The Rise And Fall Of General Motors

The United States of America has a long tradition of honoring winners and mercilessly tossing losers into history’s dustbin. That’s why it borders on the miraculous that they’re pussyfooting around General Motors so timidly and even want to let Rick Wagoner continue calling the shots.

Under Wagoner’s leadership, the world’s largest car manufacturer has racked up more than $40 billion in losses since 2005 alone. The fact that the company has thus far survived bears witness to the reserves it was able to amass during better years. What kind of a company was it? And what has become of it?

Detroit’s protestations to the contrary, the losses had little to do with the financial crisis. As early as 2005, the company’s credit rating was downgraded to “junk” status with about the same credit worthiness as Jamaica. GM wasn’t building the vehicles that domestic consumers wanted. That falls under the general heading of poor management.

Dreams of freedom, sex and wealth

Rick Wagoner’s November 7th announcement that the one-hundred year old firm could go broke before the year’s end if financial aid wasn’t forthcoming illustrated the true extent of the catastrophe. The international insurance firm Euler Hermes gave notice that they intended to cancel insurance coverage to GM’s suppliers. Suppliers were told they could deal with GM only on a cash basis. That made the liquidity crisis more acute.

GM, icon of the American economic miracle, was reduced to begging for help. GM’s web page now has a list of reasons why a financial bailout of the company is in America’s best interest. Among other points: the collapse of the company would trigger a domino-effect, endanger research into fuel cell technology and put health insurance for two million Americans at risk, not to mention the pensions of some 800,000 retirees.

How did it get this far? GM was the most important company of the 20th century. It delivered on the dreams of freedom, sex and wealth promised to the American people. There were GM products for every socio-economic level: Chevrolets for those starting their careers, Pontiacs, Buicks and Oldsmobiles for those on the way up, and Cadillacs for those who had made it to the top. In better days, the company had a 60 percent market share in the United States.

GM encouraged customers early on to go into debt

GM put its stamp on the whole industry not so much with technical innovation as it did with management principles and marketing. The legendary CEO Alfred Sloan pushed the concept of decentralization for years. Each division sold its products independently, with the main company setting only sales goals.

For each level of affluence, GM had a make and model ready that may have been slightly more expensive than the competition’s offering, but made up for that with more modern styling. The company also invented so-called “planned obsolescence”. Each division came out with new models every two to three years that made the previous model look old-fashioned and stuffy. GM was an early leader in encouraging people to go into debt to have the latest model.

The downfall began in the 1970’s. Increasing environmental regulations cost General Motors billions of dollars and oil shortages threw a wet blanket on demand. In the eighties, problems got worse when American manufacturers began running into competition that was better managed. The Japanese were building cars that were statistically more reliable, didn’t become obsolete as quickly, used less fuel and were cheaper to begin with.

They missed the trend toward eco-friendly vehicles

The Americans couldn’t come up with an answer to quality vehicles first from Japan and later from Germany. Technological advances came from foreign producers while American producers concentrated on large limousines and so-called sport utility vehicles, large gas-guzzling multi-use vehicles that appealed to an America flush with money during Bill Clinton’s administration.

That course toward huge, inefficient vehicles caused GM to miss the coming trend: inexpensive, eco-friendly cars for the U.S. Market. Skyrocketing fuel prices during the last two years dampened demand for cars in general, but General Motors’ gas-guzzling lineup was especially hard hit. But GM never bothered to look at alternatives.

In 2003, General Motors ended development of a new vehicle that could have become its best hope for the future: the electric EV1. When Bob Lutz, GM’s Vice Chairman of Global Product Development, suggested building cars using alternative power sources, GM’s upper-level management objected strenuously. Meanwhile, Toyota was gaining market share and polishing its image with its eco-friendly Prius. It wasn’t until two years later at the 2007 Detroit Auto Show that GM boss Wagoner announced the development of an electric car, Chevrolet’s Volt, to be available in 2010.

The company was late off the mark in adopting necessary changes and had to cut its workforce by half during the years 2000-2008. It was, however, successful in negotiating deals with the autoworker’s union that saved it nine billion dollars and reduced its pension liability, something that added as much as $1,600 to the cost of each vehicle manufactured.

But their efforts may have come too late. Although incoming President Barack Obama has signaled his willingness to help, he doesn’t take office until January 20th. By then, General Motors could be broke.