#55 Wrap-Up of the GM Story…for Now

31 Saturday May 2014

Posted by Jordan Abel in Back Asswards Thinking, General Motors, Personal Stories, Stupid Is as Stupid Does

(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, the story might be more meaningful by starting at the beginning.)

(Want a PDF version for Entries #1-10, #11-20, #21-30 formatted as an e-book? Entries #31-40 available soon. Click links for download. America’s 5th Revolution Volume I (Entries 1-10), America’s 5th Revolution Volume II (Entries 11-20), America’s 5th Revolution Volume III (Entries 21-30)

Scene: Jordan’s office with Matt, reporter for major publication. Matt has been asked by POTUS’ office to help write the story of GM. POTUS wants to use the information as part of a plan to help rebuild US manufacturing. Entries about GM begin #41.

Jordan: “Matt, we’ve covered a lot of ground about GM. Any thoughts on what else about GM we should cover for POTUS’ project? There’s 10+ years left before GM files bankruptcy.”
Matt: “From what I’ve heard from you, the GM ship really started to take on water during Roger Smith’s tenure. The EV1 (electric vehicle) could have helped plug the leak but EV1 was thrown overboard.”
Jordan: “And the situation continued to get worse.”
Matt: “From what I know, seems like GM continued to wander around under Jack Smith and who followed him…Rick Wagoner?”
Jordan: “You are spot on. Believe it or not, instead of GM trying to fix the car divisions, GM bought other car companies, probably in worse shape than GM.”
Matt: “What did they buy?”
Jordan: “SAAB and Hummer. And then made an alliance with Fiat. And that was Fiat pre-Sergio Marchionne. At the time Fiat was anything but a top-line European car manufacturer.”
Matt: “So more cash out the door. What on earth did anyone see in SAAB?”
Jordan: “SAAB is…or was…an interesting car with a group of buyers who would not normally consider GM products. But the SAAB buyers were quirky and more attracted to the quirkiness of SAAB.”
Matt: “So if GM tries to integrate SAAB into the rest of the company, the quirks go away and SAAB becomes…something other than SAAB. If they do not integrate it, then what’s the benefit of buying SAAB? I’m confused.”
Jordan: “You’re not the only one. Another GM boondoggle was buying Hummer. As you know, Hummer was really a military vehicle…more like an old-style Jeep on steroids.”
Matt: “Who bought Hummers? How many Arnold Schwarzenegger’s are there?”
Jordan: “Matt, quit being so perceptive. There weren’t many Schwarzenegger’s out there. GM eventually came out with a smaller version – still large but not gigantic. But GM also had SUV’s from Chevrolet, GMC and even Buick.”
Matt: “Seems as if GM kept adding new mouths to feed for product updates. And that is expensive. Putting more people at the dinner table with less money in the bank to buy food is not a good formula.”
Jordan: “Now think about GM’s alliance with Fiat. Talk about mouths to feed. Fiat was a very large family…that was very hungry.”
Matt: “How did the Fiat alliance work out?”
Jordan: “It didn’t. I think GM had to pay about $2 billion…yes one billion plus one billion…to get out of it.”
Matt: “What the heck were they thinking?”
Jordan: “I don’t know exactly but I do know this. A lot of financial guys measure transactions at the margin.”
Matt: “Not sure what you mean.”
Jordan: “The question becomes, ‘What is the incremental cost in terms of cash?’ Using that approach there is little, if any recognition to the long-term cost…and impact on such factors as manpower needs, corporate image, time available for decisions, distribution, and a bunch of other stuff.”
Matt: “Interesting that all the deals beginning with Roger Smith and thereafter – EDS, Hughes, Saturn, EV1, SAAB, Hummer, Fiat…and who knows what else – are all dead. And all died relatively quick deaths.”
Jordan: “Some were spun off but you’re right, most died relatively quickly.”
Matt: “How much cash did GM burn in these deals?”
Jordan: “We will never know but fair to say these deals were a major contributor to putting GM into bankruptcy.”
Matt: “Rather than plowing earnings back into the car divisions and making them stronger, GM kept bleeding the car divisions and making them weaker. GM spent money like a drunken sailor.”
Jordan: (laughing) “Matt, now you know all sailors aren’t drunks.”
Matt: “You know what I mean.”
Jordan: “GM’s wild spending spree and Squeaky’s reorganization plan also killed some very good suppliers divisions, which were big money makers for GM.”
Matt: “I forgot how vertically integrated GM. Why did GM get rid of the supplier divisions?”
Jordan: “Vertical integration was part of the formula for the GM money machine. Squeaky then spun off the supplier divisions. From a pure financial perspective, it appears cheaper to buy products from outside suppliers rather than buying from GM divisions…because you can shop around for the best price.”
Matt: “But, if there is anything I’ve learned from this study, the purchase price is only part of the equation. There are many more things to consider.”
Jordan: “Bean counters don’t look at the whole picture, only tangible cost. A lesson for POTUS is executives should be focused on understanding how different part of the business affect the whole. Bean counters…and all executives…should be taught to take a holistic approach to cost and many other issues.”
Matt: “You’re starting to sound like some granola junkie. Holistic approach?”
Jordan: “Look at the companies that are most successful long term. The companies are more balanced…much like GM was for many years.”
Matt: “Other thoughts?”
Jordan: “I know I’m repeating myself, but until we started this assignment for POTUS, I did not appreciate the extent to which Roger Smith, then Jack Smith and finally Rick Wagoner, screwed up the GM money machine.”
Matt: “Think it was intentional?”
Jordan: “That’s like saying there was a conspiracy to kill the electric car.”
Matt: “Then what happened?”
Jordan: “The singular focus on financial – earnings per share — rather than growing the business was the problem. Squeaky’s ‘my way or the highway’ decree that earnings were more important than market share changed the culture and turned out to be the death knell of GM.”
Matt: “What about post bankruptcy?”
Jordan: “The group that replaced GM management didn’t get it either. The CEO was from a telephone company. C’mon.”
Matt: “You know, Jordan, this might be a good place to wrap up lessons learned from GM. How do we apply those lessons to help POTUS formulate a policy to rebuild US manufacturing.”
Jordan: “As simple as this sounds, and for fear of repeating myself yet again…
Matt: “Say it again.”
Jordan: “Companies need to be balanced. Take a holistic approach. And companies need to be fair. Fair to customers, fair to suppliers, fair to employees. And by employees I don’t mean just executives, or even salaried workers. Fair to everyone, including the lowest paid workers. And by being fair, the company will be consistently profitable over the long term.”
Matt: “That seems so simple.”
Jordan: “The company must have incredible discipline to continue to be fair to all parties, and not get hung up in short-term earnings. It is very difficult to create and maintain that discipline. GM maintained it for many years.”
Matt: “And during those years made tons of money, even in the Depression. Then GM lost its balance, as it were, and slid into bankruptcy.”
Jordan: “A simple and powerful lesson.”
Matt: “Jordan, thanks for the insight. This has been a great education for me. Are you available if POTUS wants some additional information?
Jordan: “Of course. Matt, I really enjoyed working with you. And thanks for your time and patience.”

#54 EV1 Ends CEO’s Tenure. Bean Counters Reign, Again.

28 Wednesday May 2014

Posted by Jordan Abel in Back Asswards Thinking, Economics, General Motors, Stupid Is as Stupid Does

≈ 2 Comments

(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, the story might be more meaningful by starting at the beginning.)

Matt: “As you were saying…something about a meeting.”
Jordan: “The GM EV1 (electric vehicle) program was effectively dead before it was ever introduced. Like we talked about earlier, when Bob Stempel supported the program, it likely killed his career.”
Matt: “I hear you say that but really?”
Jordan: “Here’s the scene – GM Building, West Grand Boulevard, Detroit, small conference room, near executive offices and the Board room. Meeting starts at 3:00pm.”
Matt: “Who was there?”
Jordan: “Four executives from the EV1 program and four from GM corporate – chairman, president, head of financial staff and an assistant.”
Matt: “Man, heavy-weight group. What was the content?”
Jordan: “We presented a review of progress on EV1 – product update, interest among prospective buyers, media coverage, cost, etc. A bit broader than the typical product program update.”
Matt: “What was the reaction?”
Jordan: “The behavior of the individuals was the most telling. Stempel, who was a strong supporter of the program…”
Matt: “…He was still chairman, right?”
Jordan: “Yes. Stempel took notes during the meeting and asked a number of questions. Jack Smith, then GM’s president, sat with his arms folded and took not a single note.”
Matt: “What a contrast. Wasn’t Jack Smith really a financial guy?”
Jordan: “Yes, virtually all of Jack’s career leaned toward the financial side. No one ever called him a car guy…at least that I heard.”
Matt: “Then what happened?”
Jordan: “During the meeting Jack would occasionally glance at his watch. Then at precisely 5:00pm, Jack stands up, turns to Stempel, who is to his right, and says, ‘Bob, you cannot afford the program.’ Then walks out.”
Matt: “What happened at the rest of the meeting?”
Jordan: “To tell you the truth I do not remember. Smith’s remark and then leaving the meeting effectively ended it.”
Matt: “Quite a scene. By the way, is Jack Smith related to Squeaky…I mean Roger Smith?”
Jordan: “No relation to my knowledge.”
Matt: “So Jack Smith says the EV1 program is too costly. How does Stempel counter the argument and keep the program alive? After all he is chairman.”
Jordan: “The short story is…he doesn’t. Within a few weeks Stempel resigns as chairman and Jack Smith takes over as CEO. My version of events is slightly different than the official story.”
Matt: “Different in what way?”
Jordan: “I believe that Jack Smith instigated a palace coup to throw out Stempel.”
Matt: “Why so?”
Jordan: “The Board of Directors was still packed with appointments from Roger Smith’s tenure. These were guys who supported Smith’s idea that earnings were more important than market share. Under Stempel, earnings started to fall, but through no fault of his.”
Matt: “It was on his watch.”
Jordan: “Matt, Matt, you know better than to say that. Earnings during Stempel’s time suffered from some of the shenanigans pulled under Squeaky’s reign. The poor economy just made earnings look worse. Truth be told, GM was probably technically bankrupt at the time.”
Matt: “Stempel gets caught in a vortex.”
Jordan: “My view is Jack Smith could see the problems coming. Rather than have the problems on his watch, he supported…or didn’t resist…putting Stempel in as chairman following Squeaky. Stempel was set up as the fall guy.”
Matt: “Really?”
Jordan: “Think about this. If you’re Jack Smith…or Roger Smith, who is still on the Board…you can state that Stempel’s support of the EV1 program when the company was so short of cash was proof that he did not understand how to run the company. Therefore a change at the top was needed.”
Matt: “I recall there was an issue about Stempel’s health.”
Jordan: “He did not look good at the meeting. I rarely talk about business issues with wife but I did mention to her how he did not look well.”
Matt: “How serious was the problem?”
Jordan: “He ended up with a stent as I recall. But Bob was very active for many years after the procedure. I think any concern about his health was a smoke screen.”
Matt: “OK, so Stempel is out and is replaced as CEO by Jack Smith. Based on what you’ve said, Jack is more of a bean counter than product guy. Then what happens?”
Jordan: “Soon thereafter, the GM Board of Directors effectively kills the EV1 program. And guess what date?”
Matt: “I have no idea.”
Jordan: “December 7.”
Matt: “You are kidding, right? How ironic. GM has a car that creates all kinds of interest and improves GM’s image. GM could capitalize on the improved image and begin to counter losses in market share to imports, especially Japanese imports. And then what does the Board do? Kill the EV1? And on what day? December 7.”
Jordan: “Hollywood script material, huh?”
Matt: “Better than Hollywood. True back asswards thinking. Actually, maybe no thinking by the Board.”
Jordan: “Let’s get another cup of coffee.”
Matt: “How about a glass of wine, instead. I’m still shaking my head.”

#53 GM Lets the Batteries Drain on EV1

24 Saturday May 2014

Posted by Jordan Abel in Back Asswards Thinking, General Motors, Innovative Thinking: Ideas and Products, Stupid Is as Stupid Does

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(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, the story might be more meaningful by starting at the beginning.)

Matt: “I’ve been thinking about the last session. GM was generating a lot of positive media coverage around EV1 (electric vehicle). But support for the program internally was weak so GM pulled the plug, as it were.”
Jordan: “I would call it more like letting the batteries drain. GM eventually introduced the EV1 but the program was effectively cancelled before it was ever introduced.”
Matt: “So by pulling the plug on EV1 GM managed to take all the positive publicity generated and turn it into negative publicity.”
Jordan: “Probably more negative publicity generated than positive…so GM ends up losing on what was developing into a major win for GM. Another case of GM grabbing defeat from the jaws of victory.”
Matt: “Wasn’t there a movie made about GM killing the EV1?”
Jordan: “Yes, a so-called documentary titled ‘Who Killed the Electric Car.’”
Matt: “You were in the movie if I’m not mistaken.”
Jordan: “Yes, my one and only…at least I hope only…feature film.”
Matt: “You said ‘so-called’ documentary.’ Why the label?”
Jordan: “I think the producer left out key points in the film. Look, I understand all films take some license. Films need to tell a story.”
Matt: “But you think the whole story wasn’t told?”
Jordan: “The movie claimed, or at least implied, there was a conspiracy to kill the electric car. I laughed at that idea. We were all too naïve…I sometimes say not smart enough…to have a conspiracy. The EV1 died because of some bad decisions, not because of some conspiracy.”
Matt: “What about GM crushing all the EV1’s? Why?”
Jordan: “This is my frustration with the movie. Key points were left out. In fact, I agree that GM should have crushed the cars.”
Matt: “Huh? Seems like convoluted thinking on your part. You are frustrated that GM killed the program but agree they should have crushed the cars. Why?”
Jordan: “GM made two big mistakes when they crushed the cars. One was they never explained why. Second was they crushed the cars too soon. GM management never understood or appreciated the value of all the positive media coverage the EV1 continued to generate.”
Matt: “You’re right, I’ve never heard why the cars were crushed. All I know is the cars, other than a few, are long gone. What’s the reason?”
Jordan: “Remember GM never sold the EV1 to anyone. All cars were leased.”
Matt: “Why not sell them?
Jordan: “Two reasons. Leasing avoids the battle with the GM financial staff over what the MSRP would be. Financial guys wanted to recover costs as quickly as possible and given the low volume, MSRP would have been outrageously high.”
Matt: “I know the timeframes are different but Tesla has a high MSRP and sells quite a few cars.”
Jordan: “You’re right. And GM might have sold as many as Tesla. The more important reason GM leased the cars was associated with providing service. EV1 was plowing new ground. There were no other electric vehicles, no hybrids and very limited knowledge on how to provide service. Working on the EV1 battery pack was not like changing your car battery.”
Matt: “You mean I could have gotten fried.”
Jordan: “In a heartbeat, or lack of a heartbeat. The battery pack had lots of volts and amps. But there was also a law…at least at the time…and I suspect something similar exists today. At the time if an auto company sold a car…transferred title…then it was obligated to provide service and parts for 10 years.”
Matt: “So if I bought an EV1 in California, where it was introduced, and then moved to say Bangor, ME, GM would be obligated to provide service in Bangor for 10 more years? Even if the car was not sold in Maine?”
Jordan: “Essentially, yes.”
Matt: “And lease cars have different rules?”
Jordan: “The person leasing the car never takes title and therefore does not trigger the service obligation. Plus, the lease can include restrictions on where the car can be driven, where serviced, etc. As a lease car, the EV1 still belongs to GM. The person leasing is really like a long-term renter.”
Matt: “Now I understand why GM leased the EV1’s. I wish the movie would have explained that.”
Jordan: “You and me both. Virtually no one is aware of the service requirement.”
Matt: “But why didn’t GM renew the lease instead of calling all EV1’s back and then crushing them?”
Jordan: “Matt, quit thinking like a marketing guy and start thinking like a bean counter. As a bean counter, you would view the EV1 program as a cost center and not recognize any benefit. The faster the program was shut down, the faster the cost could be eliminated.”
Matt: “I’m still having trouble understanding why the financial guys could not understand the value of EV1. It seems so obvious.”
Jordan: “I hear you. Maybe a story will help you understand. The story I’m about to tell is rarely told. One reason is so few people were involved.”
Matt: “I’m all ears.”
Jordan: (cell phone rings) “Excuse me Matt. I need to take this call. We’ll continue shortly.”

#52 Value of GM EV1: Holistic Cow

21 Wednesday May 2014

Posted by Jordan Abel in Back Asswards Thinking, General Motors, Stupid Is as Stupid Does

≈ 2 Comments

(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, the story might be more meaningful by starting at the beginning.)

Matt: “I’m really surprised there was not more support inside GM for the EV1 (electric vehicle). I mean, people must have been aware of all the positive media coverage.”
Jordan: “The lack of support within GM was virtually everywhere.”
Matt: “I really don’t understand. Why?”
Jordan: “The problem was two-fold. One, the car divisions – Chevrolet, Buick, etc. — had experienced 10 years of Roger Smith diverting funds that should have been used for product programs.”
Matt: “Funds for buying Hughes, buying EDS, buying out Ross Perot for $700, and then starting Saturn division. So the EV1 comes along and all the divisions think more product development dollars are being diverted to some low volume, goofy-looking electric car. I can understand why they did not support it.”
Jordan: “The divisions might have supported it if they understood the potential value.”
Matt: “What do you mean? It was an electric vehicle. What value is an EV to say Buick or Cadillac?”
Jordan: “EV1 qualified as what one could call a ‘halo’ car. A halo car helps improve the image for the company.”
Matt: “Which in turn increases the number of people who might consider buying a car or truck from the company, not just the halo car.”
Jordan: “Grocery stores have specials to get people in the door. The halo cars do the same for auto dealerships. Corvette is a halo car for Chevrolet. Viper for Chrysler. You get the picture.”
Matt: “But the ‘halo’ message never got across…at least inside the company.”
Jordan: “Here’s where I need to take some blame. The EV1 marketing effort focused almost 100% outside GM. We assumed…erroneously…that people inside the company understood the value of EV1.”
Matt: “How widespread was the misunderstanding, even resistance, inside GM? The divisions, yes. What about the staff?”
Jordan: “Funny story. More tragic than funny but I think representative of the problem.”
Matt: “Ok, what happened?”
Jordan: “The EV1 group had its own government relations staff, which reported to me.”
Matt: “Was that unusual?”
Jordan: “Within GM, yes. We were the only group with a separate government relations staff. All other government relations efforts had to be channeled through corporate staff.”
Matt: “Mmm, interesting. A bit of friction there?”
Jordan: “Some but I think the real problem was a perceived difference in function.”
Matt: “Not sure I understand.”
Jordan: “An example. I’m having lunch one day with the chief environmental lobbyist for GM – just the two of us. He leans across the table and says, ‘You are my worst enemy.’”
Matt: “An odd statement. What did he mean?”
Jordan: “That’s what I wanted to know. So I asked why.”
Matt: “And?
Jordan: “He said his primary task was to convince federal and state legislators to overturn tailpipe emissions laws that were too strict for the auto companies to meet. And since I was out there promoting an electric vehicle with no tailpipe emissions. My efforts were proving him wrong.”
Matt: “Did he want you to stop?”
Jordan: “Yes. Then I asked who was signing his paycheck. I told him our group worked directly for the chairman and until I was told to do otherwise, I was going to promote the zero emission EV1.”
Matt: “Now I see what you mean about internal misunderstanding and friction.”
Jordan: “The real resistance was at the operating divisions.”
Matt: “They were still smarting over the diversion of funds.”
Jordan: “I can’t blame the divisions for lack of support. Product program funds had been diverted for the Squeaky’s boondoggles. Matt, at the same time the CEO says the company policy is to increase earnings and not be concerned about market share.”
Matt: “And for 75 years the divisions and dealers have focused on market share. Isn’t achieving certain market share a key part of the dealer franchise agreement?”
Jordan: “It was then and I assume so now. “
Matt: “No wonder the divisions were in a sour mood about EV1. What about the US economy? Wasn’t it starting to slow down about the same time?”
Jordan: “Yes, for lots of reasons. Plus the savings and loan scandal disrupted the financial markets for a while.”
Matt: “Sounds like the perfect storm.”
Jordan: “It was not the same storm as in 2008 but things were not good.”
Matt: “You said part of the problem was not educating the staff inside GM on the value of the EV1. Tell me more of what you mean.”
Jordan: “What the EV1 group did not promote was the spin-off benefits.”
Matt: “Such as?”
Jordan: “While the EV1 was in development, engineers at Delco were taking components and testing in gasoline cars.”
Matt: “You mean integrating some of the electronic features from EV1?”
Jordan: “Exactly.”
Matt: “Who knew about such programs? I’ve never heard anything about it.”
Jordan: “I don’t think many people knew, even many GM executives.”
Matt: “But why? Seems like a good idea.”
Jordan: “Part of the problem was GM and the other auto companies were suing the state of California over laws requiring zero-emissions vehicles, aka ZEV’s. One of GM’s arguments was cost for developing EV’s was too high.”
Matt: “The argument goes away if development costs are spread over say 4-5 million cars and trucks versus say 25,000 EV’s.”
Jordan: “Absolutely. Take say $250 million development costs for the EV1. If you spread out development costs over GM production for 5 years – about 25,000,000 cars and trucks – the cost is $10 per car. The same $250 million over 5 years of EV1 sales – remember the forecast was about 5,000 per year – development cost comes to $10,000 per car.”
Matt: “So GM knows it will lose its argument for the lawsuit if it promotes using EV1 components in all its cars and trucks.”
Jordan: “Another case of back asswards thinking. Why not promote the value of the EV1 as helping all cars and trucks?”
Matt: “Senior GM management apparently did not understand the value of what it had developed.”
Jordan: “Unfortunately, EV1 suffered from the same problem as the boy who cried wolf’ too often. When the real wolf came no one believed him.”
Matt: “No one believed him but it was true. But wasn’t Bob Stempel chairman by now?”
Jordan: “Yes, but he was fighting the financial staff who looked only at the bottom line. Remember the financial guys were part of Squeaky’s cadre, and not loyal to Stempel. In fact, many in the EV1 group considered the CFO as a spy.”
Matt: “Not a good scene. Let me summarize. What I want to do is translate the events into al lesson POTUS can use to help explain how to rebuild US manufacturing.”
Jordan: “For me the simplest lesson is educating people inside the company is as important…maybe more important…than educating people outside the company.”
Matt: “Another lesson is to look beyond the obvious. Making lemonade out of lemons. GM kept claiming costs for the EV1 were excessive but in fact, could have been spread over many carlines.”
Jordan: “If you think about the cost of the EV1 – use $250 million – and take a look at the positive media coverage that was generated about GM, the development cost becomes inexpensive advertising.”
Matt: “But the financial group would not recognize the value of positive image?”
Jordan: “Never. To them EV1 was only a cost program. Virtually none of the financial guys had any experience in marketing.”
Matt: “So the lesson is to implement a more holistic approach to value creation and not just look at cost.”
Jordan: “Matt, great way to end this session.”

#51 The Electric Spark

17 Saturday May 2014

Posted by Jordan Abel in Back Asswards Thinking, General Motors, Innovative Thinking: Ideas and Products

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(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, the story might be more meaningful by starting at the beginning.)

Matt: “So the Squeaky reigns ends when, sometime in 1990.”
Jordan: “Yes, ten years of proctology decisions. I will say the last major idea had merit.”
Matt: “Really? What decision was that?”
Jordan: “At the Los Angeles Auto Show, early 1990, Squeaky announced GM would build a 2-passenger electric car.”
Matt: “Was that the EV1?”
Jordan: “Yes, but the original name was ‘Impact.’ Great name for a car, huh? Impact.”
Matt: “Whose idea was that?”
Jordan: “I don’t know for sure but I should. Might have been Smith. Might have been someone else. But Smith bought into the name.”

Matt: “You ended up on that program, right?”
Jordan: “Yes, and I give Squeaky credit. The idea of GM taking the lead on electric vehicles was a good strategy, but…”
Matt: “But what? Poor execution, again?”
Jordan: “Setting proper expectations is critical to any successful program. If you over-promise, then the program might be labeled a failure even though it would have been considered successful if proper expectations had been set.”

Matt: “You’re saying too high of expectations can create the perception of failure.”
Jordan: “Absolutely. And that was one of the problems with the electric vehicle program. Expectations far exceeded what was likely to happen. Yet, many aspects of the program were highly successful.”
Matt: “You need to explain more. I need some reference points.”
Jordan: “On the positive side, many electronics and features, even in today’s cars, had their origin during the Impact program. The program really helped changed thinking about integrating electronics into vehicles.”
Matt: “No one seems to know that.”
Jordan: “You’re right. That was a real positive that helped improve fuel economy on every new car and truck. Now, let’s talk expectation. Impact…err EV1…was announced as a regular production model. Cars in the category need to sell a minimum 20-25,000 units per year to be considered even marginally successful.”
Matt: “That seems like a reasonable number.”
Jordan: “The major hurdle for EV1…aside from being electric, was the 2-passenger configuration.”
Matt: “But you bought a Miata and its 2-passenger.”
Jordan: “I bought a Miata for me as a personal car. On occasion I have a passenger, usually to go get ice cream or something like that. I also bought a Miata because it goes vroom, vroom.”
Matt: “And the Impact didn’t go vroom, vroom.”
Jordan: “You’ve driven an electric vehicle, haven’t you? I know you driven a golf cart. The only noise is a little whine from the motor and the tires on the road.”
Matt: “And guys with sporty cars want noise.”
Jordan: “Beyond the vroom, vroom part 2-passenger cars have an inherent problem – space. People want a back seat, even if it is cramped. And with no back seat, a lot of people who liked the car and the idea of an electric vehicle just walked away because there was not enough room.”
Matt: “I hear what you’re saying but when you look on the road, seems well more than half the cars have just one person. Was there any research to support why people claimed they needed more space?”
Jordan: “Lots of research indicates people buy cars, and especially SUV’s, for occasional, even rare use – one or two trips per year. 2-passenger cars are basically 1-person cars with room for briefcase, backpack, golf clubs…and the occasional passenger.”
Matt: “How can you get around that kind of behavior?”
Jordan: “You can’t, really. We even considered allowing people to have access to a SUV for 1-2 weeks a year through AVIS. But people just don’t want the inconvenience of picking up another vehicle…even if there is no charge.”
Matt: “Seems like more of an excuse.”
Jordan: “I agree. But let me give you an example where the need for room is real. We’re at a research clinic in Phoenix. A lady drives the Impact and says to me, ‘I really love the car and I would buy all electric if…”
Matt: “And the ‘if’ was?”
Jordan: “If it had a back seat. I drop my two kids off at school in the morning and I have a briefcase and purse. Even a small back seat would be OK. But I can’t buy a 2-passenger.”
Matt: “So now you’re discovering the sales potential might be less than the 20-25,000 necessary for a regular production model. And the problem with proper expectations.”
Jordan: “The research suggested no more than 5,000 units per year and less initially. And the 5,000 assumed a very favorable MSRP.”

Matt: “So know you have a piece of the pie but not the whole pie. Knowing the problems with a 2-passenger, why not add a back seat? The car was still a prototype, right? You had time to make a change.”
Jordan: “Funny you mention adding a back seat. I said the same thing in a staff meeting right after the research in Phoenix.”
Matt: “And what was the reaction?”
Jordan: “This is close to the quote, ‘We can’t change the design because Roger Smith said it would be 2-passenger.’”
Matt: “Was Smith still chairman of the Board?”
Jordan: “No. He was a board member but not chairman. Yet, managers more senior than I were still so intimidated they would not go forward to fix an obvious problem.”
Matt: “Did the second seat idea have support among other staff members?”

Jordan: “The manufacturing manager accused me of trying to sabotage the program because I would not support sales volume of 20-25,000 units for the existing design.”
Matt: “A classic case of shooting the messenger.”
Jordan: “That’s a lesson we need to make sure is in the write-up for POTUS. Listen to your customers and your staff, especially when you don’t agree.”
Matt: “So noted. But despite the limited sales forecast, wasn’t support for the EV1 concept among the public pretty good?”
Jordan: “The fact that GM was taking the lead on introducing a viable electric vehicle was great for its image.”
Matt: “GM sure needed a boost following Squeaky. It needs even more of a boost now. But how do you know it was good for GM’s image?”
Jordan: “We hired a company to measure coverage about GM — articles in newspapers, magazines, TV coverage. Remember at the time the internet was in its infancy.”
Matt: “Results were what?”

Jordan: “The EV1 group generated more positive publicity about GM than the rest of the company combined. And that lasted for probably three years.”
Matt: “Promotion budget must have been pretty healthy.”
Jordan: “Oh contraire, Matt. The dollars we spent were a fraction – and I mean a tiny fraction – of the marketing budgets for the car divisions. I think our total marketing budget was about 1% of what Buick spent and Buick’s budget was about 1/5 of GM’s marketing budget. We’re talking peanuts.”
Matt: “That’s impressive. All the positive coverage must have generated widespread support inside GM.”
Jordan: “I wish that were the case but just the opposite happened. There was a lot of opposition.”
Matt: “Another bummer story coming up. GM demonstrates how to grab defeat from the jaws of victory.”
Jordan: “That’s what happens with back asswards thinking. I’ll take part of the blame for not generating more support inside the Company. And I will explain what went wrong at my end…after we take a break.”

#50 GM Saturn: Where Was the Proctologist?

14 Wednesday May 2014

Posted by Jordan Abel in Back Asswards Thinking, General Motors, Personal Stories, Stupid Is as Stupid Does

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(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, the story might be more meaningful by starting at the beginning.)

Matt: “We need to talk more about Saturn. I know the program upsets you but I want your perspective.”
Jordan: “Of all the programs and changes Roger Smith implemented, I think starting Saturn division was the worst.”
Matt: “Why do you say that? Saturn seems like a good idea.”
Jordan: “The concept of Saturn was OK. But concept and execution are entirely different.”
Matt: “What do you think went wrong?”
Jordan: “Squeaky was adamant that Saturn become, in the words of the Hal Riney ad agency, ‘A Different Kind of Car Company.’”
Matt: “Good idea. You think bad execution. Why?”
Jordan: “Because the Saturn team was given carte blanch to build a new assembly plant, new foundry, new whatever they thought…emphasize what they thought…would separate Saturn from the rest of GM.”
Matt: “Do I detect a bit of jealousy? How was Saturn funded?”
Jordan: “Now we are getting at the heart of the problem — funding. GM profits were down because Squeaky and the gang ignored market share and kept thinking GM could save its way into prosperity.”
Matt: “So profits are flat to down and in the meantime GM spent tons of cash to buy Hughes, EDS and then pay Ross Perot another $700 million to get off the Board of Directors.”
Jordan: “With the buying spree and payoff to Perot…plus keep in mind GM is still paying a dividend even though it needs cash…there is no money left in the piggy bank. Pardon me, no money except for Saturn.”
Matt: “Then where did the money come from?”
Jordan: “Cutting product programs at the life blood of GM – the car divisions.”
Matt: “You’re kidding. Squeaky funds Saturn by not spending money to update product at Chevrolet, Olds, etc. From what you said GM makes money at the car divisions. What am I missing in Squeaky’s logic?”
Jordan: “You are not missing anything other than a classic case of stupid is as stupid does. These kind of decisions show how little Squeaky and the gang knew about the car business. They were just moving numbers around on a worksheet with no real understanding of the implication.”
Matt: “Where was there head during these decisions?”
Jordan: “In a place where only a proctologist could find it.”
Matt: “Despite all this wasn’t Saturn successful?”
Jordan: “Depends on how one defines success. Once Saturn finally got on the market, it did capture some buyers new to GM.”
Matt: “What about profits?”
Jordan: “Oh, profits? You mean a division is supposed to make profits? Saturn costs were so high that it would probably never make money. If you took away all the development costs, Saturn might have made a little money in its best years. But not enough to pay for development and not enough to fund new product. It was a cash drain…a sinkhole.”
Matt: “I’m stunned. In a way, GM starting Saturn is like cutting off your nose to spite your face.”
Jordan: “If you had to pick a single event that put GM on a clear path to bankruptcy, it was the creation of Saturn. The drain on the rest of the organization was so great that it effectively killed the company.”
Matt: “Do you think other people feel that way?”
Jordan: “If they spent time thinking about what really happened and the effect on the divisions that were generating the profits, I think many people would reach the same conclusion.”
Matt: “I can tell by the tone of your voice how frustrated you are.”
Jordan: “When one guy and his henchmen basically kill an economic engine then I have a right to be angry. And so should everyone who was committed to making GM a success. It is truly maddening.”
Matt: “Whew. The scope of what you’re talking about is hard to comprehend.”
Jordan: “I’ll give you one more Squeaky proctology story and then we will move on.”
Matt: “…and that is?”
Jordan: “About one of my favorite cars, the Buick Reatta.”
Matt: “Wasn’t Reatta a two-passenger sorta luxury car? And it wasn’t around very long. What’s Squeaky have to do with the Reatta?”
Jordan: “Yes, it was a two-passenger car in what was labeled the ‘near-luxury’ segment. Why wasn’t it around very long?”
Matt: “Squeaky? But what did he do?”
Jordan: “Squeaky doomed Reatta from the start, even before it was formally introduced. During development Buick conducted some very sophisticated market research about the price point. The research, some of which was conducted through MIT, indicated MSRP should be less than $20,000. Remember this was the mid-1980’s.”
Matt: “Price sounds reasonable.”
Jordan: “That’s what we thought. At the time prices for all GM cars and trucks were reviewed by what I think was called the Price Review Group, or PRG.”
Matt: “Part of Squeaky’s reorganization plan?”
Jordan: “Yes. And guess who was chairman of the PRG?”
Matt: “Let me guess. Mmmm…Squeaky.”
Jordan: “During our presentation about Reatta, Squeaky interrupts and states, ‘Reatta price is $25,000.’ Next item.”
Matt: “Any discussion?”
Jordan: “Squeaky the king had spoken and no one on the PRG was going to challenge him. They had seen what happened to others who challenged the king.”
Matt: “How did the price affect sales?”
Jordan: “Reatta is a new entry into the two-passenger market with an MSRP 25% higher than all the research suggested. Many people who were interested in Reatta balked at the sticker price. As a result, sales never met expectations.”
Matt: “Squeaky’s pricing strategy seems just the opposite of how the other auto companies price cars.”
Jordan: “I told you it was a Squeaky proctology decision. When Toyota introduced Lexus, they low-balled the price to generate interest and sales. Same strategy on Prius.”
Matt: “But not GM…with Reatta and more recently with the Chevrolet Volt. Squeaky seems to have thought the model for pricing cars should parallel the model for pricing new electronics – like computers and phones. Price high initially and then decrease prices over time.”
Jordan: “One key difference between cars and say computers. Cars have a residual value…used car value…that electronic items do not. That residual value…trade-in value…is very important to personal use buyers and fleet buyers. Very few customers own a car for its entire life.”
Matt: “Your Miata being an exception.”
Jordan: “Yes but I knew that when I bought the Miata. For virtually all buyers, personal and fleet, there is an expected depreciation schedule. What happened with Reatta was the expected depreciation plus another 25% depreciation for the first owner. Fleets in particular were upset because costs for owning Reatta were higher than forecast.”
Matt: “So the expected depreciation schedule is why auto companies maintain prices over time for older models rather than dropping prices like computers.”
Jordan: “Matt, you now understand more about the car business than Squeaky and his gang ever did. I’m going to say it one more time, then let’s break. After the break we will move into the post-Squeaky era at GM.”
Matt: “Let me guess what you were going to say. Decisions by Squeaky and his gang were the primary cause of GM going bankrupt. And diverting funds to start Saturn were the single biggest cause.”
Jordan: “You took the words out of my mouth.”

#49 More Rain Under Roger’s Reign

10 Saturday May 2014

Posted by Jordan Abel in Back Asswards Thinking, General Motors, Stupid Is as Stupid Does

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(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, the story might be more meaningful by starting at the beginning.)

Matt: “I don’t mean to beat up on Roger Smith but most of his decision seemed to erode GM’s strength.”
Jordan: “You want an interesting review of GM in the 1980’s? Watch the movie ‘Roger and Me.’”
Matt: “Michael Moore made that didn’t he?”
Jordan: “Yes. I think it was his first major movie.”
Matt: “How much of the movie is true and how much is Hollywood taking some liberties.”
Jordan: “Far more truth than fiction. But the important point….and what you and I have been talking about….is how the personality of the CEO affects the behavior of the corporation.”
Matt: “So you think the movie is more about Squeaky than GM. I really should not call him that but the more we talk the more appropriate it seems.”
Jordan: “Yes, it was almost all about Squeaky…and the name is appropriate.”
Matt: “I’ll watch the movie but tell me some more decisions you think are important. We still need to talk organizational structure.”
Jordan: “One decision that rarely gets discussed is academic. Years ago and I think late teens early 1920’s, GM bought a university in Flint, MI that was designed to help train auto executives. GM renamed it General Motors Institute of Technology or GMI.”
Matt: “GMI was a fully accredited university?”
Jordan: “All but the football team. Hard to get fans for football when you have University of Michigan and Michigan State so close. GMI offered degrees in engineering and business administration…and I’m not sure what else. But the main attraction was GMI co-op program.”
Matt: “Students combined school and work?”
Jordan: “School for 12 weeks, then work for 12 weeks, then back to school. Took five years to graduate.”
Matt: “Students worked mostly where…GM?”
Jordan: “Yes, but other companies sponsored students also.”
Matt: “During the work sessions, did students work in the same department each time?”
Jordan: “No, and that was a major benefit of the program. Students were assigned to work in virtually every section of the business – from the assembly line to the headquarters office.”
Matt: “Were classes all about GM?”
Jordan: “GM was often used as an example but students got a very well-rounded education.”
Matt: “How much was tuition?”
Jordan: “Students made enough money during the work sessions to pay for tuition and cover living expenses.”
Matt: “So families with limited income could send children to college at no cost. And, students were hired full-time at graduation.”
Jordan: “And one other major benefit. Matt, who are some of your closest friends?”
Matt: “People from my college days.”
Jordan: “Mine, too. And the same with GMI students. GMI students ended up knowing lots of people in GM – friends and people they worked for. I ended up as thesis advisor to 8-9 students, all of whom I got to know reasonably well. GMI students had a great network.”
Matt: “What about so-called ‘group think,’ where everyone starts to think alike. If everyone has the same educational background that can hurt creativity and innovation.”
Jordan: “I’m not sure what percent of GM middle and senior executives were GMI students. Maybe 15-20%.”
Matt: “So you don’t believe ‘group think’ was a problem. Then why did GM quit supporting GMI?”
Jordan: “To save money.”
Matt: “How much money?”
Jordan: “Believe it or not, I’ve heard is less than $10 million per year.”
Matt: “You have to be kidding. $10 million is like pennies to GM. $10 mil is not even a rounding error.”
Jordan: “I know. But Smith dropped support. I also think GMI got caught up in Smith’s revenge against Flint.”
Matt: “Revenge against Flint? You mean Flint, MI.”
Jordan: “Yes. We’ll talk about that if we have time.”
Matt: “Did GMI close after GM dropped support?”
Jordan: “No. It regrouped and changed its name to Kettering University…and is doing quite well, thank you.”
Matt: “Is that the same Kettering as Sloan-Kettering Hospital in New York.”
Jordan: “One in the same. And a bit of trivia. You know what Kettering is famous for?”
Matt: “Haven’t a clue.”
Jordan: “Next time you start your car, thank Mr. Kettering, aka Boss Kettering. Among his many inventions was the electric starter. Until then you could only start your car with a hand crank.”
Matt: “How do you know all this stuff, anyway?”
Jordan: “Who knows?”
Matt: “So Squeaky closes GMI and GM loses the benefit of management having a great network. But was the network really valuable? You didn’t go to GMI and you had a wide network.”
Jordan: “One more story about the network and then we’ll move on.”
Matt: “Hit it.”
Jordan: “I’m now at Buick. A guy in one of the departments I manage is a GMI grad. Call him Bagel Bill – not his real name, of course.”
Matt: “So what does Bagel Bill do?”
Jordan: “His official title is something like Sales-Engineering liaison. I cannot remember exactly.”
Matt: “What’s that mean?”
Jordan: “All I know if there is a problem in engineering or manufacturing that is affecting Buick’s ability to sell cars, Bagel Bill makes a few phone calls, has coffee with some people and the problem is fixed.”
Matt: “Using his network of old GMI buddies.”
Jordan: “Exactly. What I did not appreciate fully was how many problems he prevented.”
Matt: “What do you mean?”
Jordan: “I think it was Einstein who said ‘Intellectuals solve problems. Geniuses prevent problems.’ If that’s true, old Bagel Bill was a genius.”
Matt: “Did GM really understand the value of guys like that? Or, was Bagel Bill just another employee?”
Jordan: “At least under Squeaky, GM never really understood how valuable these guys were.”
Matt: “Give me an example.”
Jordan: “Bagel Bill was about 55 years old when I started at Buick. Because of his time at GMI he was technically eligible for retirement. So, when GM decided to cut back on employees, I was directed to offer him a retirement package.”
Matt: “Did he accept it?”
Jordan: “No, thankfully.”
Matt: “So, what’s the story?”
Jordan: “A year or so later, GM goes on another program to retire older employees. And this time Bagel Bill took the package.”
Matt: “Then what?”
Jordan: “Then what is all hell breaks loose. You know the story of ‘The Little Dutch Boy,’ who held back a flood by putting his finger in the dyke?”
Matt: “Of course.”
Jordan: “Well, Bagel Bill retiring was like the kid pulling his finger out of the dyke. We started to have problems with engineering and manufacturing that I never knew existed.”
Matt: “So Bagel Bill had taken care of problems…actually probably prevented problems…using his old buddy network from GMI.”
Jordan: “Stopping support for GMI also resulted in more employees not understanding how an auto company really works.”
Matt: “You were not GMI and you managed.”
Jordan: “True, but I had a lot of help from guys who had been around a long time, including a bunch of GMI grads.”
Matt: “What I just heard from you is a Smith created a double brain drain program. Retire the old guys who have vast institutional knowledge. Eliminate hiring new employees who have been trained in the auto business.”
Jordan: “You got it. Not very smart, huh? Plus, GM then obligates itself to a lifetime pension for the same people who could have been contributing to the company.”
Matt: “By the way, what did Bagel Bill do?”
Jordan: “Went to work for a GM supplier. So now GM is paying his pension and effectively paying again through the supplier.”
Matt: “And Squeaky was supposed to be a financial genius? If he did not understand how this was a lose-lose for GM, what did he understand?”
Jordan: “I didn’t know then and I don’t know now.”
Matt: “Let’s try to wrap up the Squeaky end. We need to close out the story.”
Jordan: “I hear you but we might need to add a session or two. I admit until we started to talk about the Smith era, I did not appreciate fully how bad his decisions were. It’s embarrassing.”
Matt: “OK, a couple more about Squeaky, then we have to move on. I’m interested in learning more about EDS and Ross Perot. You also need to more about Saturn.”
Jordan: “Let’s talk EDS and Perot. Like many companies in the 1980’s, GM was migrating to widespread electronic data bases. Also, like many companies, the data bases were not always integrated. Improvements were needed.”
Matt: “Do you agree having an EDS-like company help with the integration was a valid idea?”
Jordan: “Yes. But GM had a large IT staff. It’s not as if GM had been operating using quill pen and papyrus paper. The IT staff could have used some outside guidance but GM did not…repeat not need to buy EDS.”
Matt: “What was the integration like? Did EDS flow seamlessly into GM?”
Jordan: “Horrible would be an understatement. The EDS culture reflected the cowboy personality of Ross Perot. We know best. Get out of my way.”
Matt: “But EDS had been very successful.”
Jordan: “True. But I am going to repeat what I’ve heard from every person who gets involved in automotive after spending time in another industry.”
Matt: “And that is…”
Jordan: “Within the first three weeks of getting involved, the person says, ‘Gee, automotive is a lot more complicated than I realized.’ And usually there are a couple of expletives in the sentence.”
Matt: “Did EDS experience the same thing?”
Jordan: “Yes, but most EDS staffers were reluctant to admit it.”
Matt: “What about Perot?”
Jordan: “He’s on the Board of Directors and GM’s largest single shareholder.”
Matt: “Was he as outspoken on the Board as he was in public about other issues?”
Jordan: “Possibly more so.”
Matt: “How did Squeaky react?”
Jordan: “The way Squeaky always reacted to someone challenging him. Except with Perot, he couldn’t fire him so Squeaky bought him out to get him off the Board.”
Matt: “How much did GM pay Perot to go away?”
Jordan: “$700 million in 1986.”
Matt: “$700 million. Wow. That’s about $1.5 billion in today’s dollars.”
Jordan: “Plus, now GM owns EDS that no one inside GM wants, other than maybe Squeaky. And EDS employees are no longer lead by Ross Perot.”
Matt: “Sounds like a disaster.”
Jordan: “Worse. The money used to buy EDS and then take out Perot…all that money was diverted from product programs for the car divisions.”
Matt: “As you said earlier, the divisions were a bit tarnished but could have been polished up with some new product. Instead, the money is spent on buying EDS and then paying again to get Perot off the Board.”
Jordan: “Ugly, huh? Probably qualifies as ‘stupid is as stupid does.'”
Matt: “What about Saturn.”
Jordan: “Saturn drained even more cash. We’ll do Saturn and then end up with the reorganization. But let’s take a break.”

#48 Squeaky Reigns and It Starts to Rain

07 Wednesday May 2014

Posted by Jordan Abel in Back Asswards Thinking, General Motors

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(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, the story might be more meaningful by starting at the beginning.)

Matt: “Jordan, my coffee is refilled. Situation: early 1980’s. GM struggling a bit but still the big kahuna. What was GM’s market share?”

Jordan: “About 45%, almost 5 of every 10 cars were still GM brands.”

Matt: “That’s a huge number. What about management? Was Mr. Murphy still chairman?”

Jordan: “No, the Board had named Roger Smith chairman in the early 1980’s.”

Matt: “Was he a clone of Murphy?”

Jordan: (spitting out his coffee) “My apologies for my reaction. Roger Smith was the complete opposite of Tom Murphy – 180 degrees apart.”

Matt: “Different in what way? Appearance? Approach to business? The way he worked with people?”

Jordan: “Yes, yes and yes. Let’s start with appearance. Murphy could have been from Hollywood casting, looking very much the part of CEO. Smith looked more like Mickey Rooney – short, a bit pudgy and reddish hair. Plus his voice was high pitched. In some management circles, he was known as ‘Squeaky.’”

Matt: “You think his appearance made a difference?”

Jordan: “Speculation on my part but Smith seemed to be conscious of his appearance. To compensate for physical shortcomings, he tried to intimidate people – and I’d say effectively.”

Matt: “Does Squeaky…I mean Roger Smith…create a team spirit? Some leaders can be intimidating and still build a good team and gain respect.”

Jordan: “Smith has a small cadre of henchmen. If you were not part of the group, you had no say.”

Matt: “What else happened?”

Jordan: “Squeaky changed the focus of GM from selling cars and trucks to maximizing profits.”

Matt: “Isn’t that what the CEO is supposed to do?”

Jordan: “Earnings come from sales. As simple as that is, Squeaky never seemed to understand that concept.”

Matt: “No sales. No earnings.”

Jordan: “Think of it this way. Take your house. You can increase your spendable income by deferring maintenance on the house.”

Matt: “But soon the house starts to deteriorate and eventually falls apart. And then is worth nothing.”

Jordan: “That’s exactly what Smith did to GM. He spent the income on other items and did not address maintenance on the house.”

Matt: “Give me some examples.”

Jordan: “The one take makes me nauseous to this day is Saturn.”

Matt: “You don’t think starting Saturn was a good idea?”

Jordan: “Possibly one of the dumbest ideas in GM history. To fund Saturn, Smith withheld funds for product development from the other divisions.”

Matt: “And you said that those divisions, while a bit tarnished, could have recovered with some new product.”

Every brand…and I mean every brand…has a period when the product and sales are a bit out of synch with market demand.”

Matt: “But don’t kill the brand just because of a solvable problem…right?”

Jordan: “Squeaky starting Saturn is like putting a very expensive addition on the house. Then neglecting to maintain the main house.”

Matt: “Jordan – is the story becoming too complicated? POTUS wants to use lessons from GM to help formulate a manufacturing policy. I’m concerned we are getting off track.”

Jordan: “I understand the question and the concern. The lesson for us is to stay focused on what GM did best, how did it fix problems rather than ignore problems and how it did not make solutions too complicated. Then talk about what happened when GM ignored the basics.”

Matt: “You think GM did not follow the lesson?”

Jordan: “They missed all three. And then paid the price…bankruptcy.”

Matt: “OK they missed but the story needs more specifics. So far you’ve mentioned Saturn and the negative effect of the other brands. That needs more explanation. And what else?

Jordan: “Second major issue is reorganizing the company in a way that destroyed the internal brand identity and created chaos. Third is buying non-core businesses depleted capital further.”

Matt: “Such as…?”

Jordan: “Such as buying Hughes Aircraft and EDS…Electronic Data Systems. When your core business needs fixing what is the logic of buying businesses that do not generate revenue?”

Matt: “Was there surplus cash?”

Jordan: “No. The company was short of cash. The GM money machine – the car divisions – needed some cash to freshen the product.”

Matt: “And the cash gets spent on Saturn, Hughes and EDS.”

Jordan: “You got the picture.”

Matt: “I have a question for you I have never heard addressed.”

Jordan: “Fire away.”

Matt: “Do you think Squeaky…pardon me, Roger Smith…envisioned himself as the second coming of Alfred P. Sloan?”

Jordan: “Funny you ask that. I’ve had the same thought for a long time. Smith started at GM when Sloan was still involved, albeit later in his career.”

Matt: “So you think the question is not whacko.”

Jordan: “Given Smith’s actions, I sincerely believe he thought he could become Alfred P. Sloan II, as it were. Look at the decisions.”

Matt: “Keep going.”

Jordan: “He starts Saturn. And yes, we need to spend more time talking about why it was such a debacle. Then buys EDS and Hughes. Reorganizes the company away from the Sloan model. Stresses earnings per share over market share. Then he targets the UAW, especially in Flint.”

Matt: “But all those actions seem contrary to Sloan’s model. What Sloan did was to build GM.”

Jordan: “I agree. Smith’s decisions we have talked about…and there are many more…seem to be the exact opposite of the model used to build the GM economic engine.”

Matt: “Ironically, his decisions seem to be aimed at destroying GM, not rebuilding it.”

Jordan: “I know. Head scratching, isn’t it. Matt, I need a short break. Talking about this is painful.”

#47 Small Car Setbacks Tarnish GM Image

03 Saturday May 2014

Posted by Jordan Abel in Economics, General Motors

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(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, the story might be more meaningful by starting at the beginning.)

Matt: “Jordan, now start telling me about the transition of GM from economic engine to sputtering engine to dead stop. What really happened?

Jordan: “I’m going to remind you of two things. The story is my interpretation of events. Historians and others might not agree. Second, the story needs the proper context. Too much emphasis is usually placed on earnings and stock price.”

Matt: “You think there’s a better measure?”

Jordan: “Earnings and stock price are the result of actions, not the cause. We want to talk about the cause. Otherwise the analysis does not contribute to POTUS’ effort to help rebuild US manufacturing.”

Matt: “OK, let’s get to the next phase.”

Jordan: “The 1970’s were chaotic for the US-based manufacturing companies. The country experienced two oil embargos – 1973 and 1979. There was also hyper-inflation by US standards.”

Matt: “What was the prime rate for a while, 15%?”

Jordan: “It stayed over 15% for several years and actually over 20% for a while. Hard to comprehend now.”

Matt: “High interest rates impact housing and autos, right?”

Jordan: “For autos, while overall sales declined, the bigger impact was the shift in sales mix – away from large cars and toward smaller cars.”

Matt: “How did GM fare?”

Jordan: “Not very well. Here’s a bit of info to show you how rapidly demand changed. First, the used car market does not care what the list price of a new car is. In the used car market, price is set by demand.”

Matt: “OK…now what?”

Jordan: “The oil embargo starts in October 1973. By January 1974 – three months later – demand for large and small cars has shifted so quickly that the price of a one-year old Chevrolet Vega, a small car, is higher than the price of a one-year old Chevrolet Caprice, a large car.”

Matt: “And the list price of the Caprice was what…about twice the Vega?”

Jordan: “That’s a good guess.”

Matt: “So GM had been strong in large cars now faces a market wanting small cars.”

Jordan: “GM also suffers because the first oil embargo gives the Japanese imports a real chance to make inroads in the US market. Sales were languishing prior to the embargo.”

Matt: “OK, back to GM.”

Jordan: “GM’s first real small car was the Corvair, introduced in the 1960’s. Great car until…”

Matt: “Ralph Nader wrote ‘Unsafe at Any Speed’. Was that really true?”

Jordan: “Rear-engine cars, which the Corvair was…VW Beetle another…and the 911 Porsche…used to have an inherent disadvantage in front-end crashes.”

Matt: “What do you mean?”

Jordan: “In front-end crashes the engine absorbs much of the kinetic energy of the impact. Imagine taking your hand, make a fist and hitting the wall.”

Matt: “Ouch.”

Jordan: “Ouch is right. Now put on a glove, ideally a boxing glove and hit the same wall.”

Matt: “Does not hurt as much, if at all.”

Jordan: “Think of the engine of the car as the glove…absorbing the energy from the hit.”

Matt: “And rear-engine cars have no glove.”

Jordan: “Had, at least not then. Structural engineering has improved significantly since the 1960’s.”

Matt: “So Nader’s points were valid.”

Jordan: “I think some of the points were valid. And I also think the benefit of the book has been increased emphasis on surviving accidents – emphasis by government and the auto industry.”

Matt: “But the book effectively killed the Corvair. I’ve only seen a few of them at auto shows. Looks like a great car.”

Jordan: “Here’s a bit of trivia most people don’t know. As a lead in, what car first comes to mind when I say 1960’s?”

Matt: “Mustang. Now that’s a great car.”

Jordan: “The father of the Mustang?”

Matt: “Lee Iacocca.”

Jordan: “How do you think Iacocca convinced Henry Ford II and the other executives to commit funds to develop the Mustang?”

Matt: “Don’t know.”

Jordan: “I don’t remember if I read this in a book or heard this from Lee one night over drinks. But in the Ford executive garage he lined up all Chevrolet products on one side and all Ford products on the other.”

Matt: “And on the Ford side there was an empty spot.”

Jordan: “An empty spot directly across from the Corvair Monza Spyder.”

Matt: “So that’s how the Mustang came about. To counter the Corvair Monza. Interesting.”

Jordan: “But as you know, the Corvair dies after Nader’s book.”

Matt: “And the Mustang lives a robust life. What did GM do?”

Jordan: “Counter to the Mustang was the Camaro, which lives to this day.”

Matt: “But the Camaro was not a Corvair replacement, was it?”

Jordan: “No, Corvair was replaced by the Chevrolet Vega.”

Matt: “The Vega reminds me of the Edsel. What a disaster.”

Jordan: “I think Vega was a great concept but had a lot of new technology that was never fully tested. GM rushed it to market.”

Matt: “How long was Vega in production?”

Jordan: “1970-1977. Problems with the early models doomed the car and production was minimal in the later years.”

Matt: “So GM enters the 1980’s with two recent small car failures – Corvair and Vega. At the same time the public has experienced gas rationing and higher gas prices, both of which are pushing sales toward smaller cars…away from GM’s strength.”

Jordan: “Not a good scene.”

Matt: “Did GM then just give up on small cars?”

Jordan: “No. There was another major program to introduce well-engineered smaller, more fuel-efficient compact cars. All divisions except Cadillac had a somewhat larger model that would be replaced. Inside GM these were known as ‘X-cars’ because they were built on what was labeled the ‘X’ platform. Auto speak.”

Matt: “These models were introduced when?”

Jordan: “1979 as 1980 models.”

Matt: “How well did these cars sell?”

Jordan: “Extraordinarily well compared to the Corvair and the Vega. In fact, the Buick X-car, Skylark, outsold the Chevrolet model every now and then.”

Matt: “Did something happen? Why did GM phase them out?

Jordan: “More quality issues…and lots of recalls.”

Matt: “More egg on GM’s face for small cars.”

Jordan: “The X-cars were dropped after six years and yet another series of smaller models was introduced. But sales never really took off.”

Matt: “So let me go back. At the beginning of the 1980’s GM has suffered two embarrassments with small cars. Then introduces another new series of smaller cars, which sells well initially. What about the other car lines? It’s not as if everyone is buying small cars then.”

Jordan: “You’re right. A lot of people were buying middle-size and larger cars. But GM models were getting long in the tooth and needed updating. In some cases massive changes that would be very expensive.”

Matt: “Weren’t there some mandated fuel economy standards also?”

Jordan: “Yes. The Corporate Average Fuel Economy standards, aka CAFÉ, passed Congress after the original oil embargo. And GM needed to update the larger, heavier models to help meet CAFÉ standards.”

Matt: “What about the image of the GM brands?”

Jordan: “My view is the brand images had some tarnish but good new product would begin to restore the image.”

Matt: “The brands are tarnished, need some polish. What happens next?”

Jordan: “What happens next is a break, then we will talk more about GM.”

usrevolution5

~ USA Headed for a 5th Revolution! Why?

Monthly Archives: May 2014

#55 Wrap-Up of the GM Story…for Now

#54 EV1 Ends CEO’s Tenure. Bean Counters Reign, Again.

#53 GM Lets the Batteries Drain on EV1

#52 Value of GM EV1: Holistic Cow

#51 The Electric Spark

#50 GM Saturn: Where Was the Proctologist?

#49 More Rain Under Roger’s Reign

#48 Squeaky Reigns and It Starts to Rain

#47 Small Car Setbacks Tarnish GM Image