Monday, July 14, 2008

General Motors: The 11th Hour

Coming from a family that has (or had) several GM workers, the fall of this company has been nothing short of breathtaking. At one time, in the 1930s, there were over 250,000 General Motors' employees in the US. Today, it is around 40,000 in North America (after the 25,000 cut in 2005). It will be down to around 15-20,000 in the next few years.

It is also a company that has more debts than assets. How General Motors went from the largest corporation in the world just several years ago to where it is now is a lesson in bad management. The hemorrhaging of domestic market share (which GM dominated since the World War Two era) started in the 2000's, after GM's Vice President of North American Operations, Rick Wagoner, decided in the late '90s to re-orient GM's sales to SUVs and heavy trucks. If you have looked at your nearest GM dealership lots lately, you will see the legacy of that decision. Almost immediately, the car buying public spoke, and GM's response was to promote Rick Wagoner (the man whose fateful decision put GM it its current position [North America still accounts for 2 out of every 7 new global car sales]) to CEO of the company.

Not surprisingly, Rick Wagoner decided the best "game plan" for GM was to stick with the old strategy he helped implement. GM even announced a new model for the hyper-truck Hummer. GM subsidiary Saturn started introducing larger cars and SUVs. The so-called "fuel efficient" cars that GM decided to offer, after eliminating the Cavalier, included the Aveo and Cobalt. To call these cars junk would be an insult to junk. The Aveo, with its light-weight 1.6 liter engine, and compact size, has a lower MPG than the Honda Civic, and even the Ford Focus (all of those cars having engine sizes of at least 1.8 liters). The Aveo has the "added" bonus of a louder engine (and by loud, I mean to the point that the car has noise issues at or around 60 mph). The Cobalt does not fare much better. It has lower gas mileage (although it has a larger engine) than the small car, non-hybrid competition and smaller tires (a killer for mileage). Of course, GM, as well as the other "domestic" automobile producers, still have yet to learn the concept of a 10 year/100,000 mile warranty (probably because they know most of their cars fall apart around the 100,000 mile mark).

Basically, this is what the executives and managers of GM think of the general public. In the face of competition with better products that people want, they produce the American version of Fiats. They assume people will be patriotic enough to "buy American," even though over 80% of the parts in US-manufactured cars are foreign made (and I have been to the GM factories in China to attest they are not manufactured as much here anymore, either). That GM's market share in sales in the US has dipped below Toyota should be no surprise. In fact, my only surprise is that it took this long.

The belated response of the executives helped contribute to the disaster that was 2007 (and 2008 and probably 2009). After posting a $39 billion loss in the last quarter of 2007 (the largest in the history of capitalism), GM finally announced a cutback on truck and SUV production (had it pressed toward small, fuel efficient car production back in the early 2000's, many of these problems could have been avoided). Those trucks and SUVs formed two-thirds of their sales in the 2000's, explaining why the company is in its predicament.

As it currently stands, GM has enough operating cash to last until around the mid point (maybe the last months) of 2009 (still less cash than the company lost in the last half of 2007). After that, bankruptcy. And it is going to happen, and when it does GM is going to take half of its suppliers with them (every one of my family members that worked for GM have either been "retired", bought out, or in the case of my grandfather [a retired Delphi worker, Fisher Body back when he worked at the plant] he may lose everything he has worked and saved). Those are the consequences of failure on the part of people like Rick Wagoner.

And the payoff for Rick Wagoner? A pay increase of his yearly salary to over $15 million (Toyota's Chairman has an annual salary below $1 million). In the old days, when corporate and military leaders in Japan failed, they took what they considered the honorable route and committed suicide by the sword. Maybe we need to import this practice (after all, we are buying their cars), as well as the lower pay for corporate executives. If anything signifies the socialism of the wealthier classes in a capitalist society, it is the exorbitant buyouts and pay of people who engineer the death of their own enterprises.

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