Ghosts That Haunt General Motors

Mark Thoma finds Robert Samuelson thinking about General Motors:

Economist's View: Robert Samuelson: Ghosts That Still Haunt GM : Robert Samuelson acknowledges that labor costs at GM have been high. But he believes the source of GM's troubles is poor management:

Ghosts That Still Haunt GM, by Robert J. Samuelson, Washington Post: ...General Motors ... recently announced it would close 12 facilities and cut 30,000 jobs by 2008. Granted, GM is burdened with costly labor contracts and huge numbers of retirees... But GM also inherits a self-defeating management style formed during its glory days. It presumed that superior managers could always anticipate and control change. By contrast, many top managers in younger companies accept that they will face disruptive surprises that could, unless successfully countered, destroy them. The... latest downsizing is the company's third since the early 1980s. With each, GM has struggled to catch up with changes that it badly misjudged -- the demand for smaller cars in the late 1970s; the superior quality and production techniques of Japanese manufacturers in the 1980s; and now the demand for snazzier cars and... better fuel efficiency....

GM overtook Ford because "the old master [Henry Ford] had failed to master change," [Alfred P.] Sloan wrote. Ford stuck too long with the Model T... even as the car market shifted.... Sloan had to fashion a huge industrial enterprise... this problem by decentralizing operations... among separate divisions while centralizing policy matters.... "Management" became an exercise in ensuring stability. GM's market power made it less sensitive to... labor costs, because these could usually be recovered in higher prices....

GM [today] does not have the vehicles that command good prices. To move in volume, they require steep discounts. This is a management failing that can't be blamed on unions or retirees, and it's now compounded by the impact of high gasoline prices on SUV sales.... GM's deliberate management style has produced mediocre vehicles that fare poorly in today's hyper-competitive market. Since its peak, GM's market share has fallen by half....

As I see it, GM has three big problems:

1. It paid its workers in the 1980s and 1990s in backloaded pension and health care benefits so that now workers have cash-flow rights but no control rights over the corporation, and this is an unstable and dangerous corporate control situations.
2. Oligopoly profits have been built into GM's wages for a long time, and these oligopoly profit components are very "sticky"--they remain even though the oligopoly profits are long gone.
3. GM management has bet very heavily on a low price of oil and a high price of SUVs.

Samuelson thinks that these are less important than (4): a culture of management that focuses on maintaining stability rather than taking advantage of change. He may be right.

Comments

[ogmb]

It seems more like 4 caused 1,2 and 3.

[Tom Cecere]

I think #4 is a side effect of #1 -- the thing unions want the most is stability, because that's what most workers want. Human nature abhors change, and if allowed to, people will organize to prevent it. You don't advance as a manager in a heavily unionized company by being a change agent.

[David Moles]

Don't forget (5) -- though I suppose you might consider it a secondary effect of (2) and (4) -- as Samuelson notes, GM just doesn't make very good cars.

[mlhm5]

Gee where to start. Any MBA grad who may have worked on a GM case study already knew the prognosis of a company unable/unwilling to change in a significant way even though their market had made the turn years earlier.

GM built cars that they wanted to sell the public until the Japanese showed the market a new revenue model, reliability and economy.

Despite 30 years of denial, this revenue model still works and GM to this day has not understood the customer valued reliability as the #1 attribute in making a decision regarding a vehicle.

Reliability was the ante chip. Without it, you could not play the game unless you had a monopoly in a vehicle class (full size pickups courtesy of the US government).

Now that is gone and management has no other monopolies to force feed the US public.

People will vote with their dollars for the vehicle that they believe will serve them best and it isn't going to be one made at GM.

Somone turn out the light in 2007 when GM misses the return to the diesel.

[kharris]

Samuelson's problem, that management doesn't want to change, is different in nature, not of the same level of specificity, as the other problems listed here. "Rotten cars" may not lead directly to a solution, but you know that there is some definition of quality by which GM doesn't measure up. Lumbering future sales with past costs is easy to identify in the history of labor agreements and pension assets and liabilities. Brad's points one and two are really just two ways of looking at the same problem. Betting on cheap gas and expensive SUVs is identifiable in the product line.

"A culture of management that focuses on maintaining stability" takes us into the heads of many, many people, over many years, and tries to abstract a single characterization of what they were aiming at. That doesn't mean it's wrong, but there is no sense in trying to hold it in opposition to more down-to-earth, specific explanations, or say which is more important.

[nate]

nice analysis

i am somewhat skeptical of the word "bet" in generaly when it comes to business. betting in vegas it not rational (excluding utility from losing money or winning against the odds or something else) because the odds are not in your favor. business managers may take calculated risks in situations where the odds are not necessarily stacked against managers over long periods of time.

samuelson should have talked about the paint of automobiles. per my fuzzy recollections from business school, ford kept insisting on one color for his cars (black) vs. multiple colors. sloan came up with some innovative way to do multiple colors. of course, this recollection might be wrong and i do not have tons of time to substantiate this with URLs.

[Tom Bozzo]

I'd add #3', which is that GM massively underinvested in their non-SUV product lines. With oil prices pressuring the large SUV market, that's led their marketers to put cash on the hoods of their entire lineup in amounts that rival if not exceed the effects of #1 and #2, in order to move the metal.

Some of the lack of aggression in adapting to changed market circumstances (definitely there) also is probably caused by #3'.

[Slocum]

I think that to some extent what seem to be management failures are actually *results* of other problems. Yes, GM (but also Ford and Chrysler) have continued to make heavy bets on SUVs. Why? Because they're dumb as a box of rocks? More likely, I think, is that they were forced into that direction by being unable to compete head on in niches where Toyota and Honda were strong and focused. Why are GM's products in the family sedan and minivan market lackluster? Because they haven't invested. Why haven't they invested? Because Toyota and Honda HAVE focused on these areas and GM believes (with good reason) that it can't compete in any niche where Toyota and Honda are focused. Why? Because the Japanese have that big, per-vehicle cost advantage deriving from GM's labor, healthcare and legacy costs. Would people buy a GM sedan that was as good as a Camry or Accord but cost $2,000 more? No -- in fact, they probably would buy it only if it cost $2,000 *less* due to reputation differences (to see the reputation differences in action compare sale prices of GM and Toyota versions of mechanically identical cars Corolla/Prism and now Vibe/Matrix).

So what do you do when you're in that unenviable situation? What choice do you have but to focus on niches where Toyota and Honda are relatively weak -- namely, big pickups and SUVs. Yes, this is risky if gas prices rise and stay high, but Toyota and Honda have grabbed the safe, low-risk niches, so there's just not a lot of choice.

Bottom line -- I think there's a good chance that GMs management decisions would have been very different had they been in a different competitive environment in which they did not have a substantial structural cost disadvantage relative to their Japanese competitors.

[Slocum]

"its really a self perpetuating
engine block rigid
top management team
that needs to be very loudly
put out of its misery...now"

And what would a new management team do instead? Defund the SUV and big pickup programs and pour all remaining resources into hybrids and automobile R&D?

That actually might be a good idea, but for different reasons you imagine--it would drive GM into Chapter 11 sooner rather than later and get the structural costs off their backs. And remaining cash would've already been spent on R&D rather than being left to bail out Delphi or hand over to creditors or the PBGC.

Brilliant!

[Tom Cecere]

Randy - I am partial to your argument. There is no law of nature requiring the unending life of a corporation or business idea; there is probably a natural growth limit to every company. You can add all the fertilizer you want to a 1000 year old redwood, and all you'll do is kill it faster. At some point, it's going to fall down.

[sd]

I think Slocum is very close to the truth here. GM management, at least the management of the last 20-25 years, has been playing with several limbs tied behind their back. GM's brands, in the mainstream segments of the auto industry, quite simply suck. The brands suck because of the way the company was managed many year ago, not because of any mistakes recent management has made. And when you have shitty brands coupled with a poor cost poisition, you cannot compete, which is exactly why GM has been sucking wind in family sedans and entry level cars for some time now. So GM management made the perfectly rational decision to focus on areas where their brands were strong and where the market was growing. That has meant SUVs, big trcuks, etc. But now that those markets are turning against GM, they are left with few options.

The question is: Why do GM's brands suck? I think its because they rode a successful strategy into a new era when it was no longer successful. For decades GM's basic go-to-market strategy has been to segment by nameplate. So the poor and the young bought Chevys, the slightly less poor and slightly less young bought Pontiacs, the great middle aged middle class bought Olds, the slightly more successful and grayer bought Buicks, and the well-to-do bought Cadillacs. This was a tremendously successful marketing strategy for a very long time.

The Japanese initially made inroads into the US market by selling cheap cars to young people (baby boomers) - essentially displacing Chevys and Pontiacs. This didn't worry GM execs too much, because they knew that most of their profits came from the high end cars, and that those cash-strapped young college grads would surely trade up to Buicks when they got their first big raise rather than sticking with the "rice rockets." Problem is, Japan was focusing obsessively on reliability while it was penetrating the low end car market, and stumbled upon an opportunity: Baby Boomers who bought cheap Accords and Camrys loved their cars because they were so reliable, and weren't so keen on trading up to "stodgy" brands like Olds and Buick.

So the Japanese started offering their customers the ability to trade up by slowly and steadily migrating their brands up the quality and price curve. An Accord from the early 1980s was a tiny, unappealing car that you'd only buy if you were desperate. An Accord today is a very nice car on the cusp of the luxury tier. The thing is, many of the 50 year old successful professionals buying Accords today were the 25 year old broke law students buying Accords in 1980.

This would have baffled the GM executives of the 1970s. A nameplate, after all, was supposed to mean something. If an Accord is a piece of shit today, then it ought to be a piece of shit 25 years from now. But Japan didn't compete that way. As has so often happened in the last few decades, a customer lifestyle segment focused competitor has displaced a product segment focused incumbant.

[anne]

Slocum is quite right:

What was General Motors to have done? Competing against Toyota on sedans, or sedans with hybrid engines, makes little sense because of a $1500 production cost difference on each car. The cost difference is centered on the cost of health care benefits for present and retired workers. Then, GM was actually clever to have understood how a market for high priced family vehicles could be created that was not occupied by Toyota and in which there would be no relative cost burden at least for several years before Toyota might make a determined try for the SUV market.

SUVs were excellent for GM, and the only complaint I might make was that GM did not have ready plans to produce a hybrid SUV line. Should the oil prices of 1999 really not fall below $10 a barrel as analysts were suggesting. Gasoline prices were however always high enough in international markets that GM could have been working determinedly on hybrids.

The problem then comes down to the lack of support for programs that would lessen the health care cost burden and limit health care price increases. A program that would call for national health care catastrophe coverage could dramatically lower costs for GM. Even now, GM and Delphi complain about health care costs but offer little in the way of resolutions other than cutting worker benefits as much as possible.

[Tom Cecere]

Anne, your prescription sounds a lot like a savings and loan begging for a federal government bail-out after making millions on bad loans. A major reason GM grew in the first place is that it made promises of future benefits in place of paying current cash. Their prices were lower because of these deals, and they grew market share accordingly. They made billions and lived like it. To bail them out today by taking over their incautious benefit promises would only reward them again.

They took the bet because 1) they figured that they would be retired before the chickens came home to roost, and 2) they hoped that the monopoly power and then poor quality reputation of non-american cars would allow them to raise prices as their costs rose. To paraphrase James Coburn from The Magnificent Seven: "They lost."

[Bernard Yomtov]

"GM believes (with good reason) that it can't compete in any niche where Toyota and Honda are focused. Why? Because the Japanese have that big, per-vehicle cost advantage deriving from GM's labor, healthcare and legacy costs."

This is a poor excuse.

To the (large) extent that these costs are obligations to retirees they should be irrelevant to GM's product planning. To think of them as a per vehicle cost is simply wrong.

[Maynard Handley]

"
That actually might be a good idea, but for different reasons you imagine--it would drive GM into Chapter 11 sooner rather than later and get the structural costs off their backs. And remaining cash would've already been spent on R&D rather than being left to bail out Delphi or hand over to creditors or the PBGC.
"

This raises an interesting question. After all the complaints about GM management, let me ask a question about union management. It is becoming ever clearer that the future promises of large companies (pensions, health care etc) are worthless, meaning that the logical thing for workers and unions to press for is labor contracts that provide higher wages here-and-now and give up those future promises. (This gets us into a separate, completely different issue, namely that of will workers then have enough self-control to invest those wages rather than spend them today ---my guess is no, but let's ignore that issue.)

So my question is, is this happening? Is it happening in the US (where the problem is obvious) and is it happening in other places (Canada, Europe, Japan) where the problem is not yet obvious but seems like it may well also occur?
If it is not happening, why not? This seems like an exceedingly important issue to understand.

[Buce]

Recall that GM and the unions were joint beneficiaries of the oligopoly of the 40s-50s-60s. Unions and management lived off a Galbraithian grand bargain that allowed them to offload their costs onto the consumers (not least in the form of crappy cars) until the Japanese showed up.

[anne]

Bernard Yomtov

"To the (large) extent that these costs are obligations to retirees they should be irrelevant to GM's product planning. To think of them as a per vehicle cost is simply wrong."

Interesting, I sometimes think this than argue against myself. Should the point be that GM has or should have provided for retiree medical cost through the last 30 years? Please argue this through.

[Bruce Wilder]

I'll offer a narrative of G.M.'s evolution, that will tie management "style" to these other factors. I don't know how plausible a story it will seem.

Sloan's General Motors was effectively owned and controlled by the DuPont family; ultimate power was held by the Treasury department, representing the interests of the owners, in the G.M. building in New York, and not in the executive suites in the G.M. building in Detroit. Sloan's great innovation was to create a useful policy-setting and performance monitoring function for central management in the collection of carmakers and component suppliers assembled willy nilly by Durant, the G.M. founder. In particular, he assigned the various car divisions -- Chevrolet, Buick, Pontiac, etc. -- to different market segments, and created an elaborate system of accounting and financial controls to evaluate, comparatively, managerial performance, while also critically and centrally controlling inventories and cash.

A central fact of a mature car market is that most of the cars sold are used cars; as a car market matures, profit margins on basic utility cars, like the Volkswagen Beetle or Ford's Model "T" or Model "A", are squeezed by "competition" with the existing stock of available used cars, while demand for new cars shifts toward luxury and style. Sloan, commissioning his various car divisions to target different income levels and tastes, positioned G.M. to dominate the upscale portion of the car market, where higher margins were available. While Ford, Dodge, Plymouth, Chevrolet, Nash and Pontiac fought it out in the high-volume, declining margin mainstream of the car market; G.M.'s Buick, Oldsmobile and Cadillac dominated the higher margin, but still fairly high volume end of the market. (Advances in production quality and efficiency doomed the low volume luxury producers like Packard and DeSoto.) G.M.'s high market share, weighted as it was toward the higher margin vehicles, gave it enormous profitability in the 1950's, as the prospering post-war generation traded up.

Another fundamental fact of auto manufacturing is that the economies of scale in component manufacturing are much larger than the economies of scale in final assembly. The minimum scale in assembly might be on the order of 120,000 units/year, while in engine manufacture, it would be around 500,000/year and in automatic transmissions or various drivetrain components, it might rise to 1,000,000 units/ year. Sloan leveraged G.M.'s market share to advantage its in-house component suppliers, giving the advantages of both large-scale production and assurred market. The risks attendant on variations in auto demand were exported to outside suppliers, as in-house suppliers were given priority, but not exclusivity in supplying G.M.'s needs, further padding the rents enjoyed by G.M. parts divisions.

In 1964, the DuPonts sold their remaining interest and gave up control of G.M.

The trading up, which characterized the car market of the 1950's, gave way to renewed interest in small, cheap cars, as the baby boomers got driver's licenses, and suburban America built the two-car garage. G.M. and Ford lagged in responding to the demand, which was initially filled by the Nash Rambler and European imports, most notably of the VW Beetle. Though late in responding with compact cars, G.M. and Ford did "turn back" the imports in the 1960's.

G.M. did respond, though, planning and producing various sizes of automobile. An assembly division was formed. The car divisions became more nearly pure marketing functions. Car design was centralized; the divisions would brand variations on the basic set of designs, so there would be a Chevrolet Camaro and a nearly identical Pontiac Firebird; a Chevrolet Caprice and a nearly identical Pontiac, Buick and Oldsmobile. The Chevrolet, Pontiac, Buick and Oldsmobile of each design would be assembled side-by-side in assembly plants dedicated, not to a brand, but to a particular car design.

The creation of the assembly division in G.M. capped a subtle, but profound shift in the management of internal competition, which followed the retirement of Sloan and the departure of the DuPonts. Internally, the managers had always groused about the unfairness attendant on economic ups and downs, which could make Chevrolet a success and Buick a failure, swamping the effects of the manager's individual efforts at an individual plant. But, now Buick and Chevrolet were producing the same cars, in the same plants; the internal competition and comparisons seemed much fairer.

Unfortunately, brandnames were no longer associated with quality in the marketplace, and the car divisions were sharply limited in their individual initiative. The quality of production became a huge issue in the late 1960's, to which G.M. did not respond. A critical feedback loop between customers and the individual units of production control had been removed by creating the assembly division and reducing the car divisions to meaningless brandnames.

No longer an investor-controlled corporation, the G.M. management in the late 1960's, followed the Steel industry in granting inordinate wage increases (wage increases, which not coincidentally, also benefited the whole management structure, whose compensation was also tied by custom to the union contract). Wages in autos and steel rose significantly, relative to the median U.S. wage, altering the comparative advantage of the U.S. in international auto and steel trade.

G.M. has been persistently, a highly profitable company, from the 1920's thru the 1950's. The persistence of its profitability had defied the conventional wisdom of economists and attracted a lot of antitrust attention in the 1950's. G.M. profits sunk to merely average corporate levels with the labor agreements of the late 1960's.

The Japanese automobile and steel industries reached international norms of quality and efficiency around 1970, at the same time as the U.S. automakers shifted the U.S. comparative advantage in auto production with their labor agreements. Economies of scale would otherwise advantage U.S. domestic production of any model, with a sales volume of more than around 100,000 units/year. With the exception of the VW Beetle, European importers had been limited to boutique sales, by the reality that G.M. and Ford would move to fill any niche with a volume greater than 100,000 with cheaper domestic assembly. The Japanese, in the 1970's, had an emerging cost advantage large enough to overcome both the costs of transport and the potential of competition from full-scale domestic assembly.

The Japanese also had superior production quality, and, as a byproduct of the tighter production control, which yielded the higher production quality, the Japanese had an emerging productivity advantage, which, after 1978, would be a significant factor in their success.

One particular Japanese insight, related to economies of scale, would be particularly important. The economies of scale in the production of body panels is related to how time-consuming and costly is the process of switching the steel stamping equipment from one die to another. G.M., with its huge market share, had exploited this fact, producing the same basic body panels for the Chevrolet, Buick, Olds, Pontiac versions of its high volume designs -- stamping machines could run all year, switching out the die only when it wore out. Toyota and Honda realized that they could modify the implications of this economy of scale by the simple expedient of investing in schemes to make the switching of stamping dies very, very cheap and fast. Car-body design could be adapted to smaller market niches and rapid changes of fashion, without affecting the high utilization of costly stamping equipment.

Even with value of yen at a peak circa 1978, the Japanese, with an absolute cost advantage in automobile production, compounded of lower wages and higher productivity, gained marketshare in a depressed market. The writing was on the wall. A decline in the value of the yen relative to the dollar and the inertia behind improving Japanese quality and productivity shocked the U.S. auto industry.

Internal politics in General Motors hobbled reform of the corporation. Creation of the Saturn division reflected the frustration of top management, which could see where it wanted to go, sketched on a clean sheet of paper, but could not muster the will to get there with what existed. Even the independence of Saturn could not be maintained long enough for a complete execution of that plan.

Efforts to brand quality, with a revival of the traditional car divisions, exemplified by the Buicktown effort to concentrate production of Buicks at a single high-quality, high-productivity facility in Buick's homecity of Flint (ironically, Durant's original plant, where his father founded the family fortune as the country's largest maker of horse-drawn carriages) ended badly. (See Michael Moore's "Roger & Me")

Adoption of Japanese productivity and quality techniques involved significant investment, which, in turn, threw off considerable profit and cash in the 1980's. Unable to sustain support for genuine reform in the corporation, weakling moron managment exemplified by Roger Smith, spent the money on computer services firm, EDS, and Hughes Aircraft.

The Japanese used their cost advantage to build market share to the point at which they had the scale to open their own plants in the U.S. The Japanese used their quality advantage to displace the formerly upscale Cadillac, Buick, Oldsmobile with Accord, then Lexus, etc. Reducing the cost of switching dies meant that the minimum-size market niche for any particular car design became much smaller, eroding the strategy behind the formerly huge volumes of Ford and Chevrolet, with well-adapted boutique designs.

As G.M.'s market share declined, the profitability of its in-house component suppliers also declined. The in-house component suppliers were sent outside the corporation to seek business, to maintain their scale of production, but full participation in the auto parts market exposed them to the full risk and variation in market demand (while actually reducing the risks formerly imposed on traditionally independent suppliers, which had formerly handled G.M.'s overflow demand).

Without the margins from their domination of the upscale portion of the car market, or from large-scale component production, G.M. became chronically unprofitable, and has been unable to sustain itself.

I'd be interested in whether anyone thinks that narrative adds any useful detail to Brad's analysis. I haven't followed the auto industry at all since the mid-1980's, but was deeply involved as an observer in the late 1970's, when the Japanese emerged, and the U.S. automakers were waking up to the challenge posed by the Japanese innovations in quality and productivity.

[anne]

Nicely done, Bruce, with much more to think about.

[me]

If I worked for Watson Wyatt I would recommend that GM management is paid too little and of course the workers are paid way too much.

I would recommend that top management be paid about a half a billion dollars and cut the workers pay to about 10 bucks an hour to match Delphi.

Next I would recommend that the pension fund be split three ways. One third would outsource to an offshore hit squad of goons to execute every retiree.

The second third would to to management as a bonus for ditching "legacy" costs.

The last third would go to the republican party to keep them in power with their poiicies and accounting preactices to break every working person in this country. When there is nothing left in this country they can all move to Canada or Bermuda or the next country they can plunder.

Explain again rising standard of living again, I keep missing that.

And while you are explaing that, remind me again about free market? Oh, that only appiles to LABOR. I mean, why should a cable channel have to be good and solicit viewers? That woud be competing in the free market. But no, we have to bundle because we cannot compete. Besides, if we can't raise the price every year we would have to control expenses and provide good programming.

Free market my behind. Only concessions from labor can save the country.

Delta paid retention bonuses to the top executives. you know what? Most of them are gone with their money and the airline is still bankrupt. Same with United and that great management.

[Winslow R.]

Considering the competition in the auto industry is international, why is there no mention (besides Bruce) of an item #6 - a strong dollar matched with a global auto capacity oversupply.

Sometimes commodities are profitablly mined in the U.S.

Sometimes autos are profitablly made in the U.S.

GM, Ford are becoming a casuality of globalization where there is a global glut of supply unfortunately matched by an overvalued currency.

[ogmb]

"#6 - a strong dollar matched with a global auto capacity oversupply."

This is not the root of GM's problems. It's what brings GM's problems to light.

[Ari]

http://www.nytimes.com/2005/11/24/business/worldbusiness/24continental.html?ex=1290488400&en=caa85a7c7c6d10f1&ei=5090&partner=rssuserland&emc=rss

November 24, 2005

A German Auto Supplier Delphi Might Envy
By MARK LANDLER

FRANKFURT - When Manfred Wennemer talks about the American auto industry these days, he sounds like a driver thankful to have survived a nasty pileup with a few scratches.

His German auto parts maker, Continental, has avoided most of the jolts that have rattled its American counterparts. While Delphi and its biggest customer, General Motors, are struggling to stave off financial problems, Continental's profits are surging and its stock is hitting record highs.

And yet Continental has gotten a taste of the hard times across the Atlantic. It recently laid off a quarter of the 1,200 workers at its tire factory in Charlotte, N.C., and is demanding concessions in benefits from those who remain. It no longer predicts when it will stop losing money in the United States.

"There's a cost burden that no one can manage away," Mr. Wennemer, the chief executive of Continental, said in an interview recently. "The United States has to find a way to solve that."

Fortunately for Continental, the world's fourth-largest tire maker with brands like Uniroyal and General Tire, and Europe's second-largest auto parts supplier after Bosch, the United States accounts for less than a fifth of its $14.7 billion in sales. For Mr. Wennemer, the problems at Delphi, General Motors and in his own American factories merely serve to dramatize the message he drives home day after day.

"We have to reduce our prices to our customers by 3 percent to 5 percent per year," Mr. Wennemer said. "If you don't do this, you shouldn't be in this industry. Not everybody understands that."

This relentless focus on costs has turned Continental into one of the quiet stars of German industry - a global powerhouse that makes tires in Malaysia, conveyor belts in Hungary, and brakes in Brazil. It has also made Mr. Wennemer, 58, a blunt-spoken mathematician with eyeglasses the size of saucers, into one of Germany's most respected chief executives.

"He is a very unassuming guy," said Ferdinand Dudenhöffer, the director of the Center for Automotive Research in Gelsenkirchen. "He always says, 'Look at the other C.E.O.'s, they're more important than me.' But those guys could learn from him."

The success of Continental is remarkable, given the fierce pressure on the American and European auto industries. Although it is in some of the same businesses as Delphi, and supplies the same carmakers, Continental's operating earnings jumped 35.9 percent in the first nine months of 2005, compared with last year. Its stock has risen close to 60 percent in the last 12 months.

If Delphi is forced to auction some of its assets, Continental has already put up its hand as a potential bidder.

"They really want to get into electronic steering," said Thomas Aney, an auto parts analyst at Dresdner Kleinwort Wasserstein in Frankfurt. "Delphi has got a good business in that."

Mr. Wennemer, a onetime cosmetics executive, took over Continental in 2001 after a string of acquisitions left the company deep in debt. His recipe for success, he insists, is not mysterious: create a stream of innovative products and produce them, as much as possible, in low-cost countries....

[huh]

i gotta agree with slocum...

of course i know nothing of economics, but why should that stop me from opining? (hey, at least i admit it!)

anyhow, i just don't see that GM would've really been able to take on the Japanese head-to-head in the quality-economy car market. they'd have too much catch-up to play....and it's hard to tell someone to play catch-up on their off-game when they're dominating their current in-game (suv's). of course foresight might've convinced them so....but that's really asking too much of corporate management these days.

the only thing i think GM could've done to diversify from the giganto-auto market would've been selling style.... man...the 90's??? what a nightmare. it's like every american and japanese auto designer was secretly peeking in my cat's litter box as i slept to find their next inspiration for a new car (with the horrible exception of the aztec). the japanese are only now cluing in to american tastes. the irony is that the american car makers still don't know what americans want. i think GM would've been in a much better position if they hired a few non-pretentious design studs and put out some cars that asthetically inclined techies would drool over. they can't match quality, but at least they could've sold style.....and eventually play catch-up on the reliability once they could establish that "GM isn't just for l053r5".

hell, they could've just built stuff off of old pininfarina fiat designs......i'd nut myself for a modern take on a fiat 124 spider....

[anne]

The dollar strengthened against most currencies for about 7 years till the beginning of 2002, then weakened significantly for almost 3 years to the end of 2004. Since then the dollar has strengthened. The relative value of the dollar now is about where it was 10 years ago. I do not think this is the issue.

[huh]

oh yeah....i want to commend ford for actually doing that style thing as of late....though i think it's really too late for them at this point. but it is nice to see a few genuinely sexy american cars in production again.....

[Winslow R.]

"#6 - a strong dollar matched with a global auto capacity oversupply."

This is not the root of GM's problems. It's what brings GM's problems to light."

Right, we would all like to see GM and Ford make better cars and have better management which is under their control, but not all their 'problems' have solutions that are under their control.

Unless we reach a 'tipping point', Ford and GM will have a difficult time getting the Fed/Gov to devalue the currency without a vote of 'the people'.

Roubini and Brad etc have been predicting a weaker dollar for years, but when you have an economy controlled by 'savers'....

[dearieme]

Tom said "You don't advance as a manager in a heavily unionized company by being a change agent". It may be less relevant in the US, but for years in Britain the unions were so strong that the labour force chose the management. Not directly, of course, but in the sense that bright young engineering students in the universities would look at union power and behaviour in the car industry and choose to work elsewhere. Years later the calibre of the management reflected that loss of talent. Similarly for promotions within the management, so I tend to agree with Tom (and I witnessed a diluted form of this effect when I worked in a different industry).

[Slocum]

"Considering the competition in the auto industry is international, why is there no mention (besides Bruce) of an item #6 - a strong dollar matched with a global auto capacity oversupply."

Because those Accords and Camrys that are the best selling cars in the U.S. (and many other models besides) are built here. As are the engines and transmissions and many other parts that go into them. Imports are not what is killing GM. If they were, GM could lobby for protectionist measures, but protectionist measures would do little good given that GM's most important competition is IN the U.S. Import quotas in the 80's drove the Japanese manufacturers to open plants here, and as a result they're now politically untouchable -- thousands of American jobs depend on Honda and Toyota, including many near GM headquarters in Michigan. The state of Michigan, in fact, recently went to great lengths to make sure Toyota was able to acquire land to expand its technical center near Ann Arbor (less than 50 miles from GM's headquarters in Detroit).

[Crab Nebula]

I can speak more authoritatively on the product quality and design side:

Only in the last 3-5 years has GM really risen fairly close to the competition in both quality/reliability and design/performance.

Indeed they made money in the 80s, but nearly all products were *still* atrocious. The 90s saw a return to mediocrity, with steady progress through today. However, today they are not leaders, and nothing less than that will do to get out of the hole.

GM cars today are pretty good buys for the money, especially slightly used. But if saving 1,2,3 thousand dollars doesn't matter to you, buy Asian. Hyundai is rapidly coming up on the outside, but is not there yet.

[bakho]

The internal combustion engine has been in existance for over 100 years. Most of the major innovations- power steering, automatic transmission, air conditioning all date to over half a century ago. The ICE has been fine tuned by adding computer controls, but it is still 100 year old technology. Failure to innovate is a key problem for the auto industry in general. For being the largest player in the market, GM has been one of the slowest to market new technology.

While some are quick to point to labor costs in the late 60s and early 70s as keys to allowing Japanese penetration into the US market, don't forget that during this time the US was protecting domestic steel (more failure to innovate) making costs of steel to US automakers much more costly than to the Japanese. The Japanese could put more steel in their cars for less money than GM and Ford when they were making rust buckets like Chevy Vega and Ford Pintos.

[Bernard Yomtov]

Anne,

The point is that to speak of GM's obligations to retirees as a per vehicle cost is incorrect. If GM's unit sales double, or drop by 50%, there will be no change in the size of these obligations, even though, calculated on a per vehicle basis, they will be halved or doubled respectively.

[Cranky Observer]

> Should the point be that GM has or should
> have provided for retiree medical cost
> through the last 30 years? Please argue this
> through.

Ah, the wonders of GAAP. GM wrote of $42 billion (if memory serves) about 8 years ago to fully account for all retiree health benefits to the end of the baby boom generation. What happened to that write off, exactly? Accounting fans please let me know.

Also, to re-emphasize what has been posted above: neither Japan nor the Toyota/Honda/etc plants in North America are "low cost" environments. (oh, and Toyota is said to have the most inefficient headquarters bureaucracy in the world). When the Japan-based companies want to build low cost they go to Korea (and now to Vietnam and China). If there is really a $2000 differnece between cars built in Detroit and Yokahama I would be very surprised.

As per the previous discussion: if GM had not lost the last 15 points, nay 5 points, of market share, it would be in a crisis but not its death throes. Talk to management. Talk to the designers. Bob Lutz came 10 years too late.

Cranky

[rod]

Detroit is a proof of the failure of corporate governance in America. It is a proof of the failure of leadership and government. In the early 90s the environmentalists, labor and the auto companies should have struck, and did discuss, a deal by which they would make clean cars, save jobs, seek sensible energy regulation by way of enforcement and save the industry for America. The deal fell apart. The result: catastrophe for America and btw for the shareholders.

[save_the_rustbelt]

Speaking from auto country, GM needed to change their management model and take a big strike to change their union contract model in the mid-80s.

For twenty years now they have nibbled at reform, but never really reformed anything.

So their basic model is still:

1) Make homely cars that are not durable.

2) Allow short warranty periods and provide lousy service.

3) Buy union peace at whatever cost necessary.

So ain't that working well?

The 2005 Malibu looks like a failed high school shop project - and when times get tough GM will dump them on the rental market, killing the trade-in value of anyone dumb enough to buy a Malibu, thus creating another Toyota buyer in a few years.

Delphi is overturning the apple cart, and the riplle effect is going to be messy.

[hrned]

Management gets the big bucks because they are supposed to anticipate changes that could threaten the life of the company (and because they have boards that let them). At GM, and at many other American companies, management failed badly. As compelling as some of the arguments absolving management for their failures are (e.g., can't compete head to head with a $1500 cost deficit), these reflect prior management decisions that were narrow and unwise.
At this point, the question is not what's going to become of GM, it's what is going to become of our economy overall, when top management teams are insulated from real risk by ridiculous compensation schemes.

[lending_risk]

Since we're all throwing around theories, here's mine. Engineering practice in North America lacks the discipline of practices in Europe and Japan. Huge government spending allows US firms to get access to new technologies, but once the technology is fully understood, it is almost always done better in Europe and Japan. To put it another way, even though GM focused on SUVs the Japanese and Europeans still spanked it in that market as soon as they saw what's going on (quality, performance, styling, and price of Japanese and European SUVs cannot be compared with GM's products)
I can't speculate on a root cause, though managment inflexibility seems like it could be used to define any problem in any industry.

[donna]

W. Edwards Deming. Japan listened, we didn't. The rest is history....

Maybe before people get those MBAs they ought to be required to take a quality management class, like I did, and an ethics class, like I was required to. Multimillion dollar salaries are all too common in American management, while workers contiunally get the shaft. Sure, the unions were a powerful force, because they had to be. If American companies would push for a national health care program and stop overpaying managers at worker's expense, they wouldn't be going bankrupt.

[David Agnew]

Anne,

You would do well to take a course in micro principles and learn the difference between "average cost" and "marginal cost."

[Bruce Wilder]

Details, details.

Import quotas of the 1980's. Tariffs and quotas are quite different in their effects on the distribution of rents and income. A tariff on automobiles would have transferred a part of Japanese profits to the U.S. treasury; the import quotas not only encouraged the Japanese to invest in U.S. facilities, and to move up the market toward more expensive vehicles, they helped to finance those investments, by protecting and even enhancing the rents earned by the Japanese in the U.S. market. That's an important reason why the program of "voluntary" import quotas was acceptable to the Japanese.

There was also, at the time, a tariff of ~25% on light trucks, an inadvertant consequence of an earlier dispute with Europe over frozen chickens. (I'm not kidding.) G.M. and Ford focused a lot of attention on their trucks and vans in the 1980's.

Corporate culture is a real thing. At G.M., in the 1980's, when the shoot was hitting the fan, every other top executive was named "Smith" or "Johnson" and most likely name among those who weren't, were named "Anderson." The DeLorean's -- the people with style, individuality -- were exiled. I remember a particularly a vivid case of a parts company, where a charismatic leader had developed a new package for various parts in the wheels, dramatically reducing the assembly costs for these parts. The company let this guy, who was quite impulsive and probably a bit manic, go charging ahead on one change project after another, and when he got into trouble, with output problems, they destroyed him. They did not just fire him, they let him hang, ruining his reputation in the company. It was amazing, the passive-aggressive character of the organization. They took this talented, energetic individual, empowered him, without any kind of restraint or supportive guidance, and then, having given him rope, they let him hang. He was an advocate for a kind of innovative, productivity-enhancing component redesign, which might have really helped the company, but having made him a champion, they turned around and made the poor sap a martyr for the same cause. It was an organization of anonymous men in grey flannel suits, and they just killed any kind of positive change.

The need to align the brandnames with the design and production organization, though, was critical to the failure of G.M. to make the lessons of Japanese quality and productivity stick. Consumers are very sensitive to a reputation for quality, but all the achievements in G.M. on improving quality were lost in a white noise of cross-branding bland, homogenous designs. If Assembly Plant X had a breakthrough in quality, consumers had no way of knowing, because Assembly Plant X produced Buicks, Chevys and Pontiacs, just as Plant W,Y and Z did. Parts of G.M. did well, in adopting the new techniques, but they could not translate that into marketplace success or economic performance for particular units of the company. With no way to gain marketplace recognition, the outliers were soon dragged back to the mean by the corporation.

G.M., in the 1980's, could have divided the company in various divisions, each with direct relationships with the market; Buicks could have been designed and built in facilities separate from Oldsmobiles. Some parts would have succeeded and others would have failed. That kind of raw exposure to risk was not something people in the company wanted; it would meant taking an immediate hit on the company's traditional cost advantages in economies of scale, and then scrambling to find some other basis to compete and win. Too scary; too radical. It was easier to buy Hughes.

[Bruce Wilder]

Citing the $1500/car figure can be a little confusing. I think, in the first instance, this framing is just a journalist's trick, to make clear how huge the obligation is, relative to G.M.'s capacity to meet it, from current revenues.

For people, familiar with economic or business reasoning, it is easy to slide into thinking about whether this obligation is, in any sense, either a marginal or variable cost. It is not.

In some important ways, an automobile company, at its core, is a highly specialized merchant or investment bank. It accumulates the huge amount of capital necessary to design and put into production the next generation of models. The burden of retiree benefits must be impairing that anticipatory accumulation of capital.

[tech98]

[i]An Accord from the early 1980s was a tiny, unappealing car that you'd only buy if you were desperate.[/i]

The Accord was the class-act of the compact car market - maybe clunky by today's standards, but a jewel compared to the execrable GM J-cars and Ford Tempo/Topaz that ostensibly competed with it. Accord's quality and sophistication rang alarm bells in Detroit when it was launched in 1976, being Japan's first foray out of the cheap-subcompact class, with German levels of vehicle dynamics and fit & finish.

GM has engineering talent and smart individuals equal to any other major automaker. But GM as an organization has the IQ of a slug, and an organization is in trouble when it is less than the sum of its parts, whose collective action is abysmally short-sighted and stupid.

I've been following the auto industry for several decades and the same problems keep recurring. In the 70s the excuse was the Japanese's low labor costs; now that they have reached American pay levels the whining and excuse-making has moved on to health care. Tomorrow it will be something else.

Something in the insular culture of the Detroit carmakers leads it to make the same mistakes over and over, treating their customers with contempt and cutting-corners-to-pinch-pennies in engineering, in the pursuit of short-term profit.

Perhaps one aspect of it traces back to Alfed P. Sloan's grubby often-stated philosophy: "GM makes profits, not cars". Why would you buy a car from a company like this, when you could buy from a competitor that focuses on engineering and quality?

Quality cars sell at premium prices. You don't see the Japanese running ads screaming about multi-thousand-dollar rebates.

GM's root problem is the suckful quality of its cars. It is capable of producing dynamic, stylish cars in Europe and Australia competing against the same global competitors, so it mystifes me as to why their North American offerings are so abysmal.

If GM produces a superbly-engineered superior competitor to the Accord and Camry, as they are capable of doing, it will sell at a premium price and a good profit. But it will take long-term thinking and a focus on engineering and quality, not the short-term arrogant expediency and corner-cutting we are used to seeing. Detroit's quality reputation took decades to lose and will take decades to get back.

[Jonathan W. King]

save the rustbelt writes:
>
> The 2005 Malibu looks like a failed high school shop > project - and when times get tough GM will dump
> them on the rental market, killing the trade-in value
> of anyone dumb enough to buy a Malibu, thus
> creating another Toyota buyer in a few years.

I think the example of the Malibu is interesting, but maybe for different reasons. The unfortunate fact of the matter is that the Malibu is from the features and (I think; have to check) reliability standpoint a pretty nice car. Way better than the Malibu it replaced in every way including (ironically maybe) gas mileage. However, you're also right that it is just not a very *attractive* car. For that matter, it was a design that could have been used to make a truly first rate station wagon, but instead, they ended up making a clunkier looking large hatchback (the Maxx) instead. Sheet metal is not everything, but a design that was just 20% better looking from the outside would have sold far better. Within the year that the Maxx came out, Chrysler put out the 300 and Dodge's wagon version (the Magnum) came out. They are more interesting cars, but probably not better cars. They have sold far better than the Malibu.

What GM seems to do all too well these days is take promising ideas and blow them. But the final nail, I think, is the ridiculous discounts they need to apply. The Malibu Maxx for (say) $22K might not be a bad deal, but nobody is going to buy one for that when they know that they'll get the same car in 6 months for $18K. I don't know how to cure that downward spiral.

[dsquared]

all of these things were true of pre-Daimler Chrysler (and for that matter, pre-Nissan Renault) but they managed to get over them. GM's problems are the result of about a dozen specific bad decisions about bad cars.

[Alex Marshall]

Bruce Wilder:
I think you did an excellent job on the history of GM except that I would emphasize quality and total cost of ownership.
In the early sixties, the early boomers, buying their first cars, needed inexpensive wheels. GM gave them the Corvair, which had a significant design flaw. It oversteered, a phenomenon American drivers had no clue how to correct. In the seventies, when the pig in the python was at its greatest, GM gave the mid-boomers the Vega, a car who's corrosion problems are the stuff of legend. The late boomers were blessed with the X-cars. Hey, oversteer again! (What do you call an X-car driver? Ex-drivers.) To these design problems, add a slew of fit, finish and reliabilty issues. I myself, because I worked for American automotive suppliers, drove a Pinto, a Maverick, an Escort, and a Lynx. All crappy cars.
The Detroit attitude was "Why spend a lot of money on low profit cars?" Brand loyalty is never developed when you screw over your entry-level customers.
The foreign cars of the time were crappy, also, and the initial cost to the consumer was the same. However, the Japanese cars used much less gas. A substantial number of motor heads, the kind of guys who like to work on the car on weekends, faced with the choice of Japanese or Domestic chose Japanese cars because of gas mileage. When the "Car Guys" eschew your product offerings, the death spiral commences.

[ogmb]

"Right, we would all like to see GM and Ford make better cars and have better management which is under their control, but not all their 'problems' have solutions that are under their control."

No company fails when environmental conditions are favorable. Low fuel price, advantageous exchange rates, government handouts allow companies to make mistakes without being punished for it -- until the conditions become unfavorable. GM does not suffer from adverse exchange rates. That's a red herring. GM suffers from bad management decisions made five to twenty years ago that weren't recognized and corrected in time.

[noel bautista]

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[anne]

http://www.nytimes.com/2005/05/13/opinion/13krugman.html?ex=1273636800&en=05bf06abe3995652&ei=5090&partner=rssuserland&emc=rss

May 13, 2005

Always Low Wages. Always.
By PAUL KRUGMAN

Last week Standard and Poor's, a bond rating agency, downgraded both Ford and General Motors bonds to junk status. That is, it sees a significant risk that the companies won't be able to pay their debts.

Don't cry for the bondholders, but do cry for the workers.

Standard and Poor's downgraded GM and Ford sooner rather than later because it believes that the public is losing interest in S.U.V.'s. But the companies were vulnerable because they still pay decent wages and offer good benefits, in an age when taking care of employees has gone out of style. In particular, they are weighed down by health care costs for current and retired workers, which run to about $1,500 per vehicle at G.M.

So the downgrade was a reminder of how far we have come from the days when hard-working Americans could count on a reasonable degree of economic security.

In 1968, when General Motors was a widely emulated icon of American business, many of its workers were lifetime employees. On average, they earned about $29,000 a year in today's dollars, a solidly middle-class income at the time. They also had generous health and retirement benefits.

Since then, America has grown much richer, but American workers have become far less secure.

Today, Wal-Mart is America's largest corporation. Like G.M. in its prime, it has become a widely emulated business icon. But there the resemblance ends.

The average full-time Wal-Mart employee is paid only about $17,000 a year. The company's health care plan covers fewer than half of its workers....

[anne]

http://www.nytimes.com/2005/11/19/business/businessspecial2/19generations.html?ex=1290056400&en=8ef7791af88eeb4b&ei=5090&partner=rssuserland&emc=rss

November 19, 2005

For a G.M. Family, the American Dream Vanishes
By DANNY HAKIM

"If I look at our priority list on the things we need to do to get cost competitive, wage rates are nowhere near the top for us," Mr. Wagoner, the G.M. chairman and chief executive, said in a recent interview.

Not that anyone has much chance of getting a job at these companies anymore. Wages are less important because the industry is so much more efficient than it used to be and has already cut so many jobs.

G.M. plans to cut its blue-collar work force even further, though, to 86,000 Americans nationwide by the end of 2008, about the same number of people it once employed in Flint alone in the 1970's. At its peak, G.M. employed more than 600,000 Americans.

"Frankly in our business, the progress in improving productivity has been dramatic," Mr. Wagoner said. "Over a 10-year period, we have gone from a ballpark of 40-plus hours a vehicle in assembly to 20-plus hours a vehicle."

Benefits are another matter. G.M. pays about $1,500 per car assembled in the United States for health care, more than it spends on steel....

[anne]

http://select.nytimes.com/2005/11/25/opinion/25krugman.html

November 25, 2005

Bad for the Country
By PAUL KRUGMAN

"What was good for our country," a former president of General Motors once declared, "was good for General Motors, and vice versa." G.M., which has been losing billions, has announced that it will eliminate 30,000 jobs. Is what's bad for General Motors bad for America?

In this case, yes.

Most commentary about G.M.'s troubles is resigned: pundits may regret the decline of a once-dominant company, but they don't think anything can or should be done about it. And commentary from some conservatives has an unmistakable tone of satisfaction, a sense that uppity workers who joined a union and made demands are getting what they deserve.

We shouldn't be so complacent. I won't defend the many bad decisions of G.M.'s management, or every demand made by the United Automobile Workers. But job losses at General Motors are part of the broader weakness of U.S. manufacturing, especially the part of U.S. manufacturing that offers workers decent wages and benefits. And some of that weakness reflects two big distortions in our economy: a dysfunctional health care system and an unsustainable trade deficit.

According to A. T. Kearney, last year General Motors spent $1,500 per vehicle on health care. By contrast, Toyota spent only $201 per vehicle in North America, and $97 in Japan. If the United States had national health insurance, G.M. would be in much better shape than it is.

Wouldn't taxpayer-financed health insurance amount to a subsidy to the auto industry? Not really. Because most Americans believe that their fellow citizens are entitled to health care, and because our political system acts, however imperfectly, on that belief, tying health insurance to employment distorts the economy: it systematically discourages the creation of good jobs, the type of jobs that come with good benefits. And somebody ends up paying for health care anyway.

In fact, many of the health care expenses G.M. will save by slashing employment will simply be pushed off onto taxpayers. Some former G.M. families will end up receiving Medicaid. Others will receive uncompensated care - for example, at emergency rooms - which ends up being paid for either by taxpayers or by those with insurance.

Moreover, G.M.'s health care costs are so high in part because of the inefficiency of America's fragmented health care system. We spend far more per person on medical care than countries with national health insurance, while getting worse results....

[anne]

http://www.nytimes.com/2005/10/10/business/10delphi.html?ex=1286596800&en=c95d41baeed3b651&ei=5090&partner=rssuserland&emc=rss

October 10, 2005

With Delphi Filing, Tougher Times for Auto Industry Workers
By DANNY HAKIM

Jonathan Steinmetz, an analyst at Morgan Stanley, said he did not see the Big Three necessarily coming to the same crossroad as their domestic suppliers. The competitive pressures are intense, but not the same, because Toyota and other foreign competitors are building more plants in the United States and paying wages and benefits somewhat comparable to the Big Three's. Automobiles sold in the United States are not yet being assembled in China, though parts are being made there.

What will not likely be sustained, however, are the benefits. G.M. spends $1,500 a vehicle on health care, more than it spends on steel. Every American G.M. worker supports nearly three retirees.

"It's hard to have a deflationary environment for car prices and health care inflation of 10 percent," Mr. Steinmetz said....

[anne]

Paul Krugman has repeatedly written and spoken of the $1500 per vehicle health care cost per vehicle for General Motors compared to the $201 American cost and $97 Japanese cost for Toyota. Where is the problem?

[Factory Rat]

GM management does deserve lots of blame for poor product decisions and too many marketing channels causing extreme duplicate costs. It does not manage costs in the deep recesses of engineering processes as well as the Japanese, spends way more on die sets, etc.

The root of the problem is the vehicles. If GM had five more points of market share as suggested by a previous poster, it would not be in a crisis, but instead making many billions each year.

BTW, the non-US firms are rushing into trucks as fast as they can. GM should move away a bit to mitigate risk of energy price changes, but it is just too clumbsy. Go back 15 years, and GM missed the turn toward tucks and was late to market, missing lots of profit. Same dynamic here.

The currency problem is not about the stength of the dollar against a mix of currencies, but about the yen and the blatant manipulation by Japan. GM estimates this is worth $3,000 or more per vehicle. Again I ask the economists here, what is the net cost to Japan of holding the yen down? (granted, we need someone to buy our debt)

I am also struck that no one here addresses directly the cost advantage of national health care for Japanese competitors. If GM had the same per-retiree liability as Toyota in Japan, its profits (for you GAAP fans) would increase $10 billion per year for 7 years as it unwound the $77b liability from the balance sheet. Is socialized health care financing now a natural endowment?

[anne]

Paul Krugman:

"According to A. T. Kearney, last year General Motors spent $1,500 per vehicle on health care. By contrast, Toyota spent only $201 per vehicle in North America, and $97 in Japan. If the United States had national health insurance, G.M. would be in much better shape than it is."

Evidently the health care cost difference is important for General Motors, as it is for failing Delphi and successful German vehicle supplier Continental. I find no problem with Paul Krugman and Danny Hakim arguing along this line.

[spencer]

The bottom line is still that GM has had poor management.

Compare GM and GE 30 years ago. They both built for the US durable goods market and had similiar labor costs and relations.
But GE adapted and changed and thrived
while GM stagnated and is in the process of dying.

Why the difference -- it is all management.

[anne]

The value of the dollar against the Yen is about where it was in 2000 or 1995 or 1990. In September 1985, the Japanese and other economic ministers agreed to foster a decline in the value of the dollar. The dollar did decline in value by more than 50% against the Yen and assorted amounts against other currencies. Since 2000 the dollar gained and fallen against the Yen, but been remarkably stable over the 15 years. The dollar has however gained in value against Europe's currencies through the 15 years.

Japanese and European vehicle makers and parts suppliers have adjusted well to currency swings and stability since 1985, while American companies have at times complained but with little rationale to the complaints.

The problem is not currency values.

[Slocum]

"Since we're all throwing around theories, here's mine. Engineering practice in North America lacks the discipline of practices in Europe and Japan."

Two problems with this theory. First, Japanese companies do a lot of engineering in the U.S. for vehicles that are specific to the U.S. market (examples: Toyota Sienna, Toyota Avalon, new 3.5 liter V6 for the Avalon). Second, european cars have fallen FAR behind American cars in reliability. Of the 'top ten' least reliable cars sold in the U.S., about 9 of them are European models -- VW and Mercedes are especially bad).

Krugman: "So the downgrade was a reminder of how far we have come from the days when hard-working Americans could count on a reasonable degree of economic security."

The problem with Krugman here is that Americans who worke for Honda, Toyota, etc enjoy good wages, decent health benefits, and the excellent job security that comes from working for successful, growing companies. GM's market share is not being taken by Wal-Mart.

[anne]

http://www.nytimes.com/2005/11/24/business/worldbusiness/24continental.html?ex=1290488400&en=caa85a7c7c6d10f1&ei=5090&partner=rssuserland&emc=rss

German vehicle parts supplier Continental can operate splendidly in Germany, no matter the labor wage and benefit costs, and operate well in other countries. But, the company is losing money in American operations. The problem in America is not wages but health care costs.

Of course, management matters. Of course, there is pressure for manufacturing out of Germany or Sweden or Japan. But, health care support by governments through the developed countries makes a distinct difference for company labor costs.

[anne]

Agreed; beyond a benefits cost difference there is no reason why Toyota should have so successful a hybrid engine and General Motors have none through the SUV line in any division let alone for sedans. Management and vision makes a difference.

[bakho]

If GM were selling a reliable hybrid today that could get over 45 mpg, they would be selling them hand over fist. They don't make them, so they have no market share. GM will have to fight its way in against Toyota.

GM management has fought off at all costs any changes to CAFE standards instead of taking the lead in fuel efficiency. GM has sunk to the lowest common denominator until the market has forced their hand. This could have been prevented with judicious use of GM research and technology and a commitment to leverage CAFE standards to position GM cars with respect to competitors.

This is a management decision. One wonders about the effects of Directors serving on boards of multiple corporations (autos and oil for instance) whose economic interests are opposed in some sectors (low oil use/price V high oil use/price). The technology for better fuel efficiency has been available for years. The commitment from GM management has not.

[nate]

it would be interesting to see # cars produced per employee: GM, Toyota and others (total cars produced during year) / (total # employees)

there are probably nuances to above: produced vs. sold, what is an employee, etc.

[nate]

to accompany the stat above, it would also be interesting to know average selling price per car across all the autos. GM might be able to argue for lower cars produced per employee if the cars are more expensive...

[nate]

the other thing about hybrids (gas electric): setting aside concerns over fuel-efficiency, performance hawks will probably have to admit that gas-electric vehicles may provide more horsepower at the same level of fuel efficiency. Gas-electric technology may be as much related to providing a higher-performing product than providing a more fuel-efficient product.

back in the day, gm figured out how to provide multiple color cars to people in a cost-effective manner. they beat ford to market on this. today, toyota found out how to give people more horsepower at the same mpg. they beat gm to market. ouch. i think the GM ceo realizes this, but other VPs at gm still do not sound like they do.

[Steve LaBonne]

There still seems to be a lot of "domestic vs. imported" in many people's thinking about the auto industry, but those categories ceased to be meaningful a long time ago. I happen to live in Ohio, where Honda makes many of the cars it sells in the US. Recently there was a comparison test in one of the car magazines involving the Honda Accord, Ford Fusion, Hyundai Sonata, and Toyota Camry. The only one of these cars not made in the US was the Ford! (It's assembled in Mexico). Also, the Japanese transplant factories use an ever-increasing proportion of US-made parts, and I would be surprised if Hyundai doesn't evolve in that direction as well. As GM and Ford have shed jobs, Honda, Toyota and now Hyundai have created jobs. And while their workers are not UAW members, they are not underpaid Wal-Mart slaves either- they're well-compensated. GM's (and perhaps Ford's) inevitable demise will have a painful, but limited and temporary, impact on the US economy. Even if they survive, more and more of their manufacturing will be done in Mexico and Korea anyway.

[Steve LaBonne]

Seems to me that GM and Ford are forced to outsource or die, not for currency or any other broad economic reasons, but partly because they're saddled with those UAW contracts negotiated in the cozy oligopoly days and partly because their managements haven't been smart enough to oversee the design of cars that can compete without heavy discounting. Why is it that Honda and Toyota seem to have little trouble making healthy profits from selling US-built cars?

[anne]

Steve LaBonne:

"Why is it that Honda and Toyota seem to have little trouble making healthy profits from selling US-built cars?"

Paul Krugman:

"According to A. T. Kearney, last year General Motors spent $1,500 per vehicle on health care. By contrast, Toyota spent only $201 per vehicle in North America, and $97 in Japan. If the United States had national health insurance, G.M. would be in much better shape than it is."

[Steve LaBonne]

Re anne: but you keep forgetting that Toyota is also paying less (I don't have exact figures) for health care than GM _here in the US_, not just in Japan. Again, much as I agree that we need a national health care plan, the main problem here is with excessively rich benefits (have you ever had health insurance with no copays or deductibles? I sure haven't) larded into contracts dating from the good old oligopoly days.

Re Winslow: I doubt the relevance here for 2 reasons: 1) Toyota making somewhat less money is a very different matter from GM losing buckets of money; 2) GM's North American car (as oposed to truck)operations haven't been profitable in years; it's not a recent or transitory phenomenon.

[anne]

Winslow and Steve

Please do not think I am arguing. Simply trying to sort out the problem.

Toyota spent years positioning production capability flexibly in Japan, China, Europe, and North America. The idea was to be able to compensate for exchange rate shifts when necessary. Also, the company hedges against exchange rate change for as long as 2 years which is fairly common. While General Motors may have less production flexibility, even though they produce internationally, I also think exchange rates changes not a critical issue. Toyota, after all, readily compensated for a 50% increase in the value of the Yen from 1985 to 2000.

Toyota spends $201 per vehicle on health care in America and $97 in Japan, while General Motors spends $1500 in America.

[Barry]

Steve, the advantage on health care is probably also due to (1) a younger workforce, and (2) virtually no retirees.

[anne]

Notice for instance the Lexus IS 300, new and old, and ask if flexibility in design and reliability emphasis is similar in General Motors offerings in the same range. I am similarly asking.

[anne]

But, then we come round to my foolish question. Why was General Motors not able to prepare for retiree health care costs and increases in costs over years of revenue strength?

[Steve LaBonne]

Agreed, Barry, but that can't explain all of it. It also can't explain why GM can't make money building cars in Canada, with its national healthcare system. However I do want to emphasize that in any case I think the UAW legacy cost aspect of the problem has been somewhat overblown; by far the main problem is inept management that just can't figure out how to design cars that people are willing to buy at anywhere near the same prices that Toyota et al. can command for theirs (GM's average transaction price is shockingly lower than Toyota's.) Worse yet, the brands have been so severely damaged that even if GM next year started producing cars that objectively were _more_ appealing than the competition's, it would take years for comsumer perceptions, not to mention resale values (which certainly factor into people's purchase decisions),to catch up. I see no way for either GM or Ford to survive in anything like their current forms. That wouldn't change even if we adopted the Canadian health care system tomorrow.

[Slocum]

"Worse yet, the brands have been so severely damaged that even if GM next year started producing cars that objectively were _more_ appealing than the competition's, it would take years for comsumer perceptions, not to mention resale values (which certainly factor into people's purchase decisions),to catch up. I see no way for either GM or Ford to survive in anything like their current forms."

There's something in that, but I think you overstate the problem. Chrysler went from the slow-selling Intrepid to the hot-selling 300C in one model year. It became a hot seller before there was any time for long-term changes in reputation or resale value. Ford is selling a ton of Mustangs even though the previous model wasn't much of a seller. The Taurus was a long-in-the-tooth dog, but the new Fusion is selling well. GM appears to have a hit on its hands with the Pontiac Solstice, but unfortunately it's a low volume car. If a car is appealing enough, the worries about reputation and resale are not critical.

The problem is that Chrysler has *always* been the small player and is used to having to take risks, and that's also true to some extent of Ford. But GM has been used to the big-dog niche that Toyota currently occupies -- being able to play it safe and boring still sell cars. But that's not going to work any more for GM.

[nate]

steve has a good point.

it might not be ideal for gm's situation to no necessarily become the indictment for the entire health care system in the U.S.

this is why i would like to know cars produced per worker, on average, at a variety of auto mfrs. it is possible that gm's labor is less is managed in a less productive manner than other auto mfrs. of course this shows up as higher health costs per car. gm may have higher labor costs of all kinds per car basis.

[Michael Cain]

"Why is it that Honda and Toyota seem to have little trouble making healthy profits from selling US-built cars?"

Among other factors, Honda and Toyota have been fairly fanatical about the level of production required to turn a profit. IIRC, Toyota breaks even if the factory is running at 60% of capacity, where Detroit needs to be at 75%. Similarly, Honda breaks even on sales of around 750,000 units for a model, while Detroit needs closer to 1.5M. Again from memory, some of the factors include fewer models, common subassemblies across models, lots of incremental improvements in the assembly line, etc.

[liberal]

Steve LaBonne wrote, "I happen to live in Ohio, where Honda makes many of the cars it sells in the US."

But where are the _parts_ made? Not all the value in a car is in the final assembly.

[Anderson]

Well, I'm not able to contribute to the discussion, but I do think that Slink's free verse merits some praise.

[Slocum]

"But where are the _parts_ made? Not all the value in a car is in the final assembly."

Honda and Toyota also have engine and transmission plants here. See:

http://ohio.honda.com/Company/aep.cfm
http://www.toyota.com/about/operations/manufacturing/alabama/alabamaindex.html

And there are also transplant Japanese auto parts manufacturers here that supply the assembly plants.

[Cranky Observer]

> GM's North American car (as oposed to
> truck)operations haven't been profitable in
> years; it's not a recent or transitory
> phenomenon.

While not a good thing, it is also a bit of a red herring: since about 1950 GM's auto group has existed to provide a steady flow of customers to GMAC, not necessarily to make a profit itself. As any don can tell you, financing is where the big money is made.

Cranky

[Esq.]

Bad Management. Really bad. Atrocious even.

GM basically invented planned obsolescence. Henry Ford (whatever his many other faults) would never design a car to fall apart. The Japanese needed to prove themselves and went out of their way to build cars that didn't fall apart. GM's model assumed and still assumes customers would buy another GM car when the first fell apart. The PLAN was to build crap designed to fall apart, so the customer would buy another one. They still do. They won't stop.

Moreover, GM is famously accountant driven, not engineer driven. Every penny on improvement of product hurts the bottom line - immediately. Decide not to spend that penny enough times, and you are far behind the competition. When GM begs for the bailout, one condition should be that it will be required to always give the best warranty in the industry on every vehicle it sells. When the accountants say it will cost money, marketing and construction can say the warranty expenses will put us out of business. Reducing the warranty expenses would drive the accountants to push for quality, not oppose it.

In addition, it is clear that many (most?) wouldn’t believe it, if GM started selling decent cars. A super duper warranty (free maintenance, parts and labor for the first 3 years or 100K miles) and people might give them a shot.

Lastly, it is not enough that management should be required to drive their product. No more free maintenance for management's cars. And when they get a cheap or free car, they should be required to keep ownership for the length of the loan most people use, five or six years. No more selling it nearly new as a cash bonus. Make 'em live their customer's problems with their product.

[liberal]

Slocum wrote, "Honda and Toyota also have engine and transmission plants here."

OK.

[Julian Elson]

What are the effects of sunk costs like pensions on corporate decision making? At a first glance, textbook economics says that there is no effect -- that if GM had no pensioners, it would be making the same decisions as it does now, but the risk of bankruptcy reduces their bond rating, raising their interest rates. The higher the bond rate they pay, the more the future is discounted. The pensioners and sunk costs of GM don't merely make things just generally somehow harder to get cash for improving product quality, marketing, etc. They discourage future-looking spending like R&D or new investments, not because GM just can't scrounge around for enough money for such products, but because they can't borrow at a rate at which such products would be rational.

At least, that's my analysis. Sunk costs, ceteris parabis, don't matter, but overall financial position does, and old sunk costs lead to today's bad financial position.

[Claudia]

If the country maintains a large number of well paid workers, they are going to buy a lot of cars and other stuff. When wages for workers go down, consumerism shrinks. The engine of the economy has been a well paid and secure middle class. Once that goes, companies selling to those people are going to be closing up.

[Ben]

I can only speak for myself as I explain why I switched from new GM products to new Honda products.

I walked into a Pontiac dealership in 1997 to test drive a Sunfire. When I told them that I cannot buy today because I still need to test drive the Corolla and Civic they told me that they will let me factory order any Sunfire any way that I want it for $50 over invoice plus any rebates, incentives, etc... that are applicable at the time of delivery.

I thought that was such a great deal that I signed on the dotted line.

My factory ordered car arrived some time later and when I picked it up and flipped it over the dang thing had a sticker that read HECHO EN MEXICO! When I signed on the dotted line I was not anal retentive about it being made in America; but a low wage country like Mexico?

This car was nothing but a pure lemon. When I finally got rid of this nightmare it had 56k miles and lots and lots of repairs. Like $1,300 (out of my pocket) for a new moonroof mechanism. An Oil pump, two ignition coils, stereo, rack n pinion steering gearbox, catalytic converter, and on and on and on. Every repair took the dealer at least three attempts to fix anything, and they introduced other problems at the same time of the repairs. It was an endless cycle of breakdowns, tow trucks, appointments for repairs, and long waits in a laughable sardine can sized room packed with other Pontiac customers. I was in the habit of checking under the hood after every repair attempt looking for bolts and washers that Mr. Goodwrench left out. It seems that my whole life revolved around the Pontiac dealership at times.

Maybe it would be better if the owner of this Pontiac dealership was to spend less money on his multi-room mansions that he builds for himself every three years and more money in his Pontiac dealership? Just a thought.

By the time I got rid of this GM product (remember, it had 56k miles) it was stalling on the highway every 20 minutes, the power steering fluid was leaking on a hot radiator hose and the resulting (carcinogenic?) fumes in the passenger compartment were suffocating me, it needed yet another rack n pinion steering gearbox, and the engine was at times making a horrendous screeching sound as if journal bearings where seizing or something. I was also keeping a dahon folding bicycle in the trunk just in case, and I tried not to drive too far from home so that I was always within pedaling distance of my apartment.

All the while throughout this ordeal the Pontiac dealer was "amending" existing work orders so as not to show that three attempts where made to fix anything. They told me that this paperwork is done this way because it is much easier and efficient - but the thruth is that they know not to generate all of these different work orders that prove that they are an icompetent service facility - better to show that all of these attempts to fix any one problem was one repair with only one work order.

My letters to Pontiac always came back with a form letter advising me to work to get these warranty problems resolved with the Pontiac dealership. The Pontiac dealership in turn told me that they will be more than happy to work something out about this defective product if I can get GM to do something for me. When I asked the Pontiac dealer who the regional factory rep for Pontiac was they told me that "these things are not handled this way." In other words, the Pontiac dealer did everything they could to see to it that I got stuck with this lemon.

My experience with my new 20001 Honda Accord has been very different. No sooner do I drive my new Honda Accord home I get a letter in the mail - a form letter signed by the owner of the Honda dealership - advising me that at his dealership the customer does not put up with any headaches. If something is not right then I am to speak with him and he will make it right.

Now this is an example of a new car delalership owner who is NOT so engrossed in his mansion building that he forgets where his money is coming from.

The few warranty problems that I have had with my new Honda purchase where fixed at the very first attempt to fix them. I am totally amazed that they do not break anything else when they go about fixing warranty problems or performing regular maintenance. (The Pontiac dealer led me to believe that all service departments are like that.) At 95k miles it is still going strong with no out of pocket repairs (only maintenance items like new brake linings, brake fluid flush, manual gearbox fluid change, new tires, spin balancing, etc.). The two service writers at the Honda service department today are the same two people in 2001 when I purchased my New Honda. At the Pontiac dealership what they had was a revolving door of personnel.

Last week a small decal that is glued to the driver side door that envelopes the security red blinking LED came off so I glued it back on with super glue. Last year the clutch pedal's return spring broke, so I replaced it. Maybe two years ago the clock's light bulb went dead, so I replaced it. I can live with a car that requires these simple do it yourself repairs.

I do not pretend to be an authoritative source as far as which manufacturer has the best product quality. I choose not to get into any slipery slope (read pissing contests) with people over product quality. I do not pay any attention to J D Powers or what Edmunds.com or Car and Driver are writing about the new vehicles. I am no different than most other folks whose past life experiences help shape and mold the person that they are today, and today my preferences for consideration for a new car purchase has to include Honda and Acura at the very top of my list.

If the new Cadilacs truly are great products that are just as good as any other luxury brand and the Cadilac service departments are the greatest things since sliced bread then I will never know because I will never purchase a new Cadilac.

Who could blame me?

But I have other reasons not to buy GM products. I happen to know the couple who own the local Avis rent a car agency in town. Avis rents mostly GM products. This couple tell me that they send their GM rental products to their respective GM dealership for repairs only to get swindled out of their money because these GM dealerships never fix anything.

All that I have written about GM service departments may not be fair because it is not based on a randomized statistical sampling of service at all GM dealerships - and there are thousands of GM dealerships in America - but as far as life experiences go, these are the only facts that I have to go by.

[Don Pozniak]

Being a retired GM engineer and staffer, I have a different perspective than all of you. The biggest problem has been way, way too many salaried people and way, way, way too many execs.

This situation causes ungodly amounts of usless work. After all, most everyone that comes to work wants to do something useful. But, if there are too many people, they start "inventing" things for others to do....forms to fill out, meetings to go to. It's a spiral that never ends. One of my staff jobs was to justify bloated headcounts. I'm now an expert spin-doctor who relies on spreadsheets and can prove anything with them. Just tell me the answer boss, and I'll prove it. How sad.

The next problem is the amount of time execs spend on their careers. The average is about 1 day per week. If there were 20% fewer execs, they'd have to put all their time into productive work.....maybe.

The next result is the generation of scores of checker-on-ers. These people in purchasing drive suppliers nuts with meetings and forms to fill out. As a result, the identical part costs Toyota 7% less than it costs GM.

With so many checker-on-ers everywhere, one must be constantly be CYAing. No one GM wants to look like they made a mistake (this is from a history of nuking people who did). So, the result is "one more test," "meet with.....to get their perspective," and on. We used to laugh about feeling like we had to ask the janitor for approval of any change. One colleague took this to heart, and got support for a change from anyone who he thought might have even a remote interest in that change (dozens of people across the corporation). After dedicating six months getting all the boxes checked, his exec tol him, "Get more data." This similar to his comment when my colleague started the project, "Get more data and make sure everyone agrees." Result.......end of a project that would save $5/car. That's $20M a year. $20M here, $20M there, and pretty soon you're talking real money.

So while you folks identified many symptoms, the disease is somewhat innocous, but deadly.

How did all this come about? The root cause was the reward system. As the saying goes, "show me the reward system and I'll show you the behavior." Exec bonuses were, to a large extent, based on the number of employees managed. More employees, bigger bonuses. It doesn't take a rocket scientist to predict what would happen. Fifdoms grew everywhere, with constant pleas for more staff. Now go back a few paragraphs. The bonus system may have changed by now, but it sure did wreak havoc on GM over the years.