The executives at General Motors (GM) knew they were in trouble: Their negative cash flow had become intolerable, and their lending institutions had locked up. Bankers refused to lend the corporation any more money, fearing that they'd never see GM's current loans repaid, much less any new funds they might advance. New car divisions that had opened only a few years earlier were now huge money pits. And even those divisions whose sales had once shown incredible potential now had virtually no sales at all.
GM put some divisions and parts operations up for sale, but potential buyers showed little interest. GM cut the size of its workforce repeatedly but could not lower expenses quickly enough to match the fall-off in demand. Finally, GM's lead creditors met quietly at Chase Bank in New York, seeking to find out whether they could salvage any of their loans if they forced General Motors to liquidate.
The bankers hammered GM executives: Why did they insist on keeping different divisions, when it was obvious they were simply money pits? One GM executive explained that if the company failed, it had the potential to set off a nationwide panic, which could damage the improving consumer confidence just starting to take hold after the massive downturn in the economy. He also pointed out that the vehicles the bankers were calling foolish had been some of GM's most profitable vehicles just two years earlier. It couldn't be helped, he said, that the public had become so fickle and tightfisted, not when a massive economic contraction had just scoured the country.
The bankers had their doubts. But after looking at the facts they decided that if GM would dump its losing properties, effectively fire the CEO, and allow the bankers to elect the new board of directors, then GM would be advanced the funds to get past its current financial problems.
Boom and Bust
Welcome to September 1910, when the bankers revolted against Billy Durant's General Motors. Ten years later, GM would be back in the same financial mess as in 1910—too many divisions, too few making a profit, and doubts publicly raised as to whether the company could ever recover from a short period in history where they almost failed twice. It should also be noted that, at that time, from all outward appearances Ford Motor (F) was sitting pretty.
The history of large-scale industries tied directly to the American consumer has always been one of boom and bust. The immense amount of money needed to build factories, design products years in advance, support retail sales, and cover their products with service and parts has never been the favored business model of our financial industry.
For a very good reason, those industries are just as cash-intensive in good times or bad. Just as our airlines will soon shell out up to $200 million to buy one Boeing (BA) 787-9 Dreamliner so we can fly across the country for $300, it can cost multiples of that amount to create just one all-new vehicle—with absolutely no guarantee of an audience for the product once it's delivered. (To read more about the high cost of the Dreamliner, click here.)
Moreover, in periods where the economy turns south, the downturn is often far quicker than any large-scale consumer-based industry can properly respond to lowered sales. For example, many commercial airliners are sitting in the desert right now because airline travel has fallen off so far, but payments still have to be made on those jets whether they collect sand or flying miles. Like the airlines, the auto industry has to continue to amortize the costs of new products even if their sales volumes fall far below forecast.
Frankly, from a financial viewpoint, neither the auto industry nor the airline industry makes any sense at all. Too much money, too high a structure for fixed expenses, too much room for error in future planning, forced to constantly lower your prices to that of your weakest competitor, and a public that can desert you overnight when the economy contracts.
Now, can you imagine our society without an inexpensive way for us to travel?
We all have a tendency to view history from the narrowest of perspectives—our personal experiences in our lifetime. So you owned a 1982 Cadillac Cimarron that you didn't like. That has nothing to do with the new CTS—or with today's General Motors, for that matter. What everyone is forgetting is that we have seen this stretch of the road before, where major industrial powerhouses came into financial crisis in the worst of economic times and were written off as dead. Furthermore, many of these "dead companies walking" not only returned to financial health when the economy recovered, but actually prospered: Like Cadillac, they went on to become the standard that the rest of the world strove to emulate.
In GM's case, the bankers took over the company in 1910 and put it on an austerity program, although after the 1910 Financial Panic ended, rising sales proved that GM was viable in any condition.
Billy Durant, GM's ousted CEO, went off to start two more car companies, Little and Chevrolet. The Chevrolet was a flop, but the Little automobiles weren't, so Durant switched the nameplates and Chevrolet as we know it was born. Durant then used his stock in Chevrolet to retake control of General Motors—and then was fired for good during the recession of 1920-21.
That move brought Alfred Sloan to his position with the company, and for the second time in 10 years GM downsized the number of its divisions and altered its financial accounting, and the General Motors of legend was born. In the second major downsizing of GM, the only company Sloan kept that was losing money was Frigidaire. Sloan believed, as Durant did, that refrigerators for the average person had a definite future in America. It should also be noted that GM's second reincarnation was a product not just of Sloan's brilliant management, but of timing: The 1920s were the first major boom decade for the average American.
So the question becomes this: Why are so many people now rooting for the demise of America's auto industry? After all, in the early 1990s both BMW (BMWG.DE) and Mercedes-Benz (DAI) saw their sales fall in this country to barely over what Saab has been selling in recent years. And 15 years ago both Kia and Hyundai were considered automotive jokes—not to mention that both Korean carmakers were effectively bankrupt a few years later. Volkswagen's (VOWG.DE) total U.S. sales in the mid-'90s were less than half the volume GM's new Malibu is achieving.
No Good Policy Options
All of these car companies experienced incredible comebacks and did so in short order. People today spend in excess of $40,000 to buy a new Hyundai Genesis, although it is likely none ever made payments on a 1994 Excel. Then again, no one dismisses Hyundai's resurgence or new engineering brilliance by constantly throwing up their past products to marginalize their present vehicles. Much in the same way, no one discusses the fact that Honda's (HMC) Acura division lost money in this country for more than a decade; but if GM has a division that is losing money—whoa, that's a big problem.
So what are we going to do if we lose most of our domestic auto industry? Import more automobiles to make up the volume? Wait for the Japanese and Germans to build more factories here to supply U.S. demand? Or give China the big opening they've been waiting for into the U.S. market?
And if we do, then how do we deal with another couple of million good-paying jobs lost forever, or another massive increase in our foreign deficit? That's right, we don't have any good policy options.
I suspect that most politicians, like the public, don't remember that General Motors collapsed in 1910 and 1920 and nearly collapsed in the Great Depression. It went down three times and came back four, much like our economy. Can you imagine the American Century if we had let GM go back then?
I can't either.
Ed Wallace is a recipient of the the Gerald R. Loeb Award for business journalism, given by the G. and R. Loeb Foundation, and is a member of the American Historical Society. His column leads the Fort Worth Star-Telegram's "Sunday Drive" section. He reviews new cars every Friday morning at 7:15 on Fox Four's Good Day, contributes articles to BusinessWeek Online, and hosts the top-rated talk show Wheels Saturdays from 8 a.m. to 1 p.m. on 570 KLIF.