From General to Government Motors: can GM return to its former glory?

The effort to transform General Motors and Chrysler by using American bankruptcy laws is a huge experiment. If it works, GM in particular will re-emerge as a smaller but very competitive and profitable auto company worldwide. But if the process gets bogged down in political wrangling, it’s conceivable that GM might never emerge from bankruptcy and government control. The resulting implosion would be heard around the world.

Before we can project into the future, we have to examine the past. How did GM find itself on the losing end of competition against Toyota Motors in particular and the Japanese in general?

It’s a classic tale of international competition. GM was founded in 1908 by Billy Durant who mashed together a variety of separate companies such as Chevrolet, Cadillac, Oldsmobile, Pontiac and Buick and wanted them to compete against each other. When Alfred P. Sloan took over, he imposed a bit more order, but each of the divisions still had their own design and engineering, stamping, manufacturing, parts and procurement efforts and distribution arms.

Though GM wasn’t a centrally controlled company, it didn’t seem to matter. It had the power to steamroll just about anyone. At the heart of supplying tanks and vehicles to the US military in World War II, GM was instrumental in overwhelming the Japanese with material force. It went on to achieve 50.7 per cent of the US market in 1962 and its designs captured the American imagination with such models as the 1959 El Dorado with its impossibly large tail fins.

The Japanese, stung by defeat, were determined to “catch up with and surpass the West”. Thanks in part to US quality gurus who were ignored by a triumphant US auto industry, Toyota came up with the lean manufacturing model. It was a fundamental breakthrough over the mass assembly line technique that the Americans used because it broke the manufacturing process into small teams, each of which had the power to pull the “andon” (or lantern) cords to stop the line. Toyota’s lean system, including just-in-time delivery and kaizen, was born.

When Toyota first tried to enter the US market in 1957, it was literally laughed out of the country. But it never stopped trying, and by the 1970s had begun to reach some scale. At that point the Baby Boom generation started rejecting the idea that they should buy GM, Ford or Chrysler products, as their parents had. They began to perceive that Japanese cars were better, which at this point they undeniably were.

Fast-forward to the mid 1980s. GM was still the largest and most profitable auto company, but it was clearly losing sales. It decided to launch a joint venture with Toyota called New United Motor Manufacturing Inc. at Fremont, California, to learn what Toyota was doing so differently.

At first, GM higher-ups rejected the “graduates” of the NUMMI joint venture when they promoted the lean system. Gradually, though, the NUMMI graduates and others with exposure to the Japanese methods began to prove that the system worked. The problem was that the company was already decade behind Toyota because management couldn’t accept the idea that its core manufacturing processes were out of date.

But there was more than just management resistance to change that accounted for GM’s predicament. The United Auto Workers had gained more ground in each contract negotiation since the 1950s and the medical tab for existing and retired workers hit $6 and $7 billion a year. That helped create an American middle class, but it savaged GM’s competitiveness.

When Rick Wagoner became GM’s CEO in 2000 he tried to address these structural challenges by centralising GM management. More and more GM plants deployed the Toyota system, and Wagoner sought to improve GM’s design, to spend more on R&D and to drive down manufacturing costs to approach those of Toyota’s. As I chronicled in my book, GM was headed for a genuine transformation, one of the most impressive in American industrial history. Unfortunately, the perception that GM made nothing other than gas-guzzling sport utility vehicles lingered.

And then crisis hit in the fall of 2008.

Overall, sales plummeted from roughly 16 million units a year to 9.5 million. GM was haemorrhaging money when Barack Obama became president. Ultimately, accepting the view that GM had failed, Obama’s automotive task force decided to push the company into Chapter 11 bankruptcy on June 1. Prior to this, Wagoner was unceremoniously dumped and replaced by his government designated successor, Fritz Henderson.