General Motor's CEO Rick Wagoner Pulls Off Business Model Innovation--Perhaps The Hardest Type of Innovation.

Larry Keeley at Doblin has taught me that there are many kinds of innovation and I think that the truly hardest is innovating the entire business model, which is what GM has just done. There are many reasons why Detroit has fallen so far behind Japan in cars, but one of the most significant is cost.

History and legacy weigh heavily on GM, Ford and Chrysler as they compete and nowhere is this more visible than in providing health care for employees. In Japan and Europe, a form of universal health care takes care of most everyone, not the corporation. It has pluses and minuses but the quality and cost of care is not a direct factor in the prices of products and services (yes, taxes to pay for universal health care do shift into prices indirectly). In the US, health care costs began to fall to companies during WW11 and in Detroit they add up to around $1,500 per car—which US carmakers have to charge above the Japanese competition.

So what to do? We can debate the morality of corporate vs. government obligations to people on health care and indeed, a needed national debate over health care is beginning again. But that will take years to conclude, if it does conclude.

Meanwhile GM’s CEO Wagoner and the UAW’s leaders have agreed on a novel plan to set up a VEBA, a Voluntary Employees’ Beneficiary Ass., a fund that would finance retiree employee health benefit, swith the union running it. Unlike pensions, VEBAs are not government-guaranteed. So it’s risky. GM is contributing $35 billion to the fund, or 70% of the value of the company’s outstanding health liabilities (legal obligations) to retirees. Here’s a text of the union statement.

GM is promising that with the cost savings, it will keep more production, design, engineering and jobs in the US and not ship them to Asia. It has to hold to this promise.

This is a huge paradigm-busting business process innovation that has implications for Detroit and other companies and industries in the US. It may be the last chance to keep manufacturing in the country.

And the shift to VEBAs will either be a successful experiment in innovation or a dramatic failure on the road to universal health care.