#350: GM EV-1: Story behind the Story. The Day the Music Died. (Part 5 of 5)

16 Monday Sep 2019

Posted by Jordan Abel in Corporate Policy, General Motors, Innovative Thinking: Ideas and Products, Uncategorized

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. Entry #346 started discussing a 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 has been reasonably well documented. In my view, the non-product side of the story is far from complete, and what’s been told so far is misleading. The series of entries has been an attempt to provide addition insight. If nothing else, the series has been a diversion from the madness in Washington and has provided a good lesson or two. (If you have not read Entries #346-#349, suggest you do so before reading this entry.

if you want to read all five entries as an ebook, download 2019Q4 GM EV-1 Story Behind the Story Booklet. Also, thanks very much to editors for these entries — my wife Pamela and Wayne Henegar, who was also on the GM EV-1 program.

This is intended to be the final entry of the series about the “inside story” of GM innovative electric vehicle, EV-1…although one never knows. The ending of the EV-1 is both sad and happy.

Sad because the EV-1 met an untimely and ugly death. Happy because many things were learned from the EV-1 program and the program has continued to this day to influence development of electric vehicles worldwide. The demand for and availability of electric vehicles has continued to grow. Even such storied brands as Porsche are introducing electric vehicles.

The EV-1 set the standard for electric vehicles, both in terms of technology innovation as well as quickly building an emotional bond with a wide swath of people. It truly bothers me to say this, but I think the auto company that so far has best captured the spirit EV-1 brought to electric vehicles has been Tesla and not General Motors.

To finish the EV-1 story, let’s start at the end and work backwards to the day the music really died. The formal death of EV-1 was in 2002. The formal death included an orderly return to GM of all EV-1’s that were on lease to customers, mostly in California.

The EV-1’s were only leased and not sold. Why only leased? Keep in mind the EV-1’s were still “experimental” by auto industry standards. Even though the EV-1’s were fully functional and met all federal safety standards, a number of items on the car had not been tested as thoroughly as most regular production models.

Leasing also allowed GM to restrict use of the cars to certain areas – initially California and later some parts of Arizona and Georgia. Leasing enabled GM to avoid what would have become a logistics nightmare. When title to a car/light-duty is transferred from the auto manufacturer to the buyer, the auto company becomes liable for providing parts and service for at least 10 years, in some states the requirement is longer.

In addition, if the owner moves from say California to Vermont, the auto company must provide service at an authorized dealership. For the EV-1 that meant possibly training dealer technicians or providing direct service to many locations throughout the country where there might be only a few EV-1’s in use.

While cancelling the EV-1 program was a strategic blunder, what GM did after the cars were returned from lease may be one of the greatest PR blunders in automotive history. After the program was canceled, remaining leases were not renewed and all EV-1’s had to be returned to GM.

So far, so good. But then what did GM do with the cars? GM crushes all but a few EV-1’s, which were donated to museums and universities but with the driveline disabled.

The giant PR mistake consisted of two components. The first mistake? With a minimal amount of effort and cost GM could have updated the cars and re-leased the EV-1’s. Doing so would have allowed GM to continue to gather customer data and maintain a positive public image about developing electric cars.

The second mistake? How the cars were disposed of. Rather than explaining to the public why the cars needed to be crushed, GM tried to keep the crushing a secret. Hard to do with that many cars and car crushers often located in open areas with no trees or other cover.

You’d think someone in GM might have remembered a previous PR fiasco, but apparently not. In the 1960’s (many people from that era had not yet retired from GM) there was a huge public outcry against GM after disclosure GM had hired a private detective to tail Ralph Nader after he published the book, “Unsafe at Any Speed,” which was critical of the safety of the Chevrolet Corvair. I guess reviewing company history and lessons learned was not part of the discussion whether to crush EV -1’s.

What happened to GM’s image after the public found out about the crushing? Almost overnight GM’s image went from good guy trying to help the environment to bad guy. Out the window went all the positive gain in GM’s image that started when the EV-1 was introduced. In fact, GM’s image slipped from positive to negative.

The public outcry over the GM crushing EV-1’s helped spawn the movie, “Who Killed the Electric Car?” Given the seemingly esoteric topic, the movie was remarkably popular. When it premiered in Charlotte, I was invited to attend. Following the movie, there was a spirited Q&A session that lasted almost an hour. The popularity of the movie helped erode GM’s image further.

But did the EV-1 really die when the cars were crushed? Or, did the EV-1 program suffer a mortal wound sometime before, and that would lead to its death? From my perspective, the real death of the EV-1 was in late 1992, years before the public demise. In blog Entry #349, I discussed how the GM financial staff viewed the EV-1 as a cost center. Entry #349 also raised a question whether there was a conspiracy among financial executives to set up, then justify replacing Chairman Robert Stempel, who had succeeded Roger Smith. Stempel was the first chairman in some time not from the financial staff.

Financial staff executives knew whoever followed Roger Smith as chairman would be faced with a host of difficult problems created while Smith was chairman in the 1980’s. The effect of most of these problems was a cash drain and reduced ability by the operating divisions to generate additional cash. In addition, it was clear by the late 1980’s that the US economy was weakening and likely would slide into a recession. The recession would cause auto sales to slow and cash reserves to erode further.

Regardless of who was appointed chairman, no question GM needed to cut expenditures. But where to cut? The financial staff continued its drumbeat that all costs associated with the EV-1 were of no value elsewhere in the company, despite evidence to the contrary.

How was the EV-1 program affected as GM looked for cash? Here’s the scene in fall 1992. Location: General Motors Building, Detroit, conference room near the boardroom. Time, 3:00 p.m.

Attendees at the EV-1 status review meeting: on the corporate side are the chairman, president and two senior financial-staff executives. Representing EV-1 are four executives, including me.

Meeting content includes an update of engineering developments, review of marketing programs, and review of program cost. During the meeting, the chairman takes notes and asks a number of questions. The president takes no notes and does not ask a single question.

At precisely 5:00 p.m., the president stands, turns to the chairman and states, “Bob (Stempel), you can’t afford the program.” The president then excuses himself and leaves the meeting. The meeting concludes shortly thereafter.

After the internal review but before the next meeting of the Board, usually the first Monday of the month, Bob Stempel resigned as chairman and retired from GM. Soon thereafter the Board announced that Jack Smith would be promoted from president to the CEO’s role. The chairman’s role was assigned to an outside Board member.

The Board also approved a significant cutback in staff throughout the company as well as a cutback funding for certain product programs, including the GM EV-1. All the cutbacks, including funding for the EV-1, seems consistent with the idea that Stempel had been set up as the fall guy before someone from the financial staff could ride in on a white horse and save the company.

Oh, I almost forgot. What date did the Board formally approve cutting back on the EV-1 program? An action that in my opinion effectively killed the momentum of the only program which was improving GM’s image; a program which had the potential to attract to GM younger buyers who were more prone at the time to buy Imports, especially Japanese models. What date was the Board meeting that mortally wounded this program? None other than December 7th.

OK, so the Board was tone deaf to the irony of the date of their decision. Not having been privy to the discussion in the Board room, one has to wonder how objective the presentation was about the EV-1 program. Given the negative attitude toward EV-1 of the incoming CEO and his former colleagues on the financial staff, which usually coordinated presentations to the Board (a job I held for a while), I have serious doubts many of the positive aspects of the EV-1 program were presented.

But all connected with EV-1 program has not been lost. A number of positive aspects of the program seem relevant today. For me, probably the biggest takeaway has been how a small group of people with such a limited budget could build such a huge following and have such a lasting impact. By traditional automotive standards, the size of the individual staffs, amount of the engineering budget, amount of the marketing budget and other support was tiny.

By almost any measure, we were also an eclectic group – some staff members had lots of auto experience; some had almost none. Yet, collectively we became a highly effective team that had a major positive impact on GM’s image and set the standard for a new generation of electric vehicles.

GM senior management’s failure to realize the positive benefits of the program, especially how EV-1 improved GM’s image among younger generations, was an indication then and now that GM senior management was too focused on costs and not focused on generating revenue. The concept of a company trying to cut costs and “save its way into prosperity” never works. Such an approach often is a path to bankruptcy.

The focus of senior management on cost savings and not revenue generation also alienated a number of younger, more innovative-thinking executives inside the company. Many of these innovators left GM. Their departure left GM with far fewer executives willing to take risks and try new ideas, just at the very time GM needed this kind of thinking.

The combination of focusing on cost and avoiding any kind of risk taking proved devastating. GM’s loss of market share that started in the 1980’s because of actions by then chairman Roger Smith continued throughout the 1990’s. By the time GM finally declared bankruptcy in 2008, GM’s share of cars/light-duty trucks sold in the US had fallen from about 45.0% in 1980 to less than 25.0% and was headed toward 20.0%. In say 2006, had GM maintained the share it held in 1980, GM would have sold an additional 3,500,000 cars and trucks in the US.

Could EV-1 have saved GM from bankruptcy? As a car program, no. Annual EV-1 volume was too small to offset declines in other carlines. However, the spirit, enthusiasm and innovation that was generated by the EV-1 program, both inside and outside GM, could have been the catalyst to change thinking inside the company and stop the slide in market share. Only years after the EV-1 program was cancelled, did Rick Wagoner (another financial guy), who succeeded Jack Smith as chairman, admit cancelling EV-1 was a major mistake.

Another major irony of the program? EV-1 could have been Roger Smith’s best idea to help change GM and his legacy. Unfortunately for Smith, and GM, this great idea was preceded by actions that did irreparable harm to the company.

So, now you have another side of the GM EV-1 story. While writing these entries I was reminded of the opening words to Don McLean’s most famous ballad, “American Pie.”

“A long, long time ago
I can still remember how that music
Used to make me smile
And I knew if I had my chance
That I could make those people dance
And maybe they’d be happy for a while
But February made me shiver
With every paper I’d deliver
Bad news on the doorstep
I couldn’t take one more step
I can’t remember if I cried when I
Read about his widowed bride
But something touched me deep inside
The day the music died.”

Hope you found the series of interest. Comments welcome, as always.

#349 GM EV-1: Story Behind the Story. Inside Conspiracy? (Part 4)

08 Sunday Sep 2019

Posted by Jordan Abel in Corporate Policy, General Motors, Personal Stories, Uncategorized

≈ 1 Comment

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 has been reasonably well documented. In my view, the non-product side of the story is far from complete, and what’s been told so far is misleading. The series of entries — I actually do not know how many — will attempt to provide addition insight. The series will be a good diversion from the madness in Washington and offer a good lesson or two, I hope. (If you have not read Entries #346-#348, suggest you do so before reading this entry.)

As described in previous entries, there was a dichotomy on the GM EV-1 program. The public, the media and most government organizations were interested and viewed very positively GM’s efforts to develop and introduce an electric vehicle. Inside GM, the view was just the opposite. Many GM executives intensely disliked the EV-1 program and considered it a waste of scarce funds.

An example of the public support was the number of people who contacted the program seeking information. When the program kicked off, there was no internet. Hard to imagine now but true, no internet. The primary contact was via an 800# and some contact by snail mail. The 800# was staffed by a firm which I had used at Buick.

The firm kept a record of every contact. If you were a first-time caller, you also received a response letter written on executive stationery, which I hand signed with a fountain pen. If I knew anything about the location or something else that might be of interest to the recipient, I would write a short note in the margin.

Over roughly a two-year period, I signed about 25,000 letters. It was not uncommon to return from a week-long business trip and have a stack of 300-400 letters delivered to the house waiting for me to sign.

Did this letter writing effort have an impact? For maybe 10 years after the program, I would be introduced to someone who would say, “Oh, I know you.” I would ask how they knew me since we were just introduced. “You wrote me a letter.” Then often as not the person would reach into the desk and retrieve the letter.

Most people seemed to retain the EV-1 brochure, which was sent along with the letter. Like many efforts on the program, we broke the mold for what was considered a standard car brochure. The advertising manager on EV-1 was Amy Rader, a history major from Princeton. Amy thought we should have a different kind of brochure. She managed to convince the Robert Frost Foundation to allow EV-1 to be the first commercial use of his works. The EV-1 catalog, of course, was on recycled paper.

Contact with the EV-1 group was not limited to the United States. One day we received a package from a group of high school students in Bulgaria. Somehow they’d heard about the program (remember pre-internet) and completed a class assignment centered on the EV-1. When finished with the assignment they sent us a copy.

Unfortunately, the widespread interest in EV-1 fell on deaf ears inside GM. Part of the cause was frustration among many GM executives with 1980’s chairman Roger Smith diversion of cash from product development and marketing programs. As noted in an earlier entry, during the 1980’s Smith purchased Hughes Electronics, Electronic Data Systems, stock held by Ross Perot associated with EDS purchase. Also, Smith diverted a huge amount of cash to start Saturn. GM EV-1 was also tainted because Smith had it developed in secret by a company in California. He then held a surprise introduction at the LA Auto Show, including the statement that GM would produce EV-1.

While Roger Smith’s follies festered frustration and anger toward EV-1, some of us on the program could have done a better job trying to convey the value of EV-1 to executives inside GM. We did not spend enough time making sure our colleagues at the GM operating divisions understood how the EV-1 program could benefit GM and benefit the operating divisions.

However, even that effort might not have overcome what seems to have emerged over time as the death knell of the EV-1 program. The cause of death was the view by the financial staff that EV-1 was nothing more than a cost center. As someone who cut his teeth on the GM financial staff, I can sort of understand that view, although I do find baffling the lack of enlightenment about the non-product value that EV-1 generated for GM.

The “cost-center” view may have been a cover for at least two other actions. The first was that GM kept claiming most, if not all development cost associated with EV-1 had no other application. Yet, as EV-1 was being developed, elsewhere in GM there were efforts to incorporate many features of EV-1 into regular production vehicles. If one were to track incorporation of electronics into regular production cars/trucks, there was a huge jump after EV-1. I like to remind people that even though GM eventually cancelled EV-1, one the major benefits of the program was accelerating the use of electronics in vehicles.

The acceleration of electronics should have been fully supported by the financial staff…but it wasn’t. At the time of EV-1, many electronic features carried a price premium. Yet, the incremental cost to produce many electronic features was almost nothing. With the opportunity to use electronics to increase profit margins on most every car and truck, why was the financial staff so emphatic that EV-1 was a cost center?

The second reason for the “cost-center” claim is more sinister and one I’ve never heard discussed publicly. I reached the more sinister conclusion based on: (i) early training to be an actuary, which includes trying to find patterns out of seemingly random events; (ii) studying the history of General Motors; (iii) having worked with most of the financial executives involved.

My sinister view is the EV-1 happened to be a convenient mechanism for implementing a conspiracy by the financial staff. A conspiracy by the financial staff is unlike the conspiracy implied in the movie “Who Killed the Electric Car?” The movie suggests a conspiracy among various car companies and other organizations associated with electric vehicles. As noted in an earlier entry, I think the multi-organization conspiracy theory presented in the movie is simply not true.

Ok, then what was the conspiracy inside GM led by the financial staff? And why?

Higher-level finance executives knew that actions during Roger Smith’s reign had seriously eroded GM’s earning power. Some of this erosion had been hidden by a number of accounting changes. With that understanding, these executives knew the next chairman of GM would have a very rough time trying to stabilize the company and trying to rebuild earnings.

GM had a long tradition of the chairman coming from the financial staff and the president coming from operations. So here are my questions. Who was chosen to succeed Roger B. Smith as chairman? A financial guy? No, a guy from the operating side. Who was chosen to be president? An operating guy? No, a financial guy. Seems a bit odd, huh? Maybe a bit Machiavellian?

Robert Stempel, who was chosen as chairman to replace Roger Smith, was the quintessential engineer. Stempel had a stellar track record in operating roles at Pontiac and Chevrolet but no in-depth exposure to or understanding of finance. No surprise that Stempel was a big supporter of EV-1 since much of his career involved new product development.

The new president, Jack Smith (no relation to Roger Smith) was the quintessential finance guy with almost no experience in US operations that would help him understand how the operating divisions and the supporting dealer organization worked. An example – during a meeting I mentioned EV-1 was generating a high level of interest among teenagers. Smith replied, “15 year-olds don’t buy cars!” True, but just from a pure economic standpoint that 15 year-old will likely purchase at least 10 cars/trucks in his or her lifetime, and probably more. And who doesn’t remember which brand cars/trucks were “cool” when they were 15 years old?

So, was there really a conspiracy? Was there really a coup d’état at GM? Did the senior financial executives setup Stempel, knowing GM earnings would be rocky the first few years post Roger Smith? If Stempel demonstrated he was unable to stabilize GM, would the financial staff be justified asking the Board to replace Stempel with a traditional finance guy in order to “save” the company?

Stempel faced another problem, which was not unexpected. In the early 1990’s, the US economy slid into a recession. As GDP and personal income declined, predictably so did car sales. GM profits also fell. While Stempel continued support for the EV-1, the recession forced GM into a difficult choice. The loss of market share during Roger Smith’s reign meant fewer vehicles to cover fix cost. Plus, the diversion of cash for Smith’s various projects, especially Saturn, meant GM had no cash reserve.

GM needed to cut costs and few alternatives were available. Product programs and marketing programs at the car divisions had already been raided to fund Roger Smith’s various projects. Closing Saturn, even though it was bleeding cash, would have been a PR disaster.

What was on the table for cutting, at least from the financial staff’s perspective, was EV-1. I agree and understand that sometimes immediate needs for cash overtake future considerations, even if the long-term consequence may be negative. However, cutting EV-1 made little economic sense. The cash burn rate was not that great. Much of the development could be applied to and increase profits of other GM cars/trucks. Plus, EV-1 was GM’s only bright spot. Even with all the other problems inside the company, GM’s public image continued to improve because of EV-1.

But did that matter? Stay tuned. My apologies. In Entry #347 I promised to talk about the dynamics of the meeting the day the music died. I’ll do that in the next entry.

#346 GM Electric Vehicle (EV1) — the Story behind the Story (Part 1)

05 Monday Aug 2019

Posted by Jordan Abel in Corporate Policy, Education Issues, General Motors

≈ Leave a comment

[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.

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. (if you want to read all five entries as an ebook, download 2019Q4 GM EV-1 Story Behind the Story Booklet.)

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.

#242 Primer Cha 7: Eliminating Incentive to Pillage

25 Saturday Mar 2017

Posted by Jordan Abel in Back Asswards Thinking, Corporate Policy, Gov't Policy, Innovative Thinking: Ideas and Products, Societal Issues

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First-time readers, the dialogue in 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 Revenge Revolution and author, Entry #1. List and general description of entries to date. Annual assessment if Revolution plausible.

Note: most characters appear in a number of entries, with many entries building on previous conversations. Profile of characters. You’ll catch on quickly. Thanks for your time and interest…and comments.

Scene: Gelly, Jordan’s assistant, has been editing and updating a primer Jordan wrote about 2011. Section starts Entry #235. (Primer will be available as PDF in another few chapters. Then the primer download will be updated regularly.)

Gelly: “Jordan, you’ve done it again?”

Jordan: “Done what, again?”

Gelly: “Made me scratch my head. I just never thought about economic development as an incentive to pillage. I mean isn’t economic development supposed to create jobs and make everyone wealthier?”

Jordan: “That’s the political line. OK, some people do benefit.”

Turtleneck Gelly: “You mean the executives of the company that’s relocating. But I never though about the cost of these relocations to the people where the company left and even…”

Jordan: “…even to the taxpayers of the town where the company is relocating.”

Gelly: “If you add up all the costs, the only winners seem to be the company executives.”

Chapter 7: Eliminating the Incentive to Pillage. Some might view decisions to shutdown facilities and/or relocate manufacturing plants or distribution centers as capitalism at its best. Others view such decisions as capitalism at its worst – an incentive to pillage with no repercussions.

Senior executives and shareholders of a company can benefit financially from these actions. Senior managers at companies often have a major portion of compensation in stock – 75.0% of total compensation in stock is not unusual.

Stock price, and therefore executive wealth, is highly influenced by short-term earnings. If you do not believe so, look at the effect on the stock price if a company does not meet the quarterly earnings forecast.

While having compensation in stock rather than cash, especially with a claw-back provision (right to “recall” a portion of compensation at a later date) if long-term earnings do not pan out, is a major step forward, executives of the company still have a major incentive to take actions that may be contrary to the best interests of US society.

Many executives believe that by relocating operations, the company will lower its costs and in turn increase stock. The theory of this action – and I emphasize theory – is the wealth of those executives implementing job cuts will increase the company’s stock price. Screwed in this equation are those people whose jobs are eliminated and who helped build the company and create its value.

This perverse incentive to screw the very people who helped create the company’s value is either not understood or ignored by the public and politicians who make the tax laws. Management of these companies is giving away most of the store – in many cases transferring future wealth creation outside the US – and being rewarded for the transfer. It is as if the country where the new manufacturing plant is located offered current management a kickback – in effect robbing the US – and the US taxpayers are rewarding the management for accepting it.

The same perverse situation occurs when plants relocate elsewhere in the United States. State and local governments offer tax incentives to have plants relocate from one state to another.

Who pays for these relocations? Taxpayers at both locations. The people where the plant was previously located now have a lower tax base. The people where the plant is now located have higher spending to support the facility but without the benefit of taxes from the new company, which usually does not pay its fair share since it was recruited by waiving taxes.

If proper financial analysis were completed, my belief is it would be less costly to society and especially taxpayers, if the company revamped the existing facility rather than relocating to a new facility in another state. While some might view this perspective as socialism, the view is actually one that ensures America remains a vibrant country for generations.

Benefits of Using Existing Manufacturing Facilities The benefits of using existing manufacturing facilities rather than developing new or “greenfield” facilities are significant. Some benefits of existing over greenfield include:

Infrastructure in place and ready. Many new facilities require roads, sewers, high–voltage electric lines, schools and other expensive infrastructure. Existing facilities may need some upgrades but the cost of upgrades will be less than: (i) building new and (ii) leaving the existing infrastructure in place to be repaired or sit idle and decay. Creating new infrastructure is double taxation on US citizens – once to build the existing infrastructure and again for the new infrastructure.
Workers already trained. While some retraining may be needed, skills of existing workers can be utilized to develop and manufacture products of the same genre as currently produced. Why train someone in auto production in a different part of the US when a large segment of the population in another area is already trained?
Lower cost to begin production. When all costs are considered – not just labor costs per hour – revamping and continuing to utilize the existing facilities and workforce are less costly to society than starting new. Even if a new building is required in the existing location, there are no additional costs for infrastructure or training.
Faster turnaround from product concept to production. Skills acquired over many years cannot be taught in a short period, no matter how proficient the trainers. Even if the current employees are not trained in the latest technology, combining existing skills with those familiar with the latest technology will shorten the development time for new products.
Avoiding costs for family relocation. Relocating workers and families includes both the direct cost of relocation and the indirect social cost. While some workers will view the relocation as an opportunity to move beyond the current environment, many of those who want the adventure have already moved. Forcing families to choose between retaining a job and relocation can have a major social cost. The more dominant the company in the area, the higher the social cost of closing the facility and relocating to another area.

An Occasional Exception to the Rule What if the existing infrastructure and local infrastructure is inadequate to support the company? In these circumstances, can the relocation be justified?

Yes, if a true case can be made. A few years ago two companies relocated North American HQ from Augusta, GA to Charlotte, NC. – Electrolux, Husqvarna. While Augusta, a town of about 200,000, had supported these firms and such other companies as EZ-Go and Club Car (both golf cart manufacturers), Electrolux and Husqvarna may have needed a larger community with a more diverse population, stronger academic institutions, international banks, international law firms and access to an international airport.

“Economic Development” Uneconomic. Do most relocations add jobs to the US market? No. Are there usually incentives to entice the companies to relocate? Yes.

Do these relocations create a net gain to US society? No. Owners of the business that’s relocating give taxpayers the finger twice. Taxpayers where the plant was located originally lose a tax base. Taxpayers in the new location pay additional the relocation incentives. Even for Electrolux and Husqvarna, there is likely a net loss to society rather than a net gain.

I realize this rationale may seem counter intuitive, especially to those involved with what is often labeled as “economic development.” However, I am waiting for someone to convince me with a rationale argument that these moves make economic sense.

Yes, the moves make sense for the companies. But the companies are part of a whole. Until we begin considering the impact of such moves on the system – all society – we will be double taxing ourselves with no net gain to the country’s wealth. Please show me why I am wrong. (BTW, please read Chapter 8 before forwarding your ideas. Thanks.)

#216 Trade Agreements Cost Jobs! But Why? (Part 3)

04 Sunday Sep 2016

Posted by Jordan Abel in Causes of the Revolution, Corporate Policy, Economics, Gov't Policy

≈ Leave a comment

First-time 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 Revenge Revolution and author, Entry #1. List and general description of entries to date. Annual assessment whether Revolution plausible.

Scene: Jordan’s Office, on phone with nephew of long-time friend. Nephew is taking advanced economics course and been assigned paper to determine if trade agreements cost US workers jobs. Conversation begins Entry #214.

Jordan: “Billy, I’ve got my coffee refilled. Back to the question, ‘Do trade agreements cause job losses for US workers?’ For now focus on manufacturing jobs.”

Billy: “I suppose it depends on what expertise each country has.”

Jordan: “Give me an example.”

Billy: “If a country has much lower labor cost, then high labor-content jobs might move to the new country…assuming the skills were there.”

Jordan: “OK, I’ll buy that argument. What about jobs where labor content is low?”

Billy: “Then there’s no reason any jobs should be lost. Why would you move to a different country if labor content in the US plant is low? That makes no sense.”

Jordan: “What about moving jobs if the labor cost in the new country is lower but the delivery times are longer and other logistics issues are more complicated?”

Billy: “That might make sense. If I were the US company, I’d have to decide if responding to customer orders more quickly was more important than savings a few bucks. I suppose if you’re making Popsicle sticks that are all the same, cost per stick becomes more important. However, I think for many products turnaround time and responding the customer requests are more important than a few dollars saved.”

Jordan: “You mean if you were selling products like clothing, furniture, cars? Stuff like that?”

Billy: “For clothing it’s probably OK to source overseas generic items like T-shirts, underwear and some other articles that rarely change – maybe some standard jeans, for example. But for products that are more subject to fashion changes, I’d want to have assembly as close to the marketplace as I could.”

Jordan: “What about automotive products — cars and trucks?”

Billy: “If I ran an auto company, I’d want at least some cars and trucks assembled in the US.”

Jordan: “Seems as if the most of the foreign auto companies agree with you.”

Billy: “Never thought about how many foreign auto companies have assembly plants in the US. Let’s see, Toyota, Nissan, Honda, BMW, and Hyundai…even Mercedes. I’d also want key components assembled in the US. Look what happened to the Japanese auto companies after the earthquake and tsunami in Japan in what 2011 or 2012. The Japanese auto companies had to cut way back on production until they could find another supplier before resuming production. Then they had to air freight some of the parts to keep the assembly lines operating. Talk about expensive.”

Jordan: “What else do you think is different about auto plants…in fact most manufacturing plants…than 25-30 years ago, and especially 40-50 years ago?”

Billy: “Not sure what you mean. I wasn’t around then.”

Jordan: “Here’s another way to think about it. Do you know how to use a typewriter?”

Billy: “I know how to type…but you know what? I don’t think I’ve ever seen a typewriter, other than photographs in books and in old movies.”

Jordan: “Ever seen a picture of an old auto assembly plant?”

Billy: “Yeah, lots of people working on an assembly line.”

Jordan: “Have you seen a picture of a modern auto assembly plant?”

Billy: “Seems as if no one is around. Most everything is assembled by a robot. The few people who are around seem to be watching the robots.”

Jordan: “Now do you understand my question about what’s different from 25-30 years ago?”

Billy: “You mean much of the labor content in putting together cars and trucks has disappeared.”

Jordan: “With that in mind, now what do you think about the argument by some politicians that countries with which we have trade agreements have stolen many US jobs?”

Billy: “The jobs in automotive…and probably most manufacturing jobs…were not lost to Mexico or China or wherever…but lost to automation.”

Jordan: “Claiming jobs were lost because of trade agreements makes for good 10-second sound bites. And, yes, some jobs were lost. But the decline in manufacturing jobs and the decline in jobs requiring say high-school or some college have been lost to automation, not trade agreements.”

Billy: “My paper needs to explain that while some jobs in certain industries can be lost due to trade agreements, many of the job losses, in fact possibly most of the job losses in manufacturing, are due to adaptation and implementation of technology.”

Jordan: “So far we’ve talked about manufacturing jobs. What about the service sector?”

Billy: “You know, I don’t think I’ve heard a politician talk about whether trade agreements affect jobs in the service sector. From what I’ve studied so far in economics, the service section is a much greater percentage of GDP than manufacturing. In terms of employment service sector accounts for about 70.0% of all jobs.”

Jordan: “Good guess. It’s a bit higher — 75.0%+.”

Billy: “Then why don’t politicians talk about the service sector? Why just manufacturing jobs when they talk trade agreements?”

Jordan: “Because many service-sector jobs…not all but many…cannot be exported.”

Billy: “So politicians focus on the sound bite, not the substance.”

Jordan: “I’m not discounting the importance of manufacturing jobs. I’m a big believer of a very strong manufacturing sector. But the fact is, service jobs dominate the economy. If you want to stay in a hotel in Manhattan, you cannot export your stay to a hotel in Cancun. The hotel, staff, food service all have to be in Manhattan.”

Billy: “What about the effect of automation on service sector jobs, like what happened to jobs in manufacturing?”

Jordan: “Great question, Billy. We’ll talk about that next. I think many people are in for a big surprise.”

(Continued)

#185 One Person Can Make a Difference (Part #9)

17 Wednesday Feb 2016

Posted by Jordan Abel in Corporate Policy, General Motors, Personal Stories, Societal Issues

≈ Leave a comment

Scene: Jordan still in Charlotte and on limited work schedule while recovering from prostate surgery. Jordan calls his office and talks to Gelly, his assistant. Earlier Jordan and POTUS began conversation about rebuilding US manufacturing and the middle class. Series starts #177; conversation with POTUS, #179.

Jordan: “Gelly, could you do me a favor, please?”

Gelly: “Yes, but only because you are so helpless.”

Jordan: “C’mon. I’m not helpless. I’m just a little slow getting around that’s all.”

Gelly: “I must say. Your recovery seems to be progressing more quickly than I anticipated. You pleased with progress?”

Jordan: “I’m pleased with progress and so is the doctor. I just need to make sure my expectations don’t race too far ahead.”

Gelly: “OK, so what do you want me to do?”

Jordan: “POTUS called me at home. By the way, did you tell him about my surgery?”

Gelly: “I’ll never tell. And he certainly doesn’t need me to tell him what’s going on in your life. Isn’t that what those agencies are for?”

Jordan: “We had a nice chat about the technology used in surgery.”

Gelly: “Only guys would talk about the machines and software used to cut them open and remove parts. OK, I’ll stop and listen.”

Jordan: “What we never got around to was a story I had promised to tell him. He said to call when I was feeling better.”

Gelly: “So, now you’re feeling better and want me to find out a good time for him to chat, right?”

Jordan: “Yes, please. Earlier in the day is better for me. Thanks.”

Gelly: “I’ll make sure Little Jordan is not in his jammies when POTUS calls.”

Jordan: “You’re tough, Gelly.”

Gelly: “I harass you because I like you Jordan. When I stop harassing you is when you should be concerned.”

Next day Jordan receives call at home.

Jordan: “Jordan Abel, may I help you.”

POTUS: “He doesn’t get it. Relax dude.”

Jordan: “Alright, Mr. President, I’ll relax. I’m just so programmed to answer the phone a certain way.”

POTUS: “I hear you. Gelly said you were ready to tell me the second story, which is about how one person can make a difference. If you have time, I’m ready. Is this another Buick story?”

Jordan: “Yes. Here’s the background. Buick spends lots of money modernizing an old assembly plant. Production then resumes but quality lags.”

POTUS: “How bad was it?”

Jordan: “Second worst plant in North America.”

POTUS: “You mean 2^nd worst for Buick?”

Jordan: “No, 2^nd worst of any assembly plant in the industry. That’s all domestic plants and all foreign-owned plants.”

POTUS: “Quality was that bad after all the money was spent modernizing the plant?”

Jordan: “Yes.”

POTUS: “Big problem.”

Jordan: “The main character in this story works in the Buick service department. Mid-level salary guy but his family is…”

POTUS: “…Let me guess. This is Flint and he’s the first of his family not working on the assembly line? How’d I do?”

Jordan: “Dead on. The family is 3^rd or 4^th generation hourly worker and 2^nd generation UAW.”

POTUS: “What happens next?”

Jordan: “He comes to my office and borrows a report with all kinds of quality data and consumer rankings. Like a JD Power report but it’s developed internally and has much more detail.”

POTUS: “Is he supposed to have the info in the report?”

Jordan: “No reason he can’t. But unbeknownst to me and any other department head, he takes the report and meets with the UAW.”

POTUS: “The same UAW guy you talked to. You know, the one whose son you mentored? Wasn’t he president of the UAW local?”

Jordan: “Probably but the same guy but I’m not 100% sure. Whoever he talked to, he reminded them his family had worked in the plant since Buick was founded in 1903. He also told them the ratings were not Buick’s but from customers. Finally, he told them that if quality did not improve, the company was likely to close the plant and move production elsewhere.”

POTUS: “Close it, even though they’d spent all the money modernizing the plant?”

Jordan: “His analysis was spot on.”

POTUS: “What happened?”

Jordan: “I’ll tell you the results. How the idea was communicated with the rank-and-file, I have no idea…nor frankly, do I want to know. But what happened is quality started to improve quickly.”

POTUS: “Then what?”

Jordan: “Within 18 months, the quality of the plant went from 2^nd worst in the industry to 2^nd best…and within a whisker of being first.”

POTUS: “in just 18 months? Really?”

Jordan: “Really.”

POTUS: “This guy get some kind of award?”

Jordan: “No one even knew about it or talked about until a few years later. Management knew that quality turned around but no other exec I talked to knew exactly what happened.”

POTUS: “So one guy did all this on his own?”

Jordan: “One guy started the ball rolling. But when you step back and think about, this guy had more credibility with the UAW than the entire management team. They trusted him. He wasn’t a suit. He wasn’t out for some political gain…or some promotion. In fact, he risked getting demoted for going outside the system. But he didn’t worry about personal consequences. And he had credibility because of his family history.”

POTUS: “Quite a story. I keep shaking my head. Just one guy who did this on his own. Wow.”

Jordan: “One guy. No committee. No incentive other than trying to do the right thing and save jobs for his family and other members of the community. And he’s not from central casting. He’s overweight and low-key — in some ways reminds you of a Guernsey cow. I mean that in a positive way…but you get the idea.”

POTUS: “Interesting profile for guy that made such an impact. Did GM keep the plant open?”

Jordan: “The plant stayed open for another probably 20 years. They shut it as part of the bankruptcy, and then demolished it. 100 years of automotive assembly history turned into a pile of rubble.”

POTUS: “As a country we’ve got to change. Stories like this one make me inspired by the effort of one individual. The story also makes me sick because 100 years of effort by a lot of people got tuned into a heap.”

Jordan: “I still get upset with the ending to the story.”

POTUS: “What are we going to do, Jordan, to help rebuild US manufacturing? And get those middle class jobs back to Flint and many other locations.”

Jordan: “You want to talk now or later?”

POTUS: “I’ve got to run. And you probably need some rest. Let’s chat some more soon.”

#183 Are Wall Street Traders Really Traitors? (Part #7)

03 Wednesday Feb 2016

Posted by Jordan Abel in Corporate Policy, Gov't Policy, Personal Stories, Possible Solutions, Societal Issues

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Scene: Jordan and POTUS continue conversation about rebuilding US manufacturing and the middle class. Series starts #177; conversation with POTUS, #179.

POTUS: “Jordan, you’re taking a tough stand. Aren’t you making it harder for manufacturing companies? Won’t companies just leave…or just start the company outside the US and not worry about regulations?”

Jordan: “Might be making it a little more difficult. But a counter is having tax breaks for US made products.”

POTUS: “You talking about tariffs for imports? We’ve got all these trade agreements between the US and other countries.”

Jordan: “What I’m suggesting is goods manufactured in the US – manufactured, not just assembled in the US – get some sort of tax relief. The goal is to make it less attractive for executives to locate outside the US.”

POTUS: “What about companies relocating in the States? Should there be some sort of penalty?”

Jordan: “Like banning Charlotte from recruiting companies from New York, Ohio, Michigan and elsewhere. Like I said earlier, recruiting from another state seems more like stealing to me.”

POTUS: “Couldn’t we allow states still to recruit but say ban any tax breaks or other type of incentives? Another approach would be to levy a tax on the company for relocating.”

Jordan: “Some type of tax or penalty seems reasonable. At a minimum companies should pay for displaced workers and the loss in tax base in the community they’re bailing out of.”

POTUS: “What do we do about the influence of Wall Street? The Street seems to put lots of pressure on companies to meet quarterly earnings targets.”

Jordan: “I view the so-called pressure as an excuse by CEO’s to cut expenses and mask poor management. Some tweaks to operations are always necessary but the company is either being run fundamentally correctly or not.”

POTUS: “If the company is being run properly, any earnings shortfall in one or two quarters should work itself out. Is that what you’re saying?”

Jordan: “Exactly what I’m saying. Sophisticated investors understand that. Warren Buffett is a perfect example. Did he build the value of Berkshire Hathaway by focusing on quarterly earnings?”

POTUS: “No.”

Jordan: “So there’s the lesson for investors. Be patient. We’ve allowed the traders on Wall Street to gain the upper hand. As a result management start to focus on the wrong issues.”

POTUS: “Are we letting the tail wag the dog, as it were?”

Jordan: “We…societal we…are letting Wall Street traders have too much influence on the way businesses are run. The time horizon for traders is minutes, not months or years. The political right would be apoplectic if they ever heard me say this, but the traders are more like traitors. They really don’t care about this country.”

POTUS: “C’mon. Wall Street traders are traitors? How can you say that?”

Jordan: “Because the traders have no loyalty to the company or the country. They do not care if a company goes under, the company moves production off shore and ruins a town. The traders care about one thing – making money on every trade.”

POTUS: “Keep talking.”

Jordan: “Think about it. Pension funds and individuals…but mostly pension funds…have large securities portfolios. What are the pension funds supposed to do?”

POTUS: “Protect the money of employees, current and former.”

Jordan: “Do you think the employees believe its smart business to ship jobs overseas and eliminate their own job?”

POTUS: “That seems like a silly question. Of course not.”

Jordan: “Well, CEO’s are doing exactly that. Why? To boost quarterly earnings so some a-hole doesn’t start trying to drive down the stock price and encourage a hedge fund to begin a takeover. I sound like a broken record, but do you think for a microsecond the traders care about the company?”

POTUS: “I hear you Jordan.”

Jordan: “Who does care about the company, or at least should care about the company?”

POTUS: “Employees, the pension fund…”

Jordan: “…and maybe some of the executives. Then why do we have all these laws that permit manipulation of stock prices? Even worse is allowing investors to raid companies.”

POTUS: “How do you propose we stop that?”

Jordan: “Mr. President, I don’t know. But what I do know is the American worker is getting screwed and wealth is being transferred from the worker to a small group of investors and some countries outside the US.”

POTUS: “What about unions? Wall Street and the execs are not the only ones playing this gig.”

Jordan: “I’m not naïve. Some unions were a problem 15-20 years ago. But they’re not now. And I contend the unions never were as big a problem as a lot of people claimed.”

POTUS: “I’ve heard stories where unions drove companies out of town.”

Jordan: “I have to. And there are likely a few examples. But people forget, unions are made up of people. People with kids and families. And people with feelings.”

POTUS: “Some people will claim you sound like some screaming liberal.”

Jordan: “For some issues, I probably am. I’ll give you an example of why I feel this way. Years ago, when I was at Buick, our department ‘hosted’ students during their co-op work period from Kettering University – it was General Motors Institute then. One session the son of the president of the UAW local was working in our department. A short time after the co-op work session ended, some of us attended a meeting with the UAW. The president and I chatted a while and then joined the rest of the group. I got all kinds of semi-nasty questions about why I was talking to the president.”

POTUS: “How’d you respond?”

Jordan: “I told ’em I was asking how his son was doing in school. And that the president thanked me for taking his son under my wing.”

POTUS: “You think that happens very often?”

Jordan: “Probably not, but it should. We were a couple of guys trying to help a young man get an education. What’s so terrible about that?”

POTUS: “Sounds as if both of you were trying to do the right thing. You have another example?”

Jordan: “Yes.”

POTUS: Remember the second story, please. I’ve got to head to yet another meeting.”

(Continued)

#182 Company Relocations. Economic Development or Stealing? (Part #6)

30 Saturday Jan 2016

Posted by Jordan Abel in Causes of the Revolution, Corporate Policy, Gov't Policy, Possible Solutions, Societal Issues

≈ 2 Comments

Scene: Jordan and POTUS continue conversation about rebuilding US manufacturing. Starts entry #179.

POTUS: “As you were saying, GM technically went bankrupt in the 1990’s but never declared it. How so?”

Jordan: “Remember a company called GMAC?”

POTUS: “Wasn’t GMAC the finance arm of GM?”

Jordan: “Yes. To help beef up the cash position and avoid being forced to declare bankruptcy, GM moved money from GMAC to the operating company.”

POTUS: “Isn’t that illegal?”

Jordan: “Probably so but the financial guys covered their tracks very well. Part of the problem was caused by a number of accounting changes in the 1980’s during Squeaky’s reign. The accounting changes masked some earnings shortfalls.”

POTUS: “Pardon me for interrupting but whoever gave Roger Smith the name Squeaky deserves a drink.”

Jordan: “And I’ll buy. Anyway, with all the accounting changes, it became very difficult to determine where there were real performance problems. I’m not sure the finance guys really knew what was happening month-to-month. Sales and market share kept dropping and the cash was no longer coming in…and they essentially ran out of cash in 1992.”

POTUS: “Without getting into more detail about GM, what policies should we consider to encourage manufacturers to stay in the US, or return to the US if they’ve left?”

Jordan: “One issue that has always bothered me is the ability of companies to pick up and relocate with little or no consequence.”

POTUS: “Isn’t that a fundamental of capitalism?”

Jordan: “It’s very one-sided. Why should community and the employees make a commitment when the other side, the company, does not have to make a commitment?”

POTUS: “Are you saying the current system is unfair?”

Jordan: “Grossly unfair. And there are a couple of reasons why. First, the community and employees are often forced to make a financial sacrifice if the company threatens to relocate. Then the company can still pick up and leave.”

POTUS: “But, the community and employees have benefitted. The company has paid taxes and the employees have jobs. What’s not fair?”

Jordan: “The company has no downside risk. Heads I win, tails you lose.”

POTUS: “What if the company doesn’t sell product and make any money?”

Jordan: “Decisions that affect competitiveness are made by executive staff, not the employees or the town’s taxpayers. Failure to develop and introduce new product is a management issue, not an employee issue.”

POTUS: “What else?”

Jordan: “Laws in this country allow a company to bleed a community dry, and then relocate. As part of the relocation plan, the company demands prospective towns provide incentives. It’s a shakedown.”

POTUS: “Many people consider that economic development.”

Jordan: “I consider it stealing. Its only economic development in the eyes of the city where the company relocates. And most of those cities are too lazy to develop businesses on their own.”

POTUS: “Jordan, that’s pretty harsh.”

Jordan: “Pardon me, Mr. President, but to call incentivizing a company to relocate ‘economic development’ is BS. The only people who gain in the deal are the executives of the company…and probably a few elected officials. The overall economy loses.”

POTUS: “Tell me why you think the economy is worse off.”

Jordan: “Employees and the community where the plant was located now have a lower tax base, and very likely a higher welfare roll. They got screwed. People where the company relocated have to absorb the cost of the incentives. They might not know it but they’ve been screwed. Simple question, ‘Did employees’ wages increase?'”

POTUS: “No. Wages probably decreased except for the executives. Shareholders might benefit. I see your point.”

Jordan: “When you cut through the layers, relocation is another way to redistribute wealth…but disguised as economic development.”

POTUS: “How do we fix the problem, assuming we can convince people it is a problem?”

Jordan: “Convincing people should not be difficult. Start talking to people in cities where companies have left and see if they think its a problem. And ask them who came out ahead.”

POTUS: “You mean people in cities like Flint, Buffalo, Cleveland…and a bunch of other places.”

Jordan: “You got it. The solution to such relocations…at least a partial solution? Make the relocation costly…and difficult.”

POTUS: “Can a plan like that work?”

Jordan: “Look around Europe. Go no farther than Germany if you want to see if such an approach works.”

POTUS: “Lots of things work in Europe that don’t work in the US. National health care and gun control, for example.”

Jordan: “Attitudes in the US have changed since the Revenge Revolution. Now seems to be a good time to rethink whether we allow companies to pick up and move with no consequence.”

POTUS: “What if companies just declare bankruptcy and restart somewhere else? And what about the unions? Don’t they have some responsibility to keep a company from moving?”

(Continued)

#181 Flint, MI – Squeaky’s Sacrificial Lamb Kills the Middle Class (Part #5)

23 Saturday Jan 2016

Posted by Jordan Abel in Corporate Policy, General Motors, Personal Stories, Societal Issues

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Scene: Jordan’s office a few days after POTUS’ first call re manufacturing and rebuilding the middle class.

Gelly: “Jordan, POTUS is on the line again.”

Jordan: “Hello, Mr. President.”

POTUS: “Hello, Jordan. Have a few minutes? I want to continue our conversation about rebuilding US manufacturing.”

Jordan: “My calendar is clear.”

POTUS: “Good. I understand the need to rebuild manufacturing and the middle class. But these are abstract concepts. If we are going to sell the idea, we need to personalize the story. Make it so people can relate to it and understand what’s happened. You have an example or two in mind?”

Jordan: “You mean like what’s happened to Flint, Michigan?”

POTUS: “Wow, what a tragedy. They first lost all the manufacturing jobs, then they get hit with lead in their drinking water. Given your background, tell me what you think really happened in Flint. It went from a thriving community to being in the dumper. Why?”

Jordan: “The very short answer is Roger Smith. He’s not the only reason but if you’re looking for the primary cause and way to personalize the story, look no farther than Roger Smith.”

POTUS: “Not sure who you mean.”

Jordan: “Ever hear about or see the movie, ‘Roger & Me’?”

POTUS: “Wasn’t that one of Michael Moore’s movies? He’s had some interesting ones. I’ve seen snippets of ‘Roger & Me’ but never the whole movie. What’s it about?”

Jordan: “About how Roger Smith, as chairman of General Motors, destroyed Flint.”

POTUS: “You think that’s true or was that just some Hollywood make-believe?”

Jordan: “My perspective is a bit different from Michael Moore’s. However, his conclusion is correct. Smith destroyed Flint. Flint became a sacrificial lamb.”

POTUS: “Seems like you’re taking an extreme position. Flint was a sacrificial lamb for what?”

Jordan: “Smith was chairman of GM throughout the 1980’s. He was also feared within the company, despite being known as ‘Squeaky’ to some insiders.”

POTUS: “Was he that bad? Was Squeaky…I love that name…a real ‘my way or highway’ kind of CEO?”

Jordan: “More like ‘my way or the guillotine’ kind of CEO. He was ruthless.”

POTUS: “So what made Flint different from other GM towns in Michigan? There’s what Lansing, Pontiac, even Detroit. What’s so different?”

Jordan: “Because Flint is where the UAW forced GM to recognize the union.”

POTUS: “But didn’t GM start in Flint with Buick? Flint was GM’s hometown. Who was the guy that started GM.? Wasn’t Sloan. What was the guy’s name?”

Jordan: “William C. Durant, aka Billy Durant.”

POTUS: “That’s the guy. If GM started in Flint, then what’s the big deal about the union?”

Jordan: “Roger hated the UAW. He never forgave the rank-and-file or the people of Flint for participating in the sit-down strike of 1936.”

POTUS: “You’re really into GM history aren’t you? The strike was 45, almost 50 years before Smith became CEO. The strike was ancient history.”

Jordan: “Not to Roger, or many other people. You know Gelly, right?”

POTUS: “I talk to her when I call. Very pleasant by the way. I’ve never met her in person. Why?”

Jordan: “Her grandfather participated in the sit-down strike at Fisher #1 in Flint. She said he talked about it until the day he died. She’s 3^rd or 4^th generation auto family. Or at least she was until Smith’s reign of terror.”

POTUS: “Not to sound like an attorney for the defense, but did you ever see any memos or plans to destroy Flint?”

Jordan: “You know better than that counselor. My conclusion is based on his patterns of behavior in other situations. Also, I also looked at the number of facilities in Flint that were shut down in Smith’s reign compared to other locations. Disproportionately high.”

POTUS: “Maybe true but wasn’t GM losing share during the 1980’s? As I recall, GM was losing ground and imports were gaining ground.”

Jordan: “Except Flint’s hometown car, Buick, actually held its own during the 1980’s…and set a sales record.”

POTUS: “I’m certain you had no influence on that. Look, I can’t argue with your logic. You saw the company from the inside. You also analyze situations differently than most people. That’s why I call you. One question, ‘If Smith was so bad, why didn’t GM go bankrupt in the 1990’s? They didn’t go BK until what 2008-2009?”

Jordan: “They did go BK in the 1990’s…but not officially. I’ll tell you why.”

(Continued)

#179 POTUS Calls re Rebuilding US Manufacturing Base, Middle Class (Part #3)

10 Sunday Jan 2016

Posted by Jordan Abel in Corporate Policy, Economics, Education Issues, Gov't Policy, Possible Solutions, Societal Issues

≈ 8 Comments

Scene: Jordan’s office. Regular work day.

Gelly (Jordan’s assistant): “Jordan, sorry to interrupt you but I think you might want to take this call.”

Jordan: “Anyone important?”

Gelly: “Try POTUS. He’s calling you personally.”

Jordan: “Oops. Thanks. (Picking up phone.) Good morning, Mr. President.”

POTUS: “Morning, Jordan. Hope all is well with you. Have a nice holiday break?”

Jordan: “Yes, thank you. Had a chance to visit my wife’s family.”

POTUS: “That’s what I understand. And don’t ask how I know.”

Jordan: “I know better than to ask.”

POTUS: “Calling to see what you learned on the trip. I can’t really get out and visit with people like you can. What’s up out in the heartland?”

Jordan: “One of our stops…really one of my stops…was a truck stop in Central Illinois. Had an interesting chat with a fellow diner.”

POTUS: “Was it productive or the usual politics?”

Jordan: “Very insightful. The guy…his nickname is Doughman…talked about companies moving manufacturing jobs out of the US and relocating in Mexico or China. He just could not understand why we would want to gut the middle class in this country by shipping jobs elsewhere.”

POTUS: “What’d you tell him?”

Jordan: “I could not tell him much he didn’t already know.”

POTUS: “You mean like crazy tax laws that benefit CEO’s and other executives by moving jobs outside the US? And those laws really transfer wealth of the middle class to the executives and to the other country.”

Jordan: “Tax laws are part of it. So are the negative perceptions of unions and a few other issues. But…”

POTUS: “…but what? Have you got a solution?”

Jordan: “The solution, at least to me, seems to be more education about why manufacturing in the US can be as profitable, if not more profitable, than manufacturing overseas.”

POTUS: “What about fixing the tax laws, increasing training for workers…ideas like that.”

Jordan: “Tax laws are out of whack and need to get fixed. But the real problem, I think, is American companies do not understand total costs…or maybe don’t know how to calculate total costs. As a result, they focus on individual components…like wages…and miss the big picture.”

POTUS: “Sort of like some of these yahoo politicians focusing on one part of the problem in the Middle East and pretending the related problems don’t matter. So, OK Swami, what are we going to do about rebuilding the manufacturing base…and rebuilding the middle class?”

Jordan: “First step is to find some examples of companies that have expanded US-based operations rather than shipping jobs overseas. We can have them talk about what issues they considered in the decision.”

POTUS: “OK, then what?”

Jordan: “We need to reach out to other CEO’s and CFO’s (chief financial officers) and educate them why it can be cheaper to manufacture in the US. The conversation needs to focus on all costs, not just labor costs.”

POTUS: “That’s a big job. Who are going to get to be the spokesperson? Might need several people.”

Jordan: “The most credible would be CEO’s and CFO’s of companies that have either expanded in the US or brought operations back.”

POTUS: “What about some consumers? Some folks really prefer to buy US-made product.”

Jordan: “Good idea. And maybe you can use the bully pulpit to help persuade some companies to focus more on US manufacturing.”

POTUS: “You mean like Wal-Mart. Sam Walton must be turning over in his grave. Wal-Mart went from US-made products to “Made in China” for just about everything.”

Jordan: “Wal-Mart might be more receptive than we think about returning to US-made products. They’re struggling.”

POTUS: “Any bully pulpit effort needs to be very quiet and behind the scenes. Can’t give countries the impression I don’t support free trade.”

Jordan: “The naysayers are going to argue that China offers lower costs and therefore that helps the middle class.”

POTUS: “You sound like some politician.”

Jordan: “Should I wave my arms and raise my voice as well? Actually the argument might be true for some items. But when the people who used to buy your goods are out of a job and have no money, what does a lower price do for them? They still can’t afford it.”

POTUS: “Hasn’t much of the price decline for a lot of products been due to technology and not labor cost per se?”

Jordan: “Bingo. And that’s the core argument with the CEO’s and CFO’s. Cheap labor doesn’t matter for many products. Technology has reduced labor content to a much smaller percent of total cost.”

POTUS: “Not sure this is the right example, but your old stomping ground – the auto industry – has reduced labor costs, right?”

Jordan: “Yes. Over the last say 25 years, labor hours per car have decreased dramatically.”

POTUS: “Just thought of another point we need to emphasize. If labor costs in the US are so high, why have so many of the foreign car manufacturers set up assembly plants here?”

Jordan: “Duh. Think those companies might understand the value of manufacturing in the US better than many US companies do?”

POTUS: “OK, so we’ve identified a problem – the middle class is shrinking; and we’ve identified a partial solution – rebuild US manufacturing base; and we’ve identified a way to get started – educating CEO’s and CFO’s about how to calculate total cost….”

Jordan: “…and educating the public.”

POTUS: “Jordan, I buy the argument and the base solution. We’ve had the Revenge Revolution, which should make people more receptive. Now, how do we really get started?”

Jordan: “Want to talk now?”

POTUS: “Can’t. Have a cabinet meeting. I’ll get back to you.”

(Continued)

usrevolution5

~ USA Headed for a 5th Revolution! Why?

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#179 POTUS Calls re Rebuilding US Manufacturing Base, Middle Class (Part #3)