Can GM Learn from Its Past?
"[General Motors] was also economically vulnerable, since it had gigantic fixed investments and their relentless costs, and a high burden of service charges on its outstanding debts."
--Automotive Historian Bernard A. Weisberger, in a short biography of GM founder William Durant
There had never been a time like it in American history. Terrorist attacks had forced the government to detain and deport 1,100 so-called enemies of the state, lest more bombings take place on U.S. soil. America's youth, some recently returned from combat, were listening to a new form of music that seemed to express disdain for their parents' conservative, structured lives. America's economy seemed likely to keep growing; millions hoped that their lot in life would be improved by the productivity and financial gains that were sweeping the nation.
That spring, General Motors (GM), coming off years of a financial roller coaster, saw its stock reach almost $50 a share, and the company's executives were confidently predicting that more customers would convert from their automotive rivals, leading to a turnaround in their market share. Yet by midyear GM's sales were tumbling badly. By year's end, its share price barely broke $15.
Across town, Ford (F) was busy dismissing as many employees as it possibly could to reduce its costs of doing business -- and discounting its car prices as much as possible to stimulate the market. But, as GM had found, that wasn't enough to move the corporation back into profit.
If this story sounds like what's happening today, it's because the history of the automotive industry has always been one of booms and busts. Automotive pundits are always ready to predict the end of the road for Detroit and the defection of its most loyal customers. While that dire prophecy has not yet come true, it is reasonable to assume that unless Detroit's carmakers change their game plan quickly, the day could soon be coming when the magic of the Motor City will be relegated to the back pages of history.
The facts as they have just been presented actually happened to Detroit in the summer of 1920. A serious contraction of the economy took hold after the boom years of the Great War. Unlike today, when contracts bind labor and management, Detroit found it easy then to downsize quickly -- although in GM's case, there was no way it could remove enough debt to offset its dismal January, 1921, sales: barely over 6,000 vehicles nationally. However, what happened next altered the American economy for decades, proving the truism that "one learns all of one's good habits in bad times, and all of one's bad habits in good times."
GM was fortunate enough to have inherited Alfred Sloan when it purchased Hyatt Roller Bearing Co. a few years earlier. Now elevated to the presidency, Sloan possessed remarkable abilities: Not only could he handle the prima donnas so crucial to successful car design, but he also teamed with Donaldson Brown to create the blueprint for modern corporate accounting that's still in use (with the possible exception of Internet startups).
"EVERY PURSE AND PURPOSE."
Sloan quickly reorganized GM around Brown's financial theories while putting tighter control of capital spending at the top of the corporation. Meanwhile, he hired others such as Big Bill Knudsen to take over the floundering Chevrolet. Knudsen -- whom Henry Ford had recently fired with the line, "Bill, you're the best production man in the business. But too good for me" -- quickly moved to restore quality and expand Chevrolet's customer base.
Ford carried on with his beloved but then-dated Model T, offering it with ever lower prices. Of course, having just dismissed his entire accounting staff, Ford wouldn't realize his folly or deal with the reality that he was losing money on each car sold for another seven years.
It was GM's next action that would make the corporation the industrial giant that gained the respect of the world in the coming decades, garnering close to 50% of all of the new car sales in America. That action was to put into motion Sloan's concept of "a car for every purse and purpose." In hindsight, as a business theory, GM's grand theory wasn't particularly outlandish -- or brilliant. America had begun changing from a land of agricultural workers into one of city dwellers before 1879, the year 16-year-old Henry Ford walked from Dearborn to Detroit and landed his first non-farming job.
Noticing that the Gilded Age was fading from memory and our two-caste economic class system fast becoming history, GM had a bright idea: organize its different car divisions so each one targeted one of the five visible economic strata. Most of the pieces were in place already.
Chevrolet was targeting Ford's customers, who hesitated to buy the exact same vehicle they had purchased once or twice already. Oakland, as it became Pontiac, was marketed as the next step up the ladder. Oldsmobile fit middle-class budgets and desires perfectly. Buick would come to be known as the preferred vehicle for doctors and white-collar professionals. And the wealthiest in society would advertise their arrival in the ultimate automobile: the Cadillac.
This new concept worked well for GM. The public came to evaluate the success of others by the brand of GM vehicle they drove. However, while the corporation often amazed analysts with its profits, not all of GM's divisions succeeded financially. Those demanding that the corporation shutter more divisions must not have read the 1964 biography in which Alfred Sloan admitted that, contrary to rumor, at no time in GM's history were all five of its major divisions profitable at the same time.
Detroit's problem today is that auto makers haven't suffered enough. Losing money is not nearly the crisis that selling only 6,000 GM products all month long was in January, 1921. To survive that situation, GM had to completely rework the corporation under the worst possible circumstances. That, of course, is a far cry from today, when GM and Ford are still selling millions of vehicles but losing money overall in their North American operations.
Many at GM apparently have come to believe that Sloan's wisdom of creating cars for the different tiers of economic success is some quaint old theory taught in a course on GM's history -- interesting, sure, but no longer practical. Herein lies the problem: Many different economic classes still exist in America, including one group that no one even imagined in 1921.
That group would be the teenagers who 50 years ago saved, begged, and scrounged $100 and bought a dilapidated used car that they could fix up themselves. Today, their upper-class parents often treat their children to the finest vehicles on the market.
Families living at the bottom end of the economic spectrum have not seen much improvement, but the financial differences between the middle class and the upper middle class are becoming much more pronounced. The gap between the two has grown by 300% since 1969 (which likely explains the success of companies such as BMW, Lexus (TM), Infiniti, Acura, and Mercedes) as has the difference between being wealthy and being super-rich in America. By my count, there are still five economic classes today, but it is obvious that companies like GM (and, to a lesser degree, Ford) no longer control all of those classes. Moreover, it has been moving this way for decades.
Thirty years ago the lines blurred between buying a Chevrolet Monte Carlo, a Pontiac Grand Am, a Cutlass Supreme, or a Buick Regal. If you were young and could afford the Chevy, the Buick was only a few hundred more. However, instead of retargeting their vehicles toward the new reality, GM simply combined some divisions and closed Oldsmobile.
Even now there is marketing chaos. Walk into a Buick-Pontiac dealership and you can take your pick between an option-laden compact Pontiac G6 (the replacement for the old Grand Am) or a full-sized Buick Lucerne (the replacement for the Park Avenue) -- and both V-6 models have window stickers of less than $30,000 nicely equipped. The Pontiac is ridiculously overpriced, and the cachet once conferred by Buick ownership is destroyed. That's a business plan? What's true is that this is the exact same situation Sloan faced in 1921 -- overlapping car lines with overlapping prices -- and the reason he came up with his plan for reimaging GM's car divisions with the public.
To make matters worse, Detroit wonders why its message of value and prestige is getting lost today. They tell me that when executives in Japan are stymied by a problem, they often quietly ask themselves what the company's founder might have done had he been faced with the same problem. Maybe it's not too late for some in Detroit to ask themselves, "What would Sloan have done?"