The Insightful Trader

GM’s Decline Started When LBJ Was President

by on Apr.20, 2009, under Editorials

   We don’t know about you, but we are still trying to adjust, emotionally speaking, to GM’s probable bankruptcy. It’s a shock but not a surprise, even though GM has been ripe for the plucking for decades — and they have always been quite public about it. Ever since 1964, in fact. 

   That year Ralph Nader worked consulted for  the US Department of Labor and for a US Senate subcommittee, exposing the hazardous designs of many US built cars. Automakers claimed that driver errors caused that era’s high accident fatality rates, but Nader proved them wrong. In 1965 Nader published Unsafe at Any Speed, which made the his name and changed the country’s thinking — and its laws — regarding consumer product safety.

    GM’s reaction told us all we needed to know about the company’s arrogance and inability to learn from its mistakes. Did the company invite Nader to Detroit and ask him how to improve its products and protect its customers’ lives? No, indeed. In fact the company hired detectives to trail Nader in the hopes of digging up dirt on him. Nader sued to stop the harassment, and GM Chairman James Roche admitted to the surveillance on national TV in 1966. Since that day the Big Three have done everything they could to fight government regulations on safety, pollution, and fuel economy. The Big Three held onto the right to make bad cars and lost the war for survival.

    Contrast this stance with the way Johnson & Johnson (JNJ) handled its problem with Tylenol in 1982, the textbook example in corporate crisis management. When a vandal contaminated at least several bottles of Tylenol with cyanide, JNJ chairman James Burke convened a company task force to decide how to protect customers and also save the product. Unlike GM, JNJ put its customers first. They  recalled and destroyed existing store inventories of Tylenol nationwide at a cost of tens of millions of dollars and actually took the product off the market, even though Tylenol was one of JNJ’s most important moneymakers. Only months later, after all the facts were in, did JNJ relaunch Tylenol in new tamper resistant bottles. The relaunch was a huge success.  Surveys continue to rank JNJ among the nation’s most admired companies.

    While Detroit’s Big Three still owned the US car markets through the 1970s, we suspect that GM’s reaction to Nader’s work told foreign carmakers that GM could be had. The first Toyotas imported into the US in 1957 flopped miserably, as the China Post recounts, but the Japanese learned from their experience:

     “Used as taxis on Tokyo’s bumpy post-war roads, the Toyopet was uncomfortable, plain, and had an engine so weak it that ‘loud, threatening noises radiated  from under the hood’ when it was driven up steep hills, Toyota admitted in a retrospective.

      “Toyota had sold just 2,314 Toyopets when it was replaced in 1965 with the Corona, which was designed for American roads and drivers.

     ” The Corona was a hit, pushing Toyota into the number two spot for import cars by 1969. But import sales comprised just 11 percent of the U.S. market and      remained dominated by Volkswagen, which sold nearly five times as many cars as Toyota…”

   The oil shocks of the 1970s took their toll, and the government had to bail out Chrysler in 1979 with its $1.5 billion loan guarantee. Nonetheless, the Big Three continued to fight the idea that fuel efficiency could be a selling point. A strange strategy, since fuel efficiency proved to be a potent selling point for Toyota, Honda, and Nissan. When oil prices dropped in the ’80s, Detroit acted as if the reprieve would last forever. We now know it didn’t….

    But given the status GM still held at the time, the company received many chances to redeem itself. What amazes us is how completely it managed to flub each and every one of them. In 1983, GM and Toyota re-opened GM’s Fremont, CA plant as a joint venture named NUMMI, New United Motor Manufacturing Inc. Under the venture, Toyota got to see what it would be like to begin operating plants in the US while GM got to look at Toyota’s now-superior technology. But did GM apply what it learned to the rest of the company? Nope, it was Not Invented Here.

    Similarly GM launched its Saturn division in 1985 in the hope that it would make a home for best industry practices (including a unique agreement with the United Auto Workers)  that would in turn pace innovation at the rest of GM. Although consumers liked the “no-haggle” policy at Saturn dealers and the initial product line that offered good value for the money, managers at the other divisions starved Saturn for resources during the mid-1990s. GM also succumbed to the temptation of using other GM parts at Saturn to keep costs down. The product line aged, the division lost its initial excitement, and by the time GM revamped Saturn’s offerings the division had become.. part of GM. Again, whatever learning developed at Saturn was, Not Invented Here.

    How about battery technology, which many observers believe could be a key to future car technology? In 1989, as Naked Capitalism reminds us, GM produced its battery powered EV-1, which had an EPA certified range of 140 miles per charge for its then advanced nickel-hydride battery, ostensibly to comply with California’s attempts to encourage zero emission vehicles. Some people who drove the EV1, really, really liked it, some didn’t, but no one denies that it represented intriguing technology. As the Orange County Register notes, the end of the EV-1 was “controversial.” Indeed. No one disputes that GM did its level best to round up each and every EV-1 it could and scrap them after deciding to halt production. Given its other history with new technology, at least some people suspect that GM simply wanted to prove that electric cars couldn’t be made. Whatever its intent, in producing EV1 GM gave Toyota some great ideas that led to its monster hit model, the Prius. Since then the US has just about ceded the lead in battery technology to Asia, and last week Nissan announced a program to provide and produce advanced electric cars in Wuhan, China.

    At this point some readers will ask us, why dredge up all this history of management blunders without mentioning the UAW? We are really glad you asked! We know very well that through the Seventies the Big Three held a dominant market share, paid generous wages and benefits to the UAW, and passed costs to consumers without having to worry about other competitors. Yet the Big Three muffed a golden opportunity to unload its costs for health care benefits in 1994 when the Clintons proposed their health care reform plan. Rather than work to improve the plan as proposed, the Republicans succeeded in their strategy to kill the plan so as to prevent the Democrats from getting credit for solving an important national problem. In our view, if the Big Three had fought for the plan, the united front of business support for the Republican position could have broken,  a viable plan could have been passed, and the government would have taken over the health benefit costs. Then the Big Three would have been in the same position as its Japanese and German competitors, none of whom have to pay for workers’ health benefits because those countries have national health insurance. Instead Detroit held out for ideology rather than their own self interest (in cutting health care costs per vehicle) and … here they are.

   The Obama Administration clearly has to save GM; letting it go would cost hundreds of thousands of jobs at the company and its suppliers. Furthermore, lots of people here in the Midwest, are irate about how the Administration has been tough on Detroit and very, very soft on Wall Street, particularly Goldman Sachs (GS). But as we suggested a month ago, just bailing out Detroit while leaving them to make the same old product, would accomplish nothing other than to kick the can a year or two down the road.  So if we want to make this one count, maybe Obama should make sure that America’s smartest energy specialists — people from, say, the Rocky Mountain Institute or the Los Alamos National Laboratory — have alot to say about GM’s future products. In other words, we can’t leave GM’s current crew to the mercies of the market. We have to care about GM’s success as much as the Chinese care about  the success of their own auto industry. Or we can kiss it goodbye.

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2 comments for this entry:
  1. Rick Acosta

    Hey there, I discovered your site a little while ago and have been reading through all the info slowly. I thought would post my comment and just say hi there & let you know I really enjoy your site so far. Will definately be stopping by to read more when I have a bit more time !

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