GM bankruptcy

In honor of GM's bankruptcy filing today, see the following article from The Economist, 2 Dec 1989. Its predictions were about 10 years early, but the hopes pinned on the new Saturn brand are somewhat poignant now. (I loved driving Kerry's unreliable SC2. Given what we got, I kind of regret selling it. If only the insurance payments hadn't exceeded its Blue Book value.)


BUSINESS

From the archive

On a clear day you can still see General Motors

Dec 2nd 1989
From The Economist print edition

The 1990s will be General Motors' toughest decade. Is the world's biggest manufacturer heading for break-up or oblivion?

SOON after General Motors's chairman, Mr Roger Smith, drives the first car off the assembly line of his company's Saturn plant in Spring Hill, Tennessee next summer, he will ride off into a comfortable retirement. The company he leaves behind faces a bleaker future.

During his nine-year reign at the top of the world's biggest carmaker, Mr Smith has spent billions of dollars and overseen huge reorganisations to little avail. Crippled by a sclerotic bureaucracy, GM watched helplessly as its share of the all-important American car market tumbled from 46% in 1980 to barely 35% this year. Now Japanese carmakers are set to boost their production in America just as GM cuts back still further. If the once-mighty GM can not find a way to reverse its slide, the next decade might be the company's last. By the turn of the century, break-up or bankruptcy (and the inevitable government rescue) could well be the fate of a company which was once America's proudest manufacturer.

Saturn will be the key to GM's survival. At first, GM arrogantly dismissed Toyota and other Japanese competitors as merely makers of little cars that got lucky in an oil crisis. When GM belatedly woke up to the Japanese challenge, it exhibited the big-company knee-jerk reaction: throw truckloads of money at the problem. Many of the billions it spent on robots and other new technology have been wasted. Saturn is the attempt of a chastened GM to re-invent carmaking from a “blank sheet of paper”. Yet if Saturn is a success, the immense task of transforming the rest of the company's vast empire still lies ahead. If Saturn is a flop, GM will face naked the remorseless advance of the Japanese.

By the mid-1990s the so-called Japanese “transplant” factories in the United States and Canada will be making more than 2m vehicles a year in addition to the cars the Japanese import (now limited to 2.3m vehicles). With new-car sales in America set to fall below 10m this year, the industry is already haunted by overcapacity. Even worse for GM, Japanese transplants can build cars for an estimated $500-800 cheaper than many American-owned plants. Because their cars are better designed and marketed, the Japanese also frequently avoid offering the $1,500 discounts which are destroying the profit margins of American competitors.

Saturn is supposed to close the efficiency gap, which has resulted in GM's North American car operations losing an estimated $300m in the third quarter this year. Throughout the 1980s, GM has invested $80 billion modernising its operations worldwide (nearly three times its present market capitalisation). That spending includes some of the $2.5 billion to buy EDS to mastermind a group-wide computerisation drive. GM then spent $700m buying back GM shares from EDS's founder Mr Ross Perot as the price of ousting the outspoken critic from GM's board. Another $5.2 billion went to buy Hughes Aerospace in a yet-to-be-proved attempt to feed more space-age technology into carmaking.

Yet much of the advanced technology GM acquired at such high cost hindered rather than improved productivity. Run-away robots started welding doors shut at the new Detroit-Hamtramck Cadillac plant. Luckily for Ford and Chrysler, poverty prevented them from indulging in the same orgy of spending on robots. After wrenching management changes, some of Ford's factories are now achieving near-Japanese levels of productivity.

Saturn will use some of the most advanced manufacturing technology available, but will concentrate on the more effective use of people. GM had to resort to a joint venture with Toyota to learn that people are what count in manufacturing. Despite this benefit, the joint-venture factory in California has shown that GM's fundamental weaknesses remain.

Saturn is to be run as a separate company within GM, free of the smothering embrace of Detroit. But even with all its advantages, Saturn's future is not guaranteed because the Japanese are racing still further ahead. They are opening research-and-design centres in America to become fully integrated carmakers there. They are also moving into the market for luxury and performance cars. In the 1990s Honda could overtake Chrysler as America's third-biggest car company. If that happens, the biggest loser will be the American company with the most to lose: GM.

Mr Smith remains unruffled. He says a lot of GM's problems have been put right and that the company is now well positioned. Its spending has gone to build new plants or to modernise old ones. But he cannot expect to run the plants at full capacity. More probably, as the chart indicates, GM's market share has been permanently eroded. So more plant closures will be needed. By the mid-1990s one in four of its 130,000 managers may have lost their jobs. The company has already cut its worldwide payroll by 100,000 since 1981 to some 750,000.

With sales last year of $110 billion—roughly equivalent to the GDP of Taiwan—and worldwide production at 8m vehicles, still twice Toyota's level, GM could keep cutting back for years as the Japanese expand. But continued “down-sizing” will inevitably provoke a crisis, forcing a traumatic overhaul of the company's baroque corporate structure, says Mr James Womack, director of the International Motor Vehicle Programme—a worldwide five-year car industry study being conducted by the Massachusetts Institute of Technology. Ford faced such a crisis in the early 1980s and survived. “Ford went right to the edge and looked over,” recalls Mr Womack. “Ford realised it had to start worrying about how to avoid the abyss rather than electing the next president.” If GM's moment of truth comes later, rather than sooner, it might not survive intact.

Mr Smith's re-organisations have swept away some feudal dynasties at GM. But he failed to address a deeper, cultural malaise, says Ms Maryann Keller, a Wall Street motor-industry analyst. In her recent book, “Rude Awakening”, Ms Keller says Mr Smith found himself hopelessly entangled in a complex corporate culture that resisted change. He did little to control the power of central-office staff over operating divisions or the finance staff over the entire company. Under Mr Smith, a finance man, GM's bean counters continued to rule. For too long, says Ms Keller, GM has “hidden behind a manipulation of the numbers rather than facing its problems head on.”

GM points to its record net profit in 1988 of $4.9 billion, up 37% from 1987, as proof of recovery. But Ms Keller says that GM's record year was due more to accounting changes than to the sale of cars. Even if GM's profits recover for another year or two, she warns, “the victory is bound to be short-lived unless change occurs at the very core of its corporate culture.”

If the critics are correct, Mr Smith's successor will have to undertake a wholesale reorganisation of GM management to reverse the company's decline. The chances of such a reformer emerging are not impossible (witness the surprise arrival of Russia's Mr Mikhail Gorbachev), but they are slim. When the puffs of smoke from the company's Detroit headquarters appear, the final choice of the next chairman will largely be that of the strong-willed Mr Smith himself. An outsider can be ruled out almost entirely: top management at GM is a closed shop. Even those who have joined late in their careers have found themselves unable to make the final cut. Mr Elmer Johnson, a Chicago lawyer, headed back home last year after a brief stint as an executive vice president. He harboured ambitions of being the reformer who launched GM's perestroika.

The next chairman is likely to come from among half a dozen loyal, long-term GM executives. At the top of everyone's list is 56-year-old Mr Robert Stempel, who became president a little more than two years ago. Mr Stempel is a big, blunt-talking man with a strong background in engineering—the proverbial “product man”.

That makes him an attractive choice. GM desperately needs new products. It claims plenty are coming, but the company is still struggling to shed its image as a builder of mediocre, look-alike cars—at least in America. In Europe, where new investment has paid off better, a string of successes was reflected in the $2.7 billion which international operations added to GM's profit last year. Yet the battle for market share in Europe is increasing with the formation of a single EC market and with coming competition from East European exports. DRI, an economic-forecasting group, also thinks that a two-year decline in West European car sales will start next year.

GM has tried to give its American cars more flair by reorganising their production into two self-contained business units: Buick-Oldsmobile-Cadillac and Chevrolet-Pontiac-GM Canada. Something much more drastic is needed. If Mr Smith's Saturn project is not that something, GM could end its days as a decaying monument to the glory days of American manufacturing.