The rise and fall of General Motors
GM, once the symbol of American industrial might, is now seeking bankruptcy protection. What went wrong?
How long has GM been around?
It only seems like forever. The company was founded in 1908 by a flamboyant salesman named William Durant, with Buick as its sole original holding. Durant proceeded to snap up 30 other carmakers in 18 months, including Oldsmobile, Pontiac, and Cadillac. The acquisition spree saddled the company with debt it couldn’t repay (sound familiar?), and in 1912, GM’s bankers gave Durant the boot. He was eventually replaced by Alfred Sloan, a stiff, standoffish engineer whose innovations nevertheless rivaled those of Henry Ford. But where Ford and his assembly line revolutionized the way cars were manufactured, Sloan, who ran the company until 1956, revolutionized the way they were marketed and sold.
How did he accomplish that?
By segmenting the market and then trying to appeal to every segment. Under Sloan, GM strove to supply a car for, as he said, “every purse and purpose.” Chevrolet, said a GM executive, was “for the hoi polloi, Pontiac for the poor but proud, Oldsmobile for the comfortable but discreet, Buick for the striving, and Cadillac for the rich.” GM also produced many of the innovations that would come to define the modern automobile, including power steering and power brakes, independent suspension, and automatic transmission. And significantly, GM was the first auto company to change its cars’ features and styling almost annually—instilling in Americans the habit of replacing their cars every few years. With GM factories turning out cars in virtually every price range, sales soared, and by the 1950s, more than half the vehicles on America’s roads were GM-made.
What went wrong?
GM’s corporate structure, which Sloan called “decentralized operations with coordinated control,” worked well as long as GM dominated the industry. But decentralization created a dozen internal fiefdoms and enormous inefficiencies, and as competition, especially from Japan’s Toyota, increased, GM was unable to adapt. One division’s cars often cannibalized the sales of other divisions. Its in-house parts companies overcharged the various car divisions, which were barred from seeking lower prices from outsiders. And the various divisions resisted consolidating back-office operations such as purchasing and payroll. GM was also plagued with labor problems—one strike in 1970 took 400,000 workers off the job for 67 days, significantly slowing the entire U.S. economy. The company, which in the 1980s employed more than 800,000 people worldwide, bought labor peace by giving its unions lavish pay and benefits packages that earned it the nickname “Generous Motors.” But those labor contracts crippled the company’s ability to cut costs.
So is it the unions’ fault?
Only up to a point. The unions were slow to moderate their demands in response to competitive challenges. They resisted the closure of unneeded factories and pressured GM to create a “jobs bank” that paid laid-off workers up to 95 percent of their salary and benefits. But you can’t blame the workers for management’s arrogance and complacency. Finance executive Nancy Rottering, who quit in frustration in 1987, said the attitude at headquarters was, “We’re GM. We know everything, we don’t need to change.” Executives were literally walled off from the rest of the company behind the double electronic doors to the 14th floor of GM’s Detroit headquarters. They entered the building through a private basement garage and took their gourmet meals in private dining rooms. They rarely interacted with customers or even their own dealers, who knew firsthand their customers’ likes and dislikes.
What was the impact of management’s isolation?
It drastically slowed the company’s ability to adapt to a changing market—or even recognize that it was changing. In the late 1970s, soaring gas prices fed demand for smaller, fuel-efficient cars. While GM continued to churn out oversized gas-guzzlers, Japanese carmakers flooded the U.S. with small, fuel-efficient machines, dragging down GM’s share of the U.S. market to about 44 percent, its lowest point since the 1930s. When GM finally got around to offering small cars, they were plagued by quality problems. Styling was an even bigger disaster: The company that once created sexy, status-enhancing cars like the Pontiac GTO and Chevrolet Camaro lost its magic touch, and began producing stodgy, generic models like the Chevy Cobalt. Foreign brands such as BMW and Lexus, meanwhile, came to epitomize wealth and coolness. GM’s marketers had no idea how to restore the brand’s luster, and even contributed to the damage with their ineptitude. The Chevy Nova, for example, never met the company’s sales expectations in Latin America because “no va” in Spanish means, “It doesn’t go.”
Did GM try to adapt?
Yes, but its entrenched culture and mammoth size got in the way. The United Auto Workers, meanwhile, resisted every attempt to shrink the company to match its declining sales. It refused to renegotiate health benefits for its current members and the 377,000 retirees, even though they cost GM about $1,200 per car, putting the company at a sizable cost disadvantage to Japanese rivals. In the end, though, it was unappealing cars that brought GM down. The company that had thrived by making a car for every buyer forgot how to make cars that most people wanted to buy.
‘What’s good for GM …’
The statement “What’s good for GM is good for America,” attributed to former GM President Charles “Engine Charlie” Wilson, is often cited as a classic example of the carmaker’s hubris. But the actual quote, in context, suggests something other than overweening arrogance. Wilson testified to Congress in 1953, during hearings to confirm his appointment as President Eisenhower’s defense secretary. Asked if he could make a decision that would adversely affect GM, Wilson said he could, but added he could not imagine such a situation, “because for years I thought what was good for the country was good for General Motors and vice versa.” At that time, about one in every 200 working people in America worked for GM, and the company’s revenues equaled about 3 percent of the country’s gross domestic product—an enormous share for a single company. Seen in that light, the statement sounds less like a highhanded dismissal than a simple—and accurate—recognition that GM’s fortunes were intimately intertwined with those of the nation as a whole.