[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 previous three (3) entries were about my personal experiences with Lee Iacocca, who many consider one of the most effective corporate executives of the 20th Century. I decided to continue the break from the craziness in Washington and discuss another part of my life that continues to generate considerable interest — The GM EV1, the first modern electric vehicle.
There are two sides to the 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 x number of entries — I actually do not know how many — will be an attempt to provide addition insight. Stick around. The series will be a good diversion and offer a good lesson, I hope.
More than 25 years ago, GM presented to the public the first modern electric car. The car generated widespread interest worldwide and helped boost GM’s image. Despite the positives associated with the car, GM management never seemed to endorse the program. After very limited production by auto company standards, GM pulled the plug. People frequently ask me, “Why was the program stopped?” “What could have been done differently so GM management would have kept the program?” “Did GM killing the EV1 set back development of electric vehicles for a decade or more?”
The questions and discussions about electric vehicles range from informal over drinks and dinner to Q&A following classroom lectures to interviews as part of formal research for a book or academic paper. For example, recently I was contacted by a professor doing research on electric vehicles. He’s been researching EV’s for a number of years and contacted me for more possible insight into the late GM EV1 program.
After two lengthy Skype calls, and roughly a day I spent filling in holes in such public information as Wikipedia, his comment was, “I’ve never heard anyone talk about what you said.” Just to calm the EV1 crowd, no confidential information was provided or discussed.
The focus on the “untold story” was the dynamic inside GM that I considered the primary reason GM management never fully supported the EV1. As will be described in this series of entries, my belief – the underlying reason for stopping the program had little to do with GM’s public claim of lack of demand and excessive cost. True that GM had limited cash but, as will be described herein, much of the cash shortage was self-induced.
As a bit more background, most companies struggle with introducing new technology. Such struggles are well-documented. Two books address the phenomenon of the internal struggles. If you’re interested in learning more, start with Jim Utterback’s, “Mastering the Dynamics of Innovation.” You’ll be shocked at how many companies tried to introduce a threatening disruptive technology but were unable to do so. To help understand more about why the difficulty, read Clay Christensen’s, “The Innovator’s Dilemma.” The books have been around a while but I think still relevant and certainly will help build an understanding of the difficulties of transitioning a company from an existing to a new, disruptive technology that without adoption could put the existing company out of business.
Before getting into the internal dynamics at GM, let’s clear up one gigantic misconception about why the GM EV1, and other electric vehicle models were not pursued. Despite implications in the movie “Who Killed the Electric Car?” from all that I know and experienced – and that was a lot – there was no conspiracy! There was no sinister backroom plot to kill EV’s. Yes, auto companies were frustrated with CARB’s (California Air Resources Board) zero-emission vehicle mandate.
And, yes, oil companies have repeatedly tried to thwart any regulation or legislation that reduces access to drilling, no matter what the cost to society or the environment. But neither of those killed the electric car.
What did kill the EV1 was dynamics inside GM. The dynamics are rarely, if ever, discussed. To understand how the dynamics evolved we need to review actions inside GM during the decade leading up to the introduction of the EV1 concept car. For many inside GM, those 10 years could have been titled “The Decade of Sour Grapes.”
I apologize for the length of this explanation. I still don’t know how many entries might be required to explain properly what occurred inside General Motors and why there was such resistance among so many executives to the EV1 program. Whatever the number of entries, I hope you find these entries enlightening and hope the decision to kill the EV1 becomes more understandable. You might not like the decision, and I certainly did not, but I think it will be more understandable following this series.
In 1980, the position of GM chairman transferred from Thomas A. Murphy to Roger B Smith. Murphy and Smith were polar opposites. Tom Murphy might as well have been the quintessential CEO from central casting. He was well spoken, self-confident, witty, kind and considerate. Smith, his successor, was short, insecure and had a ruddy complexion, squeaky voice and a tyrannical personality.
After Murphy retired I often thought if you could sit down with him, ask him what decision he considered his biggest mistake as chairman, after a couple of drinks he might say appointing Roger Smith as CEO/chairman. After a few years into Smith’s reign, I decided Murphy wouldn’t need a couple of drinks to admit the mistake. A cup of coffee would do.
One of the keys to success for OEM’s in the auto industry — GM, Honda, Daimler, Ford, etc. — is keeping products up-to-date, including significant styling updates. Keeping products fresh requires enormous amounts of cash. Without product updates, sales decline and the amount of cash available usually declines even faster. Further the effect of the decline can take years, if not a decade or two to turn around.
As obvious as the sales to cash generation relationship might seem, Smith took a different view. He believed sales and market share were less important than profit per car. Profit per car is important but without sales, all the fixed cost inherent in the auto industry gets spread over fewer units and the additional cost per unit starts to eat away at even the most profitable car lines. As the sale decline continues the company can be overwhelmed with red ink.
Inside GM the car divisions were profit drivers. Virtually all cash generated within GM was associated with sales of cars and trucks. While some individual product lines were marginally profitable, those product lines helped spread the enormous overhead cost.
Forcing each carline to be profitable also limited the car division’s opportunity to offer competitive products to counter the ever increasing number of imports, particularly from Asia. The goal of the imports was to gain market share and many modals very attractively priced. The Asian companies took a much longer view and were willing to subsidize certain models sold in the US with profits from carlines sold elsewhere.
Smith’s time horizon was much shorter and the emphasis on profit per car/truck, rather than overall profit, had a devastating effect. For reference, think about a grocery store. In order to attract people to shop, the store has “loss leaders.” If the store stops offering such loss leaders, what happens? Profit margins might increase but overall profit will likely decrease as people begin to shop elsewhere. And this is what happened to General Motors in the 1980’s under Smith’s strategy of emphasis on profit-per-car/truck rather than sales. People stopped coming in GM dealerships and started shopping elsewhere.
How bad was the strategy? Over the decade of the 1980’s GM market share of all cars/light-trucks sold in the US declined from roughly 45% to 35% — a relative decline of about 25%. What did that mean in terms of unit sales? During the 1980’s, the US averaged about 13-15 million cars and light-duty trucks per year. The 10 points lost by GM (45% to 35%) equated to sales of 1.3-1.5 million cars and trucks per year.
What did that mean for employment? 1.3-1.5 million cars and trucks per year equates to roughly five (5) assembly plants. Thus, Smith’s strategy resulted in unemployment for everyone who worked at those five assembly plants and unemployment for thousands more at GM suppliers. In addition GM made huge cuts in white-collar staff. (Yes, I understand there is another discussion that needs to take place about which auto companies gained share that GM lost. However, that conversation is not relevant to the dynamics inside GM that affected the EV1 program.)
Did GM profit improve under Smith’s strategy? In terms of earnings, if each car averaged say $2,000 variable profit (a reasonable estimate), then GM lost market share during the 1980’s reduced potential GM earnings over the 10-year period by at least $15-$20 billion. (Roughly $30-$40 billion in $2019.) In addition, GM profit margin declined as did overall profits. If you were the teacher grading Smith’s performance, a grade of “D-“would be extremely generous.
In addition to a strategy that generated lower profits and less cash, Smith directed GM to purchase Hughes Electronics, to purchase Electronic Data Systems (EDS) and to start the Saturn division. Where did the cash come from for these ventures? Funds from an ever smaller piggy bank that should have been allocated to help car and truck divisions maintain competitiveness were instead diverted to Smith’s various projects. As such, the divisions — Chevrolet, Buick and others — had even less money to update new products and less money for marketing. Of the GM car and truck divisions, only Buick managed to maintain market share during Smith’s reign.
The purchase of EDS created another problem. With the purchase of EDS, Ross Perot became GM’s largest single shareholder. Perot asked many thorny questions during the GM board meetings which irritated Smith. Perot irritated Smith so much he ordered GM to buy back all of Perot’s stock — for $750,000,000. (About $1.5 billion $2019.)
Where did the $750 million cash come from to repurchase Perot’s stock? Again, funds diverted from the car divisions that should have been used for product development and marketing.
Another major diversion of cash went to the creation of Saturn division. Smith created Saturn because he believed the existing car divisions were incapable of attracting younger buyers. Smith’s attitude angered many senior executives at the car divisions.
To make a bad situation worse, Smith insisted Saturn should be set up as a completely separate car company, even to the point where Saturn had a separate foundry to cast engine blocks. Such vertical integration was ridiculous. No one, and I mean no one, cares which supplier casts a particular engine block as long as it meets quality standards.
In addition to diverting funds to set up Saturn as an operating unit, Saturn never made money. The longer Saturn stayed in business the more the other car/truck divisions suffered as funds were diverted from product development and marketing programs to prop up Saturn. (Although not a topic of this set of entries, Smith’s negative impact on GM did not stop when he left office. The decline in GM share became almost impossible to stop because the product competitiveness of the divisions had fallen so far behind. In my view, GM’s eventual bankruptcy should be attributed directly to Smith.)
Hope you’re beginning to get an understanding of frustration among executives at the car and truck divisions. Hard to believe, I know, but there’s more background we need to cover. You mean like why Smith cast aside the organizational structure that had made GM hugely profitable for decades? Yes. And when the reorganization happened Alfred P. Sloan likely rolled over in his grave…and rightfully so. Time to pause for now.