03/28/2006: Few people are as hard on General Motors management (and union reps) as yours truly. I spent my first three years out of college working at various General Motors plants, as an Engineering Systems Engineer for EDS. (EDS was a subsidiary of GM back then, and was responsible for the information systems at GM.)
I was there in 1992, when GM recorded the $23 billion annual loss. It was depressing, but most of us knew that most of that loss was on paper. The consultants on the plant floor–charged with accelerating the adoption of synchronous manufacturing–were convinced that GM (and the American auto industry) had turned things around. The quality gap was closing.
To a point, they were right. Improvements were made, and GM would return to profitability.
Unfortunately, the consultants were wrong on another front: while GM incorporated some modern manufacturing and engineering methodologies, overall corporate culture had not really changed. Underneath the talk of synchronous manufacturing and Just-In-Time, GM remained an Old Economy company with an Old Economy mindset stuck in the midst of a global economy that now threatens to leave GM on the ash heap of economic history.
It is as simple as that.
It is not that GM managers are stupid; in fact, GM hired some of the highest-achieving college grads. Trouble is, those managers have spent decades in a company that rewarded people for thinking inside-the-box. (And GM bureaucracy is as bad as–in some cases worse than–the most bloated government agencies.)
It’s not that GM engineers are not bright, either: GM was known for hiring outstanding graduates from Purdue, GMI, and University of Michigan. I knew the people who developed the products that led to the creation of Magnequench, which was part of GM back then: they were spectacular engineers from General Motors Research Laboratories. In the field of magnetic research, few scientists or engineers could hold a candle to John Croat.
No. The problem is not the competence of the people that GM has hired: it is their corporate culture, which has rewarded employees for thinking inside the box for the better part of the last six decades. General Motors is an Old Economy company–whose business and engineering processes are still tied to that paradigm–trying to stay afloat in the New Economy.
(1) They have too many vehicle platforms.
(2) They have too many brands.
(3) Their vehicles do not share the degree of commonality among parts that their competitors do.
(4) In spite of remarkable improvements in quality, GM still suffers from the stigma of past blunders.
(5) Their strategists tied GM’s future to large trucks and SUVs, leaving GM vulnerable to spikes in fuel prices.
(6) Their legacy costs include slushy handouts–such as the Jobs Bank–to uncontrollable expenses such as retiree pensions and health coverage. Some employees have spent upwards of ten years in the Jobs Bank collecting large salaries for doing nothing.
(7) Their R&D processes are slower, as time-to-market (TTM) is much higher than that of Toyota.
The reason for this is that Toyota and Honda–New Economy companies–have embraced concurrent engineering, integrating R&D, manufacturing, and maintenance. In New Economy companies, this integration of R&D allows for more rapid product development and also better manufacturing–which leads to better quality measured by fewer defects–and better maintainability. Their R&D, manufacturing, marketing, finance, and HR units work together. At GM, those units have been known for huge rivalries.
That’s not to say that GM has not embraced any of these concepts; however, in a New Economy company, this involves integrating a corporate-wide mindset of innovation and process improvement. GM has embraced some methods, but not the outside-the-box mindset that is necessary to make them work.
That leads me to the fundamental problem with GM management: they all need to go. It’s not that they are bad people; however, they are not the right people to remodel a company to think outside the box. It’s time for new blood, new brains, new ideas, a whole new way of doing business.
Rick Wagoner and the entire executive team need to go.
While offering the buyouts to hourly workers was a step in the right direction–as is the reduction in salaried employees–that is only part of the solution. After all, no company ever cut itself into prosperity.
GM must make some hard decisions:
(1) Which brands will survive and which will be dropped or sold?
(2) How to integrate marketing, R&D, and manufacturing?
(3) How to properly fund and integrate both product and process innovation?
(4) How to close the quality gap, both in perception and reality?
(5) How to bring employee and retiree compensation to a New Economy standard?
The last element will impact everything, as GM has legacy costs that will impact them for at least another generation. While GM retirement compensation is of the defined benefit variety, New Economy companies have incorporated defined contribution (i.e. 401(k), 403(b), 457) plans.
Defined contribution plans place responsibility on the individual to manage his or her assets, while pensions place the economic burden on the company to provide financial benefits to employees beyond their years of service.
As a result, GM will face serious hurdles in covering those costs and regaining competitive strength. With its bond rating well into junk territory, her cost of capital will make it difficult to formulate a capital structure that will bring recovery.
The possibility: by selling GMAC and other business units, and by shedding hourly and salaried workers, GM will be able to raise the capital to satisfy its immediate legacy costs and bolster R&D processes. This may help stop the bleeding and return GM to financial stability in the short term. If that happens, then perhaps the bond ratings will improve–lowering the cost of capital–allowing GM to negotiate bond offerings that will meet future legacy cost structures at favorable rates.
Meanwhile, new GM employees–union and non–will be subject to New Economy standards. That means defined contribution plans and health savings accounts, and less-comprehensive health insurance.
If GM wished to be really creative, they might offer retirees a “buyout” of sorts: offer retirees a financial incentive to convert their pension into a 401(k) plan. This would involve taking accrued pension benefits and investing them in a 401(k) account carrying the investment structure selected by the retiree (perhaps in consultation with a financial advisor provided by the union).
Sadly, legacy costs may make Chapter 11 inevitable for GM. I hate that, because retirees would be the ones to suffer: many of them lack skills to re-enter the workforce and find work that would compensate for the money lost. Many have health care needs that would be impacted by reduced insurance coverage.
However, this whole case study reveals fundamental lessons in economics:
(1) There is no free lunch. That Milton Friedman truism is a scientific fact. No solution that I–or anyone else–proposes would make everyone happy or reduce everyone’s suffering. Any way you look at it, people are going to lose jobs. Retiree benefits would either be reduced (in pensions) or put at greater risk (in 401(k) plans). Any way you look at it, health coverage would either be reduced (by scaling back coverage) or put at risk (by shifting responsibility through HSAs).
(2) As with point 1, economics is less about solutions and more about tradeoffs. Mounting legacy costs will make it hard–if not impossible–for GM to compete with Toyota. On the other hand, if GM files Chapter 11 it will impact the entire economy, as well as the taxpayers who will end up footing the bill for the pensions that GM would dump onto the already debt-plagued Pension Benefit Guaranty Corporation.
But to answer the question of whether GM can survive? I’d say there is still a lot of hope. GM has weathered many storms: the Great Depression, the fuel crunch of the 1970s, the stagflation and high interest rates and recession of the late 1970s and early 1980s, the emergence of Japanese competition, the dot-com bubble, and the aftermath of 9/11.
GM has been a great company whose leaders–in good times and bad–compensated workers generously (GM was once dubbed “Generous Motors”). When CEO Rick Wagoner made the case that GM was working hard to do the right thing for America–such as 0% financing in the aftermath of 9/11–there is an element of truth to that. I’d also make the case that GM has largely tried to do right by her workers.
That’s why I’m rooting for GM to return to greatness. The situation is critical, but–if the directors make the right hard decisions–GM could become the turnaround story of the century.