06.02.09
The Fall of GM
“When GM goes bust, we’re all in trouble.” That way my father’s point of view in the mid 1960’s. At that point in history, GM was the biggest auto company in the world. Perhaps it was the biggest company in the world. Now it is in bankrupcy. Its bondholders, its retired workers, its suppliers, and everyone who had any kind of contractual relationship with GM will be severely burned.
The bankrupcy of GM ought to give us pause. How can a company that was once the world’s largest non-governmental institution be insolvent? If we answer this question well we might learn some very useful things about capitalism, about work, about power, and about anglophone culture. To the extent that we learn useful things and change our practices, we may prevent many more of America’s most powerful institutions from similar failures.
Returns to Scale - And its Limitations
The seeds of GM’s failure were sown early on in its existence. General Motors had grown to be the biggest car company in much the same way that Rockefeller’s Standard Oil had grown - mostly by expanding its economic reach by using profits to buy up competitors and improve margins. It was a practice of using high level economic might that depended very little on other techniques. It required that one acquire competitors by whatever means were effective. Then, one exploited commonality between lines to decrease tooling and production costs. Usually the simple fact of being big enough brought sufficient returns to scale that GM as a firm did not have to be much better than anyone at anything. It did not have to be better at marketing or manufacturing or design or testing. It merely had to be almost as good. Everything else could be done by manipulation of the levers of power.
When Tucker set up a manufacturing line to produce cars in the mid ninteen fifties, GM and other Detroit auto companies used their pull to have him prosecuted for defrauding investors. They claimed he never intended to build cars. The actual cars that he produced were never allowed to be introduced as evidence. He was shut down. He posed a threat to the standard way of doing business. And he was shut down by a manipulation of the legal system.
When the movie was made about his story in the early nineties, a good portion of the dozen or so cars he manufactured, were still roadworthy. Tucker represented the independent, entrepreneurial spirit in America. His ambition was to give Americans the choice of a superior automobile. This represented the peak of Detroit’s power. But five decades of waning power may not have changed Detroit’s way of thinking about the business, much.
In the minds of auto executives, automobiles have just vehicles of exchange. One built them to the lowest possible standard at the lowest possible cost and sold them at the highest possible price. One assumed that the consumer was ingnorant of all he could not see. Beauty in cars was skin deep. And when the paint peeled because of corrosion, that just meant it was time to buy another one. In this view of the business, reliability, performance, and pretty much everything other element of value to a customer were irrelevant if the customer could not sense it at the time of purchase. That meant a kind of race to the bottom.
For decades, Detroit auto companies had their way with the American consumer. Things began to change in 1972. That was when the first oil crisis struck. That was the year the US hit peak oil as predicted by Hubbert in the 1950’s. This would mean that oil production in the US would necessarily decline, and that the US would have to import ever more oil in order to consume the same amount as ever. That was the year OPEC cut oil exports to the US. They did the same in 1977. Oil prices spiked. Jimmy Carter signed a law requiring disclosure of fuel efficiency on each new car. Small cars soon earned a significant market niche.
Detroit exploited that niche by introducing the forgetable Vega and the notorious Pinto. But the Japanese used the event to enter the US market in a different way. An early TV advertisement featured a couple slamming the doors of their Toyota. The implicit message was “It may be a low cost car that sips fuel, but it is still a car of high production value.” The message stuck.
During this decade three Japanese car companies introduced models into the US market: Toyota, Honda, and Nissan. Each of these companies has grown. And, in fact, within the last few years - before the credit crunch - Toyota had already grown to be the world’s largest car company. Toyota has been building cars in the US for two decades using American labor and (some) American parts. And they have been building more reliable cars with less labor input than any other car maker. Honda’s cars are not far behind in terms of reliability. And they generally garner high praise for being fun to drive. Japanese car makers gained ground with American customers by building a reputation for high reliability and high value.
Given that they had serious scale disadvantages at the start, how could Japanese producers have hoped to be successful? There are many answers. The fundamental answer is that they paid less per car for labor and materials and they produced cars that earned for their brands a deserved reputation for reliability and value. And how did they do that?
US businessmen will argue that the labor unions were too strong and that they drew too much capital out of US car companies. This is probably true. But it is probably also true that this is more of an excuse than a reason.
There were two factors that made the labor cost lower for Japanese manufacturers. One is that labor rates were slightly lower. They ran non-union shops and paid wages that were high in local terms but low in comparison to union rates. The other reason was that Japanese had much less labor in their auto assembly processes than the US car companies. The Japanese had evolved a better manufacturing method.
The Stratification Problem
There are several related reasons the Japanese managers were able to get more value from American workers than American managers. One was the idea of KAIZEN. It is the idea of empowering workers to do things that allow them to become more productive. And its’s the idea that workers are invested in their work at every level. They work hard. And this work brings them not just a paycheck, but a meaningful place in society. They engage with all their talents.
Furthermore, position in society - i.e. status - is not a matter of categorical difference but one of function. The world is not split into nobility and “villains;” rather, people higher in the hierarchy have greater responibilities that account for their greater authority. They may have better educations and even better breeding; but they are not somehow categorically different from the people who labor in the factories. These are ideas that are deeply engrained in German and Japanese culture. There is a touch of this same idea in the French notion about work and place in society. It’s much less true in Anglophone countries where the notion of two classes still prevails.
A by-product of the classless workplace idea is that there is a constant dialogue that occurs vertically within an organization. It assumes that decisions are made closest to the groups that will be affected by them. And that competent people with strong training backgrounds, exercising good sense, and motivated by an interest in the success of the organization work out decisions in a way that gains the most advantages and avoids the most pitfals. Management is charged with enabling the virtually continuous flow of incremental improvements by providing financial and engineering support. Management, in this view of the world, derives power from its ability to make good decisions. And to make available the resources to implement.
Even if no practical business decisions were to come out of this dialogue, the dialogue itself creates a kind of shared interest in the business and its operations that knits together people at different levels of the organization. This sense of shared mission allows for give and take in all business arenas including negotiations about pay.
But it also produces good business decisions.
In this model good decisions are both the reason for existence of the power structure, and its product. This vertical dialogue keeps management in the loop about operations. It means that they stay connected with the part of the business that adds the real value.
In Detroit, by contrast, there was a kind of invisible line drawn between workers and management. Management was allowed to set goals and working rules for workers. They were required to make sure the raw materials showed up. And to make sure the finished goods got sold. And to make sure that new products were designed and tooling made. But if there were minor problems that cost time and money on the manufacturing floor, it was the workaround that ruled. The only thing that was to be negotiated between management and workers was compensation.
Similarly, it was assumed that a manufacturing plant, once it was built, was perfect. Nothing could be done to make it work better. Sure, there was an operating budget for keeping things in good repair, but there was no persistent attention paid to the question of how manufacturing processes could be streamlined to make them all better. All decisions were made by people at one level - the highest level with an interest in the outcome. And exempt employees rarely spoke to or saw non-exempt employees except at ceremonial functions.
Reinforcing this separation between workers and management was a culture of entitlement. Whereas in Japan the CEO’s of companies were rarely compensated more than 200 times what workers were; in the US 2000 times or more was not uncommon. Furthermore, the people who ran companies in the US were invariably promoted up through marketing and finance divisions. Anyone who actually knew about and cared about operations was treated as a second-class citizen. A manager might be “rotated through” an operating plant, but he was rarely expected to do much outside of learning what products it made.
Everyone knew that the real money came not from being good at making a product, but by being good at selling it. There may be some truth to that proposition when everyone who is selling cars sells cars that are essentially equivalent in terms of measurable value/cost. But the proposition becomes false when this is not true. Ignore operational excellence long enough and eventually you end up on the wrong side of the value proposition. You lose money. Then you go broke.
Denying the Value Proposition
This is where Detroit has been dangerously wrong for five decades. Early on it embraced designed obsolescence. Then, when Toyota and Honda began delivering cars with greatly enhanced reliability or with measurably superior fuel mileage; when Volkswagon began delivering cars with the road performance and feel that approached that of BMW; and when Volvo and Saab delivered cars with superior safety characteristics, the issue of quality began to plague Detroit. It was clear that one could not simply plead “Rich Corinthian Leather” and sell as many cars as you could ever make. One had to figure out how to deliver value in terms of reliability, drivability, fit and finish.
Improvements in reliability since the early eighties suggest that Detroit understood that it could not afford to be much worse than all its competition in every measurable quality; but it is not clear Detroit ever did get very good at managing the value proposition. When measured against most of their competition, they are both worse than the Japanese in terms of reliability - not just on average but in almost every product line - and worse than the Germans and Scandanavians in terms of performance. Instead of really trying learn how to be better, Ford and GM bought Volvo, Saab, Mazda, and Opel.
But even its foreign acquisitions did less good than they might have. There was enough expertise in those enterprises to teach American managers a few things. But it didn’t happen. Enough of the managers came up in Detroit country clubs that if any outsiders from Europe who understood operational excellence landed in the US, they were immediately gelded. Foreign ways were immediately discounted and failure was swift. The game was the only slightly different overseas. There was nothing to be gained by over-investing in foreign operations, especially in Europe. Rather, the slow strangulation of high profile brands served Detroit’s goal of focusing on high mark-up products without delivering high end performance.
What buying those brands could have brought was people who understood how one can cultivate niche markets and serve specific needs very well and competitively. They might also have brought people who understood how to hire and train highly skilled craftsmen, treat them well, and negotiate with them as adults.
But the idea of exploiting niches is one so foreign to GM that its very name denies the possibility. So what if the people who pay a high premium for a Volvo do so because they perceive high value in not being sliced to bits in the event of an accident? So what if they want to know the car has special features that help prevent accidents as well as limit injury?These all add costs. And they cannot be spread out over the entire product line. So why do it? The simple rule that governed their whole business was a kind of interchangeability of all components across all platforms that improved returns to scale. But it also led to a king of lowest common denominator thinking. The only possible place to spend in making a car better was in optional features that were bolted on at the very end of the manufacturing process
Niche markets simply could not exist in the GM framework of thinking. Then, when in the 1990’s more than half of the automobile market was “niche” markets: when Toyota, Honda, Mazda, Volkswagon, BMW, Volvo, Saab, Hyundai, and a few other companies sold most of the cars, Detroit made most of its money on pickup trucks and SUV’s. By denying the very existence of niches, Detroit had backed itself into a place where it sold niche vehicles. But the niche that they were selling into was soon to be a rapidly contracting one. Meanwhile their costs were higher than the competition because they had counted on returns to scale and consumer ignorance to save their bacon.
One question corporate strategists never quite wrestled with was this “Will the SUVs and Pickup Trucks supplant other kinds of autos?” Detroit simply did business as if the answer had to be “Yes.” But that is a daft proposition on the face of it, for it assumes that everyone is either a soccer mom or a farmer/construction worker. And that probably accounts less than 20% of the US population. In an age when fuel prices must rise because of limitations on natural resources, it is insane build a business model on the proposition of building ever larger, more fuel-guzzling vehicles.
By contrast, it is reasonable to argue that one must have at least a meaningful token position in small autos. Because the markups are so small, doing so forces one to hone manufacturing toward operational excellence. One might actually become a far better car company by competing in the economy classes and losing a token amount of money every year at it than by avoiding it and avoiding the whole question of operational excellence.
Furthermore, one knows that eventually fuel must become expensive. So making small cars keeps one in a position of being able to move toward smaller cars the next time fuel prices go up. This is but one strategic error Detroit has made. And it has been making it since the 1970’s.
By the mid 1990’s one might argue that Detroit must have chosen to build trucks and SUV’s out of necessity - the necessity of a set of companies playing a losing hand. Detroit’s niche had always been to make cars that were cheaply wrought or ones that were wasteful of resources. The Japanese had no domestic markets for these vehicles, so Detroit could still have some advantages here. So it focussed on these areas. But even here it was not safe. Toyota brought its skill in making reliable cars to the truck and SUV market. It leveraged it reputation for reliability and scored meaningful hits on Detroit’s home turf with the likes of the Toyota Land Cruiser.
Bad Decisions - Consequence of Culture
We might all disagree about which decisions were GM’s worst. Or which choices doomed Detroit to failure. But the simple fact that it has been losing market share to Toyota and Honda for four decades is a testament to the fact that it is making worse decisions than Toyota and Honda for four decades. Back in the mid 1980’s there was an article in a major business publication that told us Japanese management held US workers in high regard for their skill, knowledge, dedication, and energy; but they viewed US managers with contempt. Perhaps there is something to be learned from the way managers of Japanese and continental European companies manage.
Since that moment, the Japanese had their little problem with banking, suggesting that not all Japanese ideas are uniformly good. But we have had our own little problem with banking. And during the two decades of retrenchment in Japan, the Japanese have continued to invest heavily in their own automated manufacturing lines. The Japanese have more industrial robots per capita than any nation on earth.
Whether this is a good business practice remains to be seen, but there can be no question that the Japanese are serious about being good at manufacturing. Americans, on the other hand, are serious only at being good at investing. It’s good to be good at investing. But it’s a short-sited view. The people who invest capital usually get the short term return; but it is generally where manufacturing operations are profitable that great wealth is generated. When a nation ships its stock of capital offshore, the bulk of the wealth generated from that capital accrues offshore. The Germans and Japanese understand this well. Americans seem completely oblivious.
The idea of investing to improve on-shore productive capacity fits hand-in-glove with the idea of Kaizen. For example, if one finds that one is paying manufacturing workers too much to make a good profit, then the goal must be to improve the productivity of the workers by increasing automation. Or by using some other high impact technique such as building out the product line so that even with marked increases in productivity, there is still a need for each worker. But in every case it requires a kind of joint interest in the long term success of the business. One cannot manage from quarter to quarter or year to year. One must take a long term view of the the business that , in ten years, sets one’s own organization far ahead of where it is today. In the case of the Detroit car company, long term is defined as being roughly the duration of a labor contract - a couple of years, maybe. And every technological change is fought because it increases business risk -especially changes that would bring big improvements in anything.
A great example of this is the Fiero. In the early 1980’s an ambitious manager decided to build a mid-engine two-seater sports car within the Pontiac brand. For reasons that are impossible to understand, he got enough support to start production. The car was ambitious for a number of reasons. One was that it used all plastic (through color) body panels that were virtually immune to denting, rusting, or scratch damage. The car was well received by the press. During its one or two years in production it sold well and it had even garnered its own cult following. What was truly amazing was that it broke every rule in the book. It was well built, reliable, sporty, stylish, and yet it sold for about the cost of a subcompact. When Pontiac stopped production everyone outside Detroit asked “Why?” To many, it seemed like the best answer was because it simply went too far. It appeared that the most compelling reason for its being withdrawn was that it was so good it made everyone else look bad by comparison. And, if the rumor is correct, that was the end of that particular manager’s career at GM: he was fired because he was so damn successful at creating customer value.
Inside American business, the problem of making bad decisions, is not just an issue of choice. It is an issue of identity. The process is lampooned weekly in Scott Adams’ Dilbert cartoon strip and the BBC program The Office. Americans make bad decisions partly because we have embrace bad mental habits in our mental conception the workplace and the various relationships that exist in that context.
The Wrong Work Ethic
One of the issues is that management in many companies in the US operates on a “clubby” mentality: The company is viewed as a club. The offices are its clubhouse. (We are tempted to think of nine-year-olds and treehouses…) Exempt employees are its club members who are elected for their good looks, brains, and athletic prowess. Or maybe because they are well connected. Education at an exclusive, expensive private university is a kind of imprimateur marking suitable club members.
Issues of technical competence are of little or no importance. Showing up at work matters not because it allows one an opportunity to work and produce wealth, but because it is symbolic of commitment to the club. It is possible for institutions to get by on this sort of culture for some time. But when they are pitted against rivals that have more productive ethics, they are doomed to failure.
A friend of mine worked in the IT branch of a major financial company in Manhattan. He joked that people showed up at 9:00. They would drink coffee and hang out in each other’s offices until lunch. Then, to look industrious, they would have sandwiches delivered to their offices. Then they would hang out in each others offices until about 3:00. At about 4:00 everyone would realize that they had a day’s worth of work to do. They would go to their own offices and work until 8:00 or 9:00 pm. Then they would go home. They would return the next day dog-tired and incapable of mounting any meaningful effort. So they would spend most the day going from office to office bragging about what long hours they worked. One’s work status depended most on being present and visible. And maybe on being good looking or witty.
In a business publication some time ago I remember reading of how German workers who came to the US were shocked at the lax culture. They were shocked to see how US workers treated the work place as a place for socialization. In contrast, when in Germany they would go to work, hardly ever talk to their cohorts at work, and then leave promptly at 5:00. Evidently the French do much the same, except they leave earlier. Paris’ afternoon rush hour starts around 2:30. The European conception of the workplace is that it is a place to work. It is not a place to socialize. Europeans work hard, expect results, and go elsewhere to socialize.
Common to the European and Japanese cultures are ideas that value training, competency, focus, and hard work. It assumes specialization and specific spheres of influence based on technical competency. This body of thinking has many consequences. One is that Japanese and European exempt employees can be quite effective during their work days. The French, for example, have the highest GNP per hour worked. Another is that when one views the work place as a place to produce output rather than a place to acquire status, one behaves toward problems differently.
This idea of technical competency allows all decisions to be made at the lowest level possible. It assures that exceptions are handled more quickly and in ways that will typically have the leas possible negative impact on the business.
By contrast, in “clubby” cultures, decisions are management’s reason for existence. And problems are signs of failure. Should ever a problem rear its head in an institution with clubby nature, the management reaction is simply to make the problem go away. The first two or three steps involve a denial of the problem’s existence. In some cases evidence of a problem disappears after it has been denied effectively at high levels. A good chain of management is defined by its ability not to cause problems to be solved, but to cause them to disappear. If nothing else works, one simply silences the person who brought the problem to the attention of others. There are hundreds of techniques to doing this ranging from discrediting the person to firing them. There are firms where such techniques are much more useful in acquiring positions of rank than are demonstrated ability in actually making the reason for the complaint disappear.
In such an atmosphere, the very act of observing a problem tempts disclosing it. And disclosure means punishment and tempts dismissal. This trains the whole organization to be oblivious to problems and to deny problems in the face of any and all evidence of problems. Only management consultants are allowed to see problems. But even here, management consultants must go around to every business of the same kind, see that everyone’s business is in serious danger of collapse because of the same problem, then they must recommend to all their clients some incremental solution that poses no threat either to the entrenched power structure or to the way the company sees itself. In such a culture, it is only a matter of time until the institution collapses.
Specialization and Technical Competency
Not every US company has this sort of a problem. A friend of mine worked at Hewlett Packard in the early nineties. HP had come up as a maker of high-end electronic instrumentation. It had a reputation for no-holds-barred product excellence and high margins. It had just gotten into the laser printer business, and it had brought its culture of excellence into that business. This friend would tell me stories about the way business decisions were made at HP.
One of the questions that people frequently asked in business discussions was “Are you technical or non-technical?” The assumption behind this question was that two kinds of issues bear on a business decision. One is technical issues. These are ones that require a deep understanding of the way things actually are. You cannot convince a broken glass that it is not broken. You either have to repair it or get a new glass. Technical people are good at understanding this sort of thing - much better than non-technical people, usually. The other type of issus is non-technical issues which deal much more with the way things are perceived, the way people are influenced, the way power and resources flow within an institution. Technical people are sometimes much less good at understanding these sorts of things. So when a person makes an assertion in a business meeting, it is helpful to know whether that assertion is backed by the authority of expertise.
No good business plan of action could go forward unless the technical people understood how to overcome the technical obstacles. No business plan could go forward unless the non-technical people understood how to overcome other kinds of business obstacles. The question implicitly gives credence to this idea. ( We note in passing that the question could persist long after the practice of managing in the way we just mentioned has ceased. For instance, it could be used to disqualify people from voicing legitimate concerns. And in such cases it would serve a purpose opposite to the one we attributed to it..)
The question itself betrays a number of bits of brilliance that might help explain HP’s early success. It suggests that business decisions take into consideration technical and non-technical ideas. It suggests that competence and good judgment in one’s field of expertise ( technical or non-technical) are highly valued. It demonstrates an implicit assumption that people are expected to come to the table with core competencies, and that decisions rely on the competencies and good judgements of all specialists. This is a sign of a workplace where work is defined in terms of delivering value to customers more than it is in terms of gaining personal status.
Decisions are not imposed from the top down. They percolate up from the operating groups of the company. It is suggestive of the idea that people at all levels are expected to voice objections and suggest problems before decisions are made.
This is an idea completely consistent with the Japanese idea of kaizen. It is an idea consistent with the continental European idea of highly trained crafts-people. It is an idea NOT consistent with the idea of business place as club. It is not consistent with the Adam Smith idea that a person in a craft or trade can learn all that there is to know about it with three weeks of on the job training.
Canary in a Coal Mine
The failure of GM is not a result of the financial crisis. My wife, who spent twenty some years as an executive in a health-care company predicted six years ago that GM would collapse if it did not get its health care related expense problems fixed. And, in fact, a huge part of GM’s financial collapse owes to financial obligations it owes in support of health care costs. Had the UAW been served by the Japanese health care system, those costs would already be something like half of what they are today and GM might not yet be entering bankrupcy. So GM’s failure ought to tell us something about the cost of not fixing health care in the US.
But Rick Waggoner, until recently the chairman of GM, insisted right up until the day he was thrown out that GM would never seek bankrupcy protection. Either he was completely delusional, or he was unwilling to publicly admit a serious problem. What is scary is that within the clubby atmosphere of the Detroit business world it is precisely this aspect of his behavior that was the most likely to get him the chairmanship. And it was the most likely to keep him there while that mentality was responsible for filling the chairman position.
The clubby practice of denying problems has kept Detroit from being as good as its competition at design, manufacturing, or reliability for something like five decades. It has imperilled American Motors, Chrysler, Ford, and GM. AMC went out of business long ago, though its Jeep brand - still plagued with reliability problems ( ironically ) staggers on as part of an ailing Chrysler.
It is inevitable that a few brands will disappear over the next decade. It will not be long before the category “commuter car” becomes a special category. And, in fact, it will not be a great surprise if some cities begin to try to create special incentives to drivers to use smaller, cheaper electric powered commuter cars.
But the bigger question is how far will the Anglophone world need to fall behind the rest of the world in order to discover that:
1) Operational excellence and technical competence counts. The notion of continuous improvement implicitly acknowledges the idea that problems exist and need to be solved. It implicitly depends on technical competence and good judgement.
2) Decisions must be made on the basis of information not just on the basis of preserving power. When considerations of power usurp the decision making process, bad decisions are made. And the consequence is a more serious erosion of power. Power is a natural consequence of good decisions.
3) The workplace is a temple for the sacred purpose of generating wealth, and power is a natural consequencs of being good at this. If one thinks of the workplace as being a place to gain status or power first, then one risks trading business assets and advantages for personal gain. That’s a morally reprehensible point of view.
4) Entitlements don’t create wealth; they create fiefdoms, slave plantations. What creates wealth is an efficient means of production or distribution. And what creates excess wealth is an incrementally more efficient means of production or distribution. Once everyone else has learned your tricks, you need to create new ones; so you must cultivate expertise and set it to work within a culture that is very good at defining and implementing low risk incremental change.
GM’s failure ought to teach us these lessons. If we learn them well, we might yet forestall a general economic disaster. Apart from the sheer monumental good fortune of its accidental discovery five centuries ago, America’s good fortune as a nation stems from healthy institutions of all sorts. It depends completely on a low level of institutional corruption and on a high level of sanity, wisdom, expertise, and business intelligence. It depends on hard work at all levels. It depends on productivity at all levels. It depends on management that is actively engaged in identifying problems and fixing them. It depends on capital and on a continuous re-investment of profits in the efforts that improve effectiveness at all levels. It depends on a high level of trust and trustworthiness among all interested parties in an institution.
All of these attributes were compromised by the clubby atmosphere that smothered Detroit. GM is bankrupt. So are the practices that got it there.