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Why GM Matters
Inside the Race to Transform an American Icon
By WILLIAM J. HOLSTEIN
WALKER & COMPANY
Copyright © 2009
William J. Holstein
All right reserved.
Chapter One What Went Wrong
It used to be that GM executives denied anything had gone wrong at their company. That denial was part and parcel of the problem. But today top executives from Wagoner on down are candid in acknowledging that GM ran off the rails. "Obviously, something went wrong because the company went, over about a fifteen-year period, from the midseventies until the early nineties, from being in a very strong position to being in a very different position and quite a bit weaker financially," Wagoner says in his office high in the Renaissance Center in downtown Detroit. "The model that had served the company unbelievably well for years no longer did."
That's an astonishing but true statement. An organization with many decades of experience and many hundreds of thousands of employees simply became outmoded. GM didn't stop working overnight, of course. A company that big is something more like an aircraft carrier. Even if it takes a torpedo hit below the waterline, it still has forward momentum. For a while. The reasons this happened are complex-a perfect storm of new competition, bad decisions, radical market shifts, and plain bad luck. But the answer to what went wrong begins in the history of how GM was created.
In the briefest possible fashion, the story goes like this: Billy Durant, a swashbuckling iconoclast who loved the art of the deal, created General Motors in 1908 by smashing together different auto companies headquartered in different cities-Cadillac in Detroit, Pontiac in Pontiac, and Oldsmobile in Lansing. It was at a time of enormous flux in the auto industry, much like today, and it wasn't at all clear which type of auto and which brand name would prevail. "I was getting every kind of car in sight, playing it safe along the way," Durant once said.
Altogether, Durant bought twenty-five companies, including parts makers, between 1908 and 1910 and put them under the General Motors umbrella. Between 1916 and 1920 he bought another fourteen, including Chevrolet and Fisher Body. He bought the companies with stock and never attempted to consolidate their operations into a single cohesive whole. Each vehicle and component division handled its own purchasing, set its own prices, and managed its own accounting. Although the field was fragmented at the time, and GM was by no means the dominant player, Durant's prospects seemed reasonably secure.
But an unexpected recession hit the U.S. economy in 1920, and GM's sales plunged. With the company on the verge of bankruptcy, Durant was forced out. (He died in 1947 managing an eighteen-lane bowling alley in Flint, having squandered a personal fortune of $120 million, an incredible sum for that era. Wagoner wisecracked in a 2003 speech that the prospect of ending one's career that way "has haunted GM chairmen ever since.")
In 1923, the company was taken over by Alfred P. Sloan Jr., whose roller and ball bearing company had been acquired and eventually assimilated into General Motors. Out of the chaotic assembly of companies Durant had put together, Sloan created a system with greater controls, particularly financial controls. It was Sloan, for instance, who figured out a price ladder for GM cars; whereas Durant had allowed his various companies to compete against one another with similarly priced cars, Sloan sought to differentiate their products, so that a buyer in a given price bracket would have only one GM option. He positioned Cadillac at the top, a car for the wealthy or the aspiring, followed in descending order by Buick, Oldsmobile, Pontiac, and Chevrolet. He also introduced the concept of annual style changes, replacing the haphazard introduction of new models with a schedule that buyers could predict-and anticipate.
But even as Sloan brought a measure of order to GM, it was still not really a unified company with a centralized management. Within divisions there were separate fiefdoms, which managers guarded against meddling from headquarters. And the company kept adding pieces, reaching out into the world. Between 1923 and 1928, it opened nineteen assembly plants in fifteen countries in Europe, South America, Asia, Australia, New Zealand, and South Africa. It made outright purchases of other automotive manufacturers, such as Britain's Vauxhall in 1925, Germany's Opel in 1929 (at the start of the Great Depression), and Australia's Holden in 1931. The new companies added to the group kept operating largely independently.
This fragmented model worked well for many decades. It worked so well that between 1948 and 1950, management started agreeing to a compact with the United Auto Workers that over coming years would pour unprecedented wealth into the hands of workers. In 1948 it agreed to the concept of annual cost of living pay increases. Then in 1950 it agreed to provide its workers full pensions and free health care coverage for life. These were the origins of how the UAW became so powerful that GM's cost structure was essentially uncontrollable.
But none of that mattered because GM kept gaining ground through the 1950s and 1960s. In 1962, at the high-water mark, it controlled 50.7 percent of the U.S. automotive market. "Back in 1963 when I joined, GM was without question and by a wide margin the dominant automotive producer in the world," recalls Robert Lutz, who is now vice chairman of global product development and the oldest member of Wagoner's management team. "We actually had a concern in the U.S., as our market share was heading over fifty percent. There was noise from the Justice Department that GM would be split up. So it was almost a disincentive to achieve greater growth and efficiency. We had a structure that worked very well for us back then, which was a great deal of divisional autonomy." By that model, once a division had its budget approved, it could design and develop and manufacture its own cars without oversight from the top.
That model helped the company make each of its brands distinct, which the market wanted. But it also made the process of making decisions at GM enormously complex and convoluted. "GM organization charts out of the sixties were published in these huge light-green foldout things," Lutz says. "It looked like a gigantic inverted oak tree. There were so many little boxes and so many divisions-and we still had all the nonautomotive."
By "nonautomotive," he means all sorts of businesses that were not even remotely related to the making of vehicles-like, for instance, the Inland Ice Cube Tray Division, which sold parts to Frigidaire for use in refrigerators. Indeed, when Lutz first arrived at GM in 1963, very little had changed in decades in the way the company was run. "It was very much into the dictates of Alfred P. Sloan-there was a degree of central coordination but decision making was decentralized," Lutz adds. "It was unbelievably slow, complex, and bureaucratic." But in an era with precious little competition from outside the United States, inefficiency could run unchecked, and the company was still "totally competitive, because we had such enormous power that we could always steamroller everybody else," Lutz says. "Even if we were late coming out with something, once GM geared up to do it, whoever started it would get crowded to the sidelines."
Nor had much changed by the time Rick Wagoner joined the company in 1977. GM was still divided and subdivided. "Our tradition was separate brands," he says. "Chevy was a pretty integrated auto company itself. Pontiac was, and so was Buick. To their credit, I think the leaders in the late seventies and early eighties saw that that needed to change. But that was hard to do, changing fifty years of history."
At about this time, in 1973 and 1974, the first major oil shock hit the United States, and the game started to change. Toyota had entered the U.S. market in 1957, but by the early seventies had gained only a very small toehold. Their first model, the Toyopet, had been derided by consumers and the automotive press, and the company's image hadn't entirely recovered. But with the new thirst for fuel-efficient cars, Toyota became a much more significant player.
Part of Toyota's advantage was in its totally different management model and manufacturing system. Toyota and other Japanese manufacturers had learned a great deal from W. Edwards Deming and Joseph M. Juran, two early pioneers of quality and efficient manufacturing who had been involved in helping the American war machine improve the quality and output of ordnance and armaments. But American manufacturers, confident in their superiority following World War II and basking in postwar prosperity, largely ignored these statistics gurus. The Japanese, however, had been stung by the manufacturing power of the United States during the war. They were open to learning. Their goal after the war was to "catch up and surpass the West."
So Deming and Juran lectured, consulted, and urged Japanese manufacturers to embrace concepts such as quality assurance and total quality control. If war-torn Japan committed to continuously improving its industrial processes, it could lead the world within a single generation, Deming suggested in 1951.
The Japanese, partly as a result of the war's devastation, also were prepared to do more with less. They had a fundamental understanding of the need for efficiency; in their model, it made a difference that each worker on the line took fewer steps to get a part and made fewer turns of the screw to attach a part. And as countless books have revealed, Toyota had a different philosophy about labor-management relations. There was very little of the hostility that characterized relations between American managements and labor forces, including GM's. In Japan, management and labor were in the battle against the enemy together; they had little or no time to fight each other. And unlike GM, Toyota had a clearly centralized management system, with the Toyoda family at its heart. (The product name had been altered slightly to Toyota to make it more appealing to American customers.)
All this gave birth to what was called the lean manufacturing system, built on several signal principles: there was kanban, in which parts were delivered to the assembly line just as they were needed, rather than being stockpiled; kaizen, a philosophy of constant improvement; and a team-based approach to manufacturing, in which a small group of workers would be responsible for each phase of building an entire car, unlike the Henry Ford system of long, depersonalized assembly lines, where few workers could be held accountable for the quality of their performance.
Whereas GM and the Americans in general had "mass," Toyota and the Japanese in general had "lean"-and lean, in the new era, was clearly better. Their vehicles were cheaper and more efficient, and did not break down nearly as often. The lean model also allowed for quicker decision making and much more efficient use of materials and energy, not to mention manpower. GM and other American manufacturers, in contrast, had not changed their fundamental approach since the days of Henry Ford's Model T.
Jack Smith, who became CEO in 1992, is the GM executive who is given credit for recognizing that there was a serious competitive imbalance. "The first indication that something was different in the auto industry was in the midseventies, when we had an overseas team that happened to be in Japan," he recalls. "They witnessed a fast die change by Nissan."
It was an unusual place for an epiphany. A die is one of the massive steel forms that shape the large metal panels of a car; massive, earthshaking stamping presses hold these dies and pound out thousands of identical parts a day. American companies would use a single die set to stamp a warehouse full of parts, then laboriously change dies before starting on another part. At the Nissan plant, the Americans saw a die that would take GM hours to change get swapped in fifteen minutes flat. They were astonished.
Such are the things that manufacturing advantages are built on. With a shorter changeover time, the Japanese company could use each press more efficiently, doing a short run of each part before switching dies and stamping another part. This required less downtime, fewer presses, and less warehouse space, all of which offered potentially huge cost savings. It was clearly a better model.
The GM team brought their observation back to headquarters, where committees reigned supreme. "At that time, we had policy groups. One was the overseas policy group, and I was working with that group," Smith explains. "If this is really true what they're doing, changing dies in fifteen minutes, it had huge implications. You have the capability to really reduce the investment [needed to manufacture cars]."
Smith was impressed, and he took the team's findings to his bosses. But his message, Wagoner recalls, went over "like a lead balloon," Top GM management wouldn't hear it and continued to deny that the Japanese had any advantage. Many executives suspected the Japanese had production technology secrets, like a specialized piece of equipment, that GM would eventually learn about. They could not accept that the Japanese had devised a superior manufacturing or management method.
Smith, however, persisted in trying to learn more about the Japanese system. In the early 1980s, he traveled to Japan and met senior members of the Toyoda family. He wanted to learn more about how they did what they did. The Toyodas, in turn, wanted to have political cover to expand their operations in the United States. What better way to protect themselves from political backlash than to have a joint venture with America's largest car manufacturer? "They weren't real comfortable with the culture and a joint venture would be a great place to start," Smith recalls.
In 1982, Toyota and GM began discussions about creating just such a joint venture: New United Motor Manufacturing Incorporated (NUMMI), which would be housed in a shuttered GM plant in Fremont, California. It was to be a collaborative effort that would manufacture cars that GM and Toyota could each sell under its own brand name. In the two years it took to negotiate the deal, Smith, then head of product planning, learned even more that alarmed him. "We had an opportunity to review our manpower versus Toyota's at a Toyota assembly plant that was making a relatively small car," he explains. "Toyota said it had two thousand people" at work on the project. "We had fifty-five hundred people doing comparable work in the United States. I lugged that information back to Detroit and it was very unwelcome news. The people responsible for manufacturing were in denial."
To be sure, Toyota was learning a lot about GM as well. "We took them to a couple of our plants and they were scared by the way we operated. They were really leery" Smith says. "They couldn't believe that not everyone came to work every day and that there were alcohol and drug problems."
The bad news continued as the two archrivals geared up to start manufacturing together in 1984. At NUMMI, the two companies had created a unified management team empowered to make its own purchasing decisions. But the members of the team-even the GM personnel-weren't impressed with GM's quality. In quality and in cost, the vast majority of GM's parts just weren't competitive. "We only won three or four parts" in the competition at NUMMI, Smith says. "We won seats," he says, and "wiring harnesses, but that came from Mexico. We won front drive axles, but that was because Toyota was out of capacity. The message coming back was that our components were out of line. This was a tough recognition for the organization. We were grossly uncompetitive in everything."
This was a very dark period in GM's modern history. The company was completely adrift without any clear and coherent strategy. Its cars weren't nearly as good or as reliable as those of a new set of competitors. Its manufacturing processes were antiquated. A new CEO, Roger B. Smith (no relation to Jack Smith), had started in 1981, and he was clearly not up to the job. He could not articulate a strategy for GM to respond to Toyota and others. Thus, when Toyota came along, GM had a ripe underbelly-a corporate structure that put it at risk to a much more centralized, focused organization like Toyota-yet its arrogance prevented it from responding.
Excerpted from Why GM Matters by WILLIAM J. HOLSTEIN Copyright © 2009 by William J. Holstein. Excerpted by permission.
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