The decline and fall of General Motors (GMVertInt1)
Oct 8th 1998 | DETROIT From The Economist print edition
America’s biggest industrial company has announced its biggest reorganisation in a decade. Even so, General Motors has still to grapple with its products and its culture
ALL empires contain the seeds of their own destruction. The ideas on which they were founded cannot adapt to changing times. Their wealth
creates bureaucracy and complacency. Meritocracy gives way to an
introverted oligarchy that wastes its talents vying for position within the
imperial court, rather than expanding the empire’s borders. Even as the
empire shrinks, an air of unreality persists—right up to the moment when
the Goths break into the imperial city.
Nowadays, General Motors’ sole claim to imperial status is size: its
608,000 employees and $166 billion in sales. Yet for most of this century,
GM was also the world’s most important company. The management
system pioneered by Alfred Sloan at GM in the 1920s became the basis
for the multidivisional modern corporation. Haunted by Henry Ford, Sloan
built a company that could run itself, independent of the whims of one
man. This explained GM’s decentralised structure, with its autonomous
operating divisions; its rigid system of command and control, where every detail had to be planned; and its vertical integration, in which GM
undertook to make nearly all the parts that went into its cars.
In the 1940s, when Peter Drucker invented management theory, he chose GM as his subject. In “The Concept of the Corporation”, he praised GM’s decentralisation, but criticised it for treating its workers as a feudal cost centre, rather than a source of knowledge. This infuriated GM, but Japanese car firms learnt from it. “Lean production”, Toyota’s management creed, which relied on putting workers into teams and just-in-time delivery, is now as popular as Sloanism once was.
Meanwhile, decentralisation—at least in GM’s sense of creating many different divisions that compete with each other—has fallen out of fashion. With each division having its own marketing and engineering, GM incurred unnecessary overheads. “As the world opened up to free trade,” says Jack Smith, GM’s chairman, “Sloan’s system was
Today, GM pops up in management books only as an example of what not to do—blamed for not introducing products
quickly enough, for poor labour relations and so on. Nobody denies that GM’s empire, no less than that of Rome or
Byzantium, has some excellent parts: its research, its Eisenach manufacturing operation in Germany, to name a couple. When GM puts its weight behind a project, as it did this week when it announced a huge marketing campaign for the new Chevrolet Silverado pickup truck, its sheer power is impressive.
But the suspicion remains that the firm’s leaders—all GM men practically since birth—still think that the firm is too big
ever to lose its dominance. In an age where “only the paranoid survive”, the chief fear stalking the firm’s new headquarters at the Renaissance Centre in Detroit is of the threat of another palace coup such as the one that removed Robert Stempel, Mr Smith’s predecessor, in 1992.
Nowhere are the doubts about GM’s management greater than on Wall Street. GM’s shares have underperformed the stockmarket by around 70% in the past decade, continuing a dismal tradition (see chart). Even more staggeringly, all
GM’s stockmarket value is accounted for by its financing operation (GMAC), its parts company (Delphi) and its 74% stake in Hughes Electronics. Other car firms also make money on financing and parts, but rarely do investors implicitly value the vehicle-making side as worthless, or even a liability. What GM’s shareholders are saying, in effect, is that they would pay you to take the world’s biggest industrial operation off
This is damning. But it is also a mark of GM’s potential. If GM could only
make cars as well as its competitors, it would be worth twice what it is
today. At a time when virtually every other car firm is desperate to
achieve economies of scale in a fast-consolidating industry, it is ironic that
the biggest company of all is considered such a laggard.
The axe falls
So far GM’s reorganisations have tended to fall into two categories—
catastrophic and ineffectual. The most catastrophic was the huge
restructuring in 1984, which set off an ill-fated $80 billion spending-spree
on technology, and also split its American division into two groups—BOC
(officially “Buick-Oldsmobile-Cadillac”, unofficially “Big Overpriced Cars”)
and CPC (“Chevrolet-Pontiac-Canada” or “Cheap Plastic Cars”). Most of
the restructurings since then have been incremental.
The changes over the past three months amount to the biggest revolution since 1984. Although GM’s senior staff insist that change has long been in
the works, two things speeded it up. The first was the recent takeover of Chrysler by Daimler-Benz. The second was a bitter strike by workers at two factories in Flint, Michigan. Over the course of seven weeks, GM ran up after-tax losses of at least $2 billion—and received fairly minor concessions. With investors angry and talk of another boardroom coup, Mr Smith knew he had to do something. Since August he has pulled four rabbits out of the hat:
• GM is trying to sell 100% of Delphi, thus giving up the Sloanist idea of being a vertically integrated company. Mr
Smith argues that a firm as big as GM should have an enormous advantage in buying parts and raw materials. So far it has not, because most of that buying power has been applied chiefly to Delphi (ultimately at GM’s own expense).
•GM will centralise its vast sales, service and marketing system for the six main American car divisions that provide two-thirds of its sales volume. This will not only save around $300m a year; it also obliterates the Sloanist idea that Cadillac, Pontiac and so on should function as autonomous divisions. Henceforth they will be little more than the nameplates bolted to the back of GM cars.
The firm will build • a network of new assembly plants. In America, where GM has been shutting factories rather than opening them, this is something of a novelty. But the new facilities will be far smaller than current GM assembly plants, use much less labour and require capital investments of “an order of magnitude” less than the sums GM has
spent on existing plants, according to Mr Smith. These factories will follow the example set by Eisenach and a new Brazilian plant, called “Blue Macaw”, which will rely on suppliers to pre-assemble “modules”, such as entire instrument
panels. The main task of GM’s workers will be to put these modules together.
This week • GM announced it would consolidate its North American and international automotive operations into a single, global unit, reporting to Rick Wagoner, the firm’s new president and Mr Smith’s heir apparent. As well as cutting layers of bureaucratic fat (if something exists, GM has a committee for it) this should also help GM change the way that it designs and builds cars. Even after recent cuts, GM still has 16 car platforms. Mr Wagoner now says these will be slimmed to eight. And even though the firm expects to launch several new models of light truck, it will maintain the current eight truck platforms.
Entertaining Mr Sloan
There are two responses to these changes. The first is simply to have doubts about them. Insiders are suspicious about the lack of detail on both the timing and the benefits. In Detroit, the changes have been seen largely as more intrigue at the imperial court. The marketing changes were seen as a victory for Ron Zarrella, the marketing chief; this week’s moves as Mr Wagoner’s final victory over Lou Hughes, GM’s international boss.
The second response is to lament just how far behind GM has fallen. For instance, Volkswagen, Europe’s largest car
maker, plans to use just four platforms in its manufacturing. Already, cars as different as the quirky Beetle and the staid Golf share everything from floor-pans to windscreen-wiper motors. Volkswagen has also introduced modular assembly at its plant in Resende, Brazil. Indeed, the factory was partly paid for by its main suppliers, which also employ three-quarters of the factory’s workers.
However the company that GM is most obviously trying to catch up on is Ford. GM’s domestic and international
consolidation borrows liberally from Ford 2000, an ambitious plan to integrate the car maker’s global car operations, launched four-and-a-half years ago. Ford 2000 has saved the company around $3 billion a year. But there were some wobbles along the way and at least one tactical retreat (the restoration of a Ford company to oversee European marketing). The plan survived only because it was zealously promoted by Alex Trotman and Jac Nasser, Ford’s two chiefs.
If GM is to succeed, it will have to show some of the same commitment. At GM, reorganisations still tend to be disseminated by memorandum (the 1984 plan paralysed the organisation for nearly two years). If GM were to ask people to write their names on a “wall of commitment”, as Ford’s managers did at a famous rally in Florida, they might end up with a scrawl of nasty graffiti.
Can Mr Smith rally the troops? His main difficulty is in North America where GM’s relations with the United Auto Workers have been poisonous. At present, GM has too many under-used plants employing too many old (and thus expensive) workers. GM’s assembly plants usually come bottom of the league in any industry comparison (see chart).
“We have 35,000 more people than the firms benchmarked best in class,” admits Mr Smith. But he points out that the average age of his employees is 48, giving GM the chance to slim by attrition over the next five years.
Somewhere behind all this lies GM’s unnecessarily confrontational culture. Over the past four years, the company has faced more than a dozen walkouts, while Ford has not faced one. Following this summer’s strike, GM agreed to set up a new communications system, so that union leaders and senior management can air and resolve their grievances. But there are already problems, especially over the management’s plan to hold separate wage negotiations after Delphi is spun off (components workers tend to be paid less than car workers).
Mr Drucker’s warning of half a century ago still holds true—except the list of people that the company has irked has
widened to include its suppliers and dealers. Many of the former have still not forgiven GM for the cost-cutting exercise instigated by Ignacio Lopez de Arriortua, its purchasing manager in the early 1990s. By tearing up contracts and banishing expensive suppliers, the Spaniard helped shave GM’s parts bill by several billion dollars a year. But he also destroyed trust that the company could well use now.
Something similar may be happening with GM’s dealers. Just as GM has too many factories, it also has too many showrooms. The downstream part of the car business now accounts for a fifth of the sticker price. Mr Wagoner seems keen to take a more conciliatory line. Although he says that GM could eliminate as much as 20% of its current retail outlets, he stresses that those who survive the shake-out are likely to be making a lot more money, a formula that can overcome all sorts of dissent.
By contrast, the one area where GM’s managers have often not been brutal enough is in their own ranks. For years the car maker was known by its white-collar workers as “Generous Motors”. The “layer of clay” made up by GM’s middle management has actively resisted many changes. GM’s habit of rotating managers every couple of years has
also made it easy for individuals to evade responsibility. Mr Smith’s answer is to create “Vehicle-Line Executives”,
engineers charged with overseeing specific products for long periods—perhaps as long as ten years.
These sorts of cultural issues can sound vague. But they are entwined with GM’s biggest challenge: to produce cars that consumers like. Most of GM’s top managers, including both Mr Wagoner and Mr Smith, have backgrounds in finance. They are not what people in Detroit call “car guys”—unlike Messrs Trotman and Nasser or Ferdinand Piech
(who led the turnaround at VW) and Bob Lutz (who was the brain behind Chrysler’s revival).
Arguably, GM’s focus on organisation rather than charisma and risk-taking dates back to Sloan and his worries about
Henry Ford. In the past ten years GM’s restructuring has been soulless. But even the most hard-bitten efficiency
experts acknowledge that you cannot simply save your way to success—particularly now that most cars work
reasonably well. “This is a product business,” says Jim Harbour, a Detroit expert. “If you don’t have the product people want, you are dead.”
If GM is going to have the influence on the next century that it has had on this one, it will need more creativity, alongside its new structure. Messrs Smith and Wagoner both say they want to take risks with new cars. They might bear in mind what Edward Gibbon wrote of another empire in decline, “all that is human must retrograde if it does not
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