Jun 102009

So long to the gorilla dust at GM. That’s what billionaire entrepreneur founder of EDS and ex-General Motors executive Ross Perot called the annual optimistic projections of GM executives during the 1980s, as it continued to lose market share. “When gorillas fight, they throw dust in the air to distract one another,” Perot said.

Gorilla dust wasn’t just thrown only by Chairman and CEO Roger Smith throughout the 1980s, as GM’s US market share dropped from 46% to 36%, but also by his successors Robert Stempel and Jack Smith throughout the 1990s and Richard Wagoner into the 2000s as well. GM’s current US market share is under 18% — that was, before the bankruptcy announcement on June 1, showing it owing creditors US $173 billion against assets of only $82 billion.

So, a company that was for decades the largest and most profitable industrial firm in history (it never lost money between 1921 and 1980), declares bankruptcy 100 years and 257 days after it was begun. It is a lesson in both amazing enterprise risk management (for instance, read the autobiography of Alfred P. Sloan, Jr., the legendary head of GM in the 1920s, My Years with General Motors) and breathtaking enterprise risk mismanagement (for instance, see Ed Cray’s 1980s book Chrome Colossus, which details its strategic, operational, and financial management errors in the 1970s).

The reasons underlying the demise of GM (and Chrysler, for that matter) have been dissected hundreds of times over the past three decades, by external analysts as well as by GM executives themselves, and I won’t bother here to go over them again in detail. Suffice to say that they are myriad in nature and, maybe after 1980, the company never really stood a chance to fix itself.

For it was in 1981 that GM announced its first loss the previous year in nearly 60 years of $750 million (about $2 billion in today’s dollars), and US autoworkers at union picnics began to routinely attack Japanese cars with sledgehammers as a way to let out their frustrations. Also by that year, Japanese car manufacturers had gained 19.8% of the US car market by offering superior-quality cars at lower prices and, by mutual agreement between the US and Japanese government (and after intense lobbying by US auto manufacturers), Japanese imports were restricted to no more than 22% of the US market.

That contortion of competitive risk backfired, as it allowed Japanese manufacturers to import their higher-priced (and higher-profit) cars, which gave them the needed capital to build non-union car-manufacturing plants in the US to compete without a quota limitation. GM spent more than $45 billion in the 1980s trying to “transform itself” to match the Japanese cars in terms of quality and cost, but the result were cars that even GM admitted did neither. In fact, the money spent was enough to buy Toyota.

By the late 1980s, GM was effectively a dead company, which spent the last 20 years just completing the paperwork. GM could never overcome its own internal cultural inertia. As one senior GM executive wrote in 1988: “We have vastly underestimated how deeply ingrained are the organizational and cultural rigidities that hamper our ability to execute.”

There are a couple of points contained in the saga of GM’s failure worth remembering. First, no company, no matter how profitable, is immune from the possibility of bankruptcy. The risk of bankruptcy seemed an impossibility for so long that its very impossibility became an operating assumption — even up to a few months ago, when the handwriting was on the wall for everyone except top GM management. As I have written many times in Cutter Advisors, an assumption made is a risk accepted — and too often unchallenged.

Second, internal dissent matters when it comes to effectively managing risk. Alfred Sloan was reported to have said once at a meeting of a top GM committee, “Gentlemen, I take it that we are in complete agreement with the decision here?” Everyone nodded in unison of their approval. “Then,” continued Sloan, “I propose we postpone further discussion until our next meeting to give ourselves some time to develop disagreement and perhaps to gain some understanding of what the decision is all about.”

Over the past several decades, this deliberate seeking out of dissenting opinion was slowly replaced by what has been referred disparagingly to as the “GM nod.” Instead of conflict, everyone on senior committees would nod in unison to whatever was proposed, because no one wanted to rock the boat. GM turned from a leading-edge car company to what one analyst in the 1980s called a “careerist company.”

Third, attacking the symptoms of risks isn’t the same as attacking the root causes of risk. Over the past 30 years, GM’s executive leadership proclaimed time and time again that it had pulled a turnaround, only to see the company lose more market share and too often more money. Upon analysis, the reason for the failing to sustain the turnaround came back to the same fundamental issues identified 30-plus years ago: too high a cost base, poor vehicle selection and design, and pitiable marketing.

In addition, as competition increased, GM executives got in the habit of casting blame on external events as the reason for the company’s problems; much like a losing sports team blaming the referees or “bad bounces” for its losses. Roger Smith, when he retired as chairman and CEO in 1990, insisted that GM’s massive loss in market share during his tenure wasn’t as bad as it looked, and that, anyway, there was a better future ahead for the company.

Less than a year ago, on the 100th anniversary of GM, CEO Wagoner brightly said, “We’re a company that’s ready to lead for 100 years to come.”

Not being able to look at the current situation with a cold heart has been a consistent problem of GM’s leadership (see my careerist comment, above, for one reason), who also seemed consistently to ignore the maxim that you don’t reinforce failure.

Which brings me to the future of GM. The US government is spending tens of billions of dollars to help GM in its bankruptcy restructuring and is saying that it expects to get all of the US taxpayers’ money back within five years. Good luck with that. GM has mismanaged its enterprise risks for decades — I don’t see any fundamental behavioral changes that lead me to suspect it won’t continue to do so in the future.

My belief is that all the US government has done, on top of massively politicizing competitive risk in a major industrial segment in which it will be fighting against itself (e.g., for GM to succeed, it will have to take market share not only away from foreign manufacturers, but from Chrysler, which is another ward of the state, as well as Ford, which could ironically turn that company into a ward of the state as well), is merely extend the time frame for finishing up GM’s death certificate paperwork. The lawyers doing the work will no doubt profit, but I don’t give much hope for those of us footing the bill.

The bailout looks like another case of hope over experience. Unfortunately, hope is not a method, nor is optimism a substitute for a feasible strategy.


  4 Responses to “No More Gorilla Dust: Autopsy of GM”

  1. Robert, just if you remember… Was there a point of no return for GM somewhere in the past. If yes – when?

  2. I think the point of no return was when GM liabilities outstripped its assets, and it did not make radical changes to stop the bleeding then as it has been forced to do now. That happened I believe in 2006, when GM first had negative equity; it now has over $90 billion in negative equity.

    Of course, that point was just an official marker of its decline. I think a point where things really started to go down hill was when GM starved Saturn in the early 1990s. A noble attempt at organizational change that too many GM’s executives just didn’t want to succeed.

  3. avatar

    I still remember when F. James McDonald was preparing to turn the helm over to his successor, Roger Smith. McDonald prophetically stated that “. . .we are not a forever company . . .”

    Yes, attempting to operate GM outside the penalties and rewards of the free market will result in nothing good for anyone, accept possibly the lawyers and politicians working on the economy of the vote.

  4. avatar

    “GM is now at a critical point in its long history. The next few years will determine whether GM remains a world leader, or quietly slides into second class status.”
    F. James McDonald, 16th GM President, 1986.


    Correction to the previous post. Not Roger Smith, but Robert Stemple.

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