[Readers: this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about the Revenge Revolution, a list of earlier revolutions and the author, Entry #1.

Periodically I write a “sense check” to assess whether in the next few years, a revolution in the US is still possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US.  Most recent sense check, Entry #332.]  

The past few entries have been a break from the craziness in Washington.  In Entries #343-#345 I included some observations about my time working with Lee Iacocca, who died July 2.  Entry #346 started discussing another project that continues to generate considerable interest — the GM EV1, the first modern electric vehicle, which was introduced more than 25 years ago.

There are two sides to the EV1 story — product and non-product.  The product side is reasonably well documented.  The non-product side story is far from complete, and what’s been told so far I think is misleading.  The next few entries — I actually do not know how many — will attempt to provide addition insight.  Stick around.  The series will be a good diversion from DC madness and offer a good lesson or two, I hope.

(If you have not read Entry #346, suggest you do so before reading this entry.)  On top of the array of his decisions to divert cash from developing and marketing new products, Roger Smith (GM CEO) hired McKinsey & Company (consulting company) to study and determine if GM should be reorganized, allegedly to streamline operations.

As someone trained in finance, I agree that some improvements in operations likely were needed.  At the same time, those improvements could have been accomplished without a reorganization. Just for some perspective on relative size of GM at the time, Buick Motor Division generated more revenue than the worldwide operations of the entire Goodyear Tire & Rubber Co. Chevrolet Division was more than two times the size of Buick. In addition, under the then current organization structure, GM had been extremely profitable for decades. So why would anyone want to reorganize?

When I was interviewed by McKinsey for the study, it was clear from the questions that Smith had already decided to reorganize the corporation. The study was a sham and used as a front to justify the decision. The reorganization, or so we were told, would streamline product development and eliminate redundant cost.

Not part of the study was the value of “organizational loyalty.” Smith never spent time on the revenue side with a US operating division — Chevrolet, Cadillac, etc. If he had spent time, he might have understood how most employees felt about “their” division. Many people at Buick, for example, whether in field sales or on the assembly line, considered themselves part of the “Buick family.”   At the time of the “study” Buick had been operating in Flint, MI for more than 75 years. Many workers were 3rd, even 4th generation. Same type of history existed with many hourly and salaried employees at Chevrolet, Pontiac, Oldsmobile, Cadillac and GMC Truck.

For many of the same workers, even though their respective operating division was part of General Motors, the other GM divisions often were viewed as competitors.  Oldsmobile was considered a competitor by many people at Buick and vice versa.   While this might seem a bit unusual to many outside GM, I personally believe the sense of loyalty to a particular operating division was one of GM’s strengths.

The reorganization ignored the “emotional bond to the division” of the various employees. The reorganization created two major operating groups – CPC, which consisted of Chevrolet, Pontiac and GM of Canada – and BOC, which consisted of Buick, Oldsmobile and Cadillac. In addition to now being grouped with a former competitor – Buick and Oldsmobile, e.g. — the name of the group, “BOC” changed the alignment of the position in the marketplace of two divisions.

Since the 1920’s, Buick had been positioned higher than Oldsmobile in the GM hierarchy and higher in the car-market pecking order. Yet, the BOC name implied Buick as being lower on the pecking order than Oldsmobile.

Another example of the people driving the reorganization being incredibly tone-deaf was the names initially assigned to the “manufacturing-related” groups within BOC.  Names for these groups were apparently chosen by people who never worked in communications or marketing. Or, if they had worked in these areas, the names assigned were to thumb their nose at those responsible for the reorganization.

The initial names for the groups were etched on large metal signs and installed at the HQ buildings. The morning after the installation I saw the sign driving into Buick’s office.  The sign noted the Flint Automotive Group would be co-located in the Buick HQ building. At Oldsmobile, I assume there was a sign indicating the Lansing Automotive Group would be co-located at Oldsmobile’s HQ.

After a quick chuckle and a head shake, I asked someone in the Flint Automotive Group if anyone had considered the initials of the group — “FAG”.  The Lansing Automotive Group initials were “LAG”. Apparently no one had considered the initials.

After the inquiry, the names were quickly changed but another example of someone making decisions but not paying attention to anything other than what was considered a possible cost savings. The inept “non-financial”-related decisions — group alignment, group names, sub-group names, etc. – never set well with most employees and the ill-will towards Smith continued at least into the 1990’s, past the announcement of the EV1.

As if it were not bad enough that Smith diverted huge amounts of cash to non-core projects that diminished GM’s competitive position and earnings power, Smith was a control freak. Smith seemed to have to make all key decisions, even if he knew little or nothing about the topic. An example was when Buick sought approval for the introductory MSRP of the Reatta, a 2-passenger near-luxury car.

Buick had completed extensive research about consumer expectations for the MSRP. Two different research methodologies were used and results of each method suggested a price of less than $20,000 ($1985). Research also indicated a price above $20,000 was a psychological barrier and would reduce sales potential significantly.

Buick presented the research findings and the ~$19,950 MSRP to the Price Review Group, whose members consisted of various GM executives. While we were making the presentation and discussing the findings of the research, Smith interrupted the presentation and stated, “The MSRP is going to be $25,000. Next item on the agenda.”

So the Reatta was introduced with about a $25,000 MSRP. What happened? The Reatta had great visual appeal and consumer interest, but sales never achieved potential. Why? Rather than argue about the correct MSRP, a better indicator of value is to look at what happened in the used-car market.

The used-car market sets prices on what customers will pay, not what a manufacturer claims the price should be. A year or so after introduction, if one applied the traditional depreciation schedule to the Reatta, the introductory MSRP should have been about $20,000 (just what the research indicated and what Buick proposed), and not Smith’s demand of $25,000. The result? Smith’s arbitrary “seat-of-the-pants” 25% premium on the Reatta basically killed the program…and with it GM lost another opportunity to build market share and make money.

Buick was not alone in being subjected to Smith’s arbitrary decisions. All divisions suffered. I’m just not as familiar with some of the details since I was focused on activities at Buick.

With no love lost for Smith among a wide swath of GM executives, along comes the GM electric vehicle, the EV1. To add a little salt to wounds inflicted by Smith, how did the EV1 concept car get developed? Through GM Design Staff? Developed in conjunction with an operating division? No, the EV1 was developed in secret by a company located in southern California, called AeroVironment.

How are GM executive introduced to the EV1 concept car? Showings at the GM Tech Center? An in-house video?  No. The executives found out when the EV1 (called the Impact at the time) was introduced at the 1990 Los Angeles Auto Show. The introduction in Los Angeles also included Smith’s surprise proclamation that GM would put the EV1 in production.

Just think about what’s happened the decade preceding the surprise introduction of the EV1. Smith’s decisions included diverting cash to: (i) buy Hughes Electronics; (ii) buy Electronic Data Systems (EDS); (iii) buy back all the stock owned by Ross Perot as part of the EDS purchase, (iv) start yet another GM division, Saturn, which then never made money; (v) reorganize a company that had essentially printed money since the early 1920’s; (vi) arbitrarily price vehicles (I’ve spared you other stories about how Smith put the kibosh on breakthrough advertising and marketing ideas at Buick); (vii) focus on profit per car rather than market share.

The effect of these decisions was hugely negative. During Smith’s reign in the 1980’s, GM lost of 10 points of market share – equal to five (5) assembly plants.  Plus, GM laid off tens of thousands of employees.  Some of the supposed cost savings from these plant closings were never realized as many hourly employees continued to receive full pay even though not working.  The net result of Smith’s actions was a loss of tens of billions of dollars profit and a drain of cash for future product development and marketing. And now Smith develops an electric car in secret and the first time most executives became aware of the EV1 and the commitment to produce was the media coverage of the LA Auto Show.

So if anyone wonders what attitude executives in the operating divisions had toward the EV1, now you know why there was little, if any support at the beginning of the program. The lack of support eroded as the program continued and GM continued to lose share and cash.

The next entry will begin to discuss conflicts that emerged inside GM after the program started and Smith retired. For example, one GM executive told me over lunch, “Dabels, you’re my worst enemy.” Stay tuned.