What Happened to GM?
June 2nd, 2009 - 98 Comments
President Obama announced yesterday that General Motors has filed for bankruptcy as part of a restructuring plan that will give Washington a 60 percent stake in the automaker while it closes 14 more plants and cuts up to 21,000 more jobs.
“After the factory closings, which will leave 12 in Michigan, GM will have fewer than 40,000 workers building cars in the United States—one-tenth of a work force that in the 1970s numbered 395,000 people,” according to The New York Times.
So what went wrong? Smeal’s Terrence Guay has some answers:
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GM’s problems go back at least three decades. First, the company became complacent in terms of products and customers, assuming that American car-buyers would choose GM vehicles (or at least those produced by GM, Ford, or Chrysler). They didn’t take the Japanese threat seriously, and consequently steadily lost market share to Toyota, Honda, Nissan, and other imports. Quality dropped and though it has improved internally, few GM products are as reliable and as highly rated as foreign vehicles.
Second, GM faced a heavy cost structure. Since the United States does not have a national health care system, many private sector companies began offering health insurance coverage to their workers in the 1950s. GM provided high-level coverage to their workers as well as to retirees and their surviving spouses. The company’s future obligations for retiree health care are estimated at $47 billion. This does not include health coverage for current workers. In 2007, the company reached an agreement with the United Auto Workers (UAW) to pass on the cost of paying retired workers’ pensions to the union. As a result of these and other labor-related costs, GM has not been able to compete well with foreign auto companies that do not have similar health and pension obligations in their home countries, or have chosen to operate factories in lower cost and union-unfriendly U.S. states.
Third, GM maintained too many brands (Buick, Cadillac, Saturn, etc.) that overlapped each other and allowed the company to lose focus on those that really mattered.
Fourth, the company by the late 1990s had focused on higher-margin sport utility vehicles and trucks. When oil and gasoline prices rose a few years ago, GM was unprepared for the rapid switch by consumers to more fuel-efficient vehicles. The company had few products available or in the pipeline to meet the current demand for increased fuel efficiency or green vehicles. It is scrambling to do so now, but it will be difficult to persuade many car-buyers that the company is a leader in such technologies.
Fifth, the company’s management, for the reasons described above, is partly to blame. It took them a long time to realize just how bad the situation at GM really was.
GM could have done many things differently, including trimming brands, relying less on SUVs and large vehicles, built more reliable vehicles, and reduced costs through greater production abroad. The company is successful in some markets today, especially China. But its main market is still the United States, and it is languishing here. I’m not sure an alliance with Renault, Nissan, or any other foreign company would have changed the company’s fortunes. Virtually all of its mistakes and problems were internal to the company.