thousands of hourly workers left the company under a generous buyout plan, and 5,000 white-collar jobs will be cut by year’s end.
Announcing the plant closures, Wagoner also revealed that the company is rethinking the fate of its Hummer brand — the icon, for many, of everything wrong with the U.S. auto industry. There’s a very good chance Hummer might be sold or even shuttered. And it may not stop there. Some insiders suggest GM management is taking a close look at every one of its brands, but for the core Chevrolet and Cadillac marques. Critics helped convince the company to ax Oldsmobile, and have been trying to get GM to eliminate some of its eight remaining divisions.
Speaking in Dallas recently, Wagoner contended that no brand but Hummer is on the line. Under the circumstances of the day, however, he wouldn’t be faulted for later reconsidering. And, it seems, many things will likely be revisited in the coming months. There’s “no thought” of bankruptcy, insists GM’s CEO. There are certainly some things working right for General Motors, but it has found it difficult to make any momentum in this storm. Clearly, the automaker is rushing to inject new, more fuel-efficient vehicles into its lineup. The Chevrolet Volt, the nifty plug-in hybrid, holds great promise. The automaker is also trying to distance itself from Big Oil by investing in cellulosic ethanol plants.
In turn, the company announced on July 15 that it was suspending its dividend (first offered in 1915), eliminating health-care coverage for U.S. salaried retirees older than 65 (starting Jan. 1), selling up to $7 billion in assets, and cutting 20 percent of its salaried costs. The question, though, remains: Will these initiatives generate cash fast enough to ward off further lending needs, which get more expensive by the day? Turnaround is still the active word among management, but how soon that might happen depends on whom you ask. Simply put: GM’s ability to navigate through the current turbulence will be one of the greatest challenges and achievements management can address at the company’s next anniversary.
