General Motors on the Ropes (Maybe Ford, Too)

So how bad is it at Generous General Motors?

Rumor has it that GM may file for bankruptcy (and maybe should). Ford, though not in the same dire straits as GM appears to be, nevertheless is facing similar seemingly intractable but less immediately urgent problems.
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Full business disclosure: I did a great deal of business with the UAW-Ford National Center, the cooperative education effort of the two entities, in the late 1990s, and have done much less business with UAW-Ford since then. I have not done business with the analogous UAW-GM or UAW-Daimler Chrysler entities.

Full personal disclosure: I have the utmost respect for the Ford’s experienced UAW rank and file and local union leadership, less for the national UAW leadership, and even less for much of Ford’s top management. Thanks to retired and currently employed relatives, I buy and drive Ford vehicles at the employee discount, and am generally pleased with their performance. I have no direct experience with the other two companies beyond following the same news stories everyone else is.
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How bad is it? Well, can you imagine McDonald’s announcing price increases so that Burger King and Wendy’s can better compete against them? Has Procter & Gamble ever offered to do that for Colgate Palmolive? Would Wal-Mart raise prices for Target’s or K-Mart’s benefit? No, no, and heck no.

But that’s nearly what has happened with Toyota and GM-Ford, except that one hand at Toyota didn’t tell the other hand what they were thinking.

One hand offered the idea:

The Japanese group’s chairman, Hiroshi Okuda, has urged companies which export vehicles to the US, the world’s largest car market, to wind back their competitiveness. If they didn’t, there could be a trade backlash from the US, he said.

“I’m concerned about the current situation GM is in,” Mr Okuda told a press conference in Japan, where he was speaking as president of the Keidanren, the Japanese Business Federation.

Mr Okuda suggested that measures like technical assistance and price rises would give the US companies “time to breathe” and turn their businesses around.

He said that, while price rises might reduce vehicle sales, the profit on each sale would be higher, making the overall effect negligible.

Offering “technical assistance” to GM and Ford? How humiliating can it get?

But the other hand (apparently one that matters more) nixed the concept:

Toyota Motor Corp. said Tuesday it will not raise its car prices to help U.S. rivals, breaking with its chairman’s comments a day earlier that voluntary price increases and other steps were in order to help restore health to the U.S. auto industry.

“Our basic stance is that prices are something for the market to determine,” a spokesman at Japan’s top auto manufacturer said. “We are not thinking about changing (vehicle) prices in order to help the U.S. auto industry.”

Japanese brands collectively grabbed a record 30 percent share of the U.S. auto market last year, and some executives have become more sensitive about how their companies’ success would play out at the political level.

Maybe some execs at Toyota are more “sensitive” (zheesh), but not enough to carry the argument.

Outside the Beltway strongly objects to Toyota easing up, and his thoughts will serve as a starting point for my take on things:

The very idea that companies would raise prices so as to help out their less efficient competitors is mind boggling…… While I’ve got some sympathy for protectionism to combat illegal state subsidies abroad, it’s outrageous to do it in cases where it’s a case of bloated companies being challenged by more efficient and innovative competitors.

General Motors has been a behemoth in the world auto market for decades. If they haven’t figured out how to make cars that Americans want by now, the (bleep) (deleted to conform with site standards) with them.

So what’s up here? And while we’re at it, why is Ford not in jeopardy to the degree that GM is?

Start with the (in my opinion) non-arguable premise that the UAW was for the most part a noble but occasionally violent and overaggressive outfit from its early existence until perhaps the late 1950s, and served as a necessary counterweight to the arrogant and exploitive management cultures that had developed at the the Big Three. If you don’t believe that the UAW was needed, you haven’t seen the pictures in the halls at Local 600 of the beatings Walter Reuther and others received at the hands of Ford thugs at The Battle of the Overpass (story here), and you don’t understand the conditions that led to the Flint sit-down strike, which forced the first national contract with GM.

In the 1960s, though, everyone involved just got too greedy, and sloppy. Hourly pay, pensions, and benefits were raised beyond reason, and very relevant to today, many of the costs involved, particularly pensions and retiree health care, were pushed out into the future (which, unfortunately, is NOW). Product quality deteriorated.

Through most of the 1970s, the union-management adversarial relationship continued, and an entitlement mentality developed on both sides. The Big Three felt they owned the American consumer and could charge whatever they pleased for mediocre vehicles (think Vega, Gremlin, Pinto), while the UAW believed they could continue to milk the companies for ever-higher benefits without consequence. This gave the foreign automakers a chance to make meaningful inroads into the US market. Toyota and Honda, with their high-quality cars made in Japan, and to a lesser extent Volkswagen in Germany, became significant threats for the first time, going after business beyond what the Big Three were willing to concede.

By 1979, the party was over. Chrysler teetered on the edge of bankruptcy and survived because of UAW concesssions, meaningful labor-management teamwork, and bailout financing from the government. Ford’s problems were perhaps worse–the losses ($1 billion in 1979 dollars) were nearly as severe as Chrysler’s, and Ford knew that no government help would come. The union-management quality circles and other cooperative measures that began during this crisis, and which mostly remain in place today, not only saved Ford, but made it the most solid and by far highest quality producer of The Big Three by the mid-1980s.

GM, though, was much bigger and much more able to absorb the shocks of the late-1970s and early-1980s; this, in my opinion, ultimately turned out to be company’s undoing. The cooperation and the culture change required to save Chrysler and Ford wasn’t required, and never came into being, at GM.

In the early 1980s, The Big Three successfully lobbied the Reagan Administration to negotiate “voluntary” quotas with Japan, which in the short term limited the damage Toyota and Honda could do and gave The Big Three the breathing room they arguably needed to shake off their adversarial union-management legacies. As noted, it worked at Chrysler and Ford, but GM did not meaningfully change its ways. In fact, in a shocking (to me) admission of impotence, GM in the late 1980s began a “new company” (Saturn) with a new cooperative framework in an attempt to get around what they couldn’t solve, and never have solved, at their existing plants.

But the quotas ended up being a classic case of “be careful what you wish for.” Honda’s, Toyota’s, and then Subaru’s and Nissan’s decisions to build plants in the United States were direct results of those quotas, because those companies did not want to have their unit sales in the biggest vehicle market in the world constrained by quotas in the next domestic auto crisis (and you’ll note, they haven’t been). I believe the Japanese companies’ entry into American manufacturing would have come much later without the quotas, and conceivably may never have happened at all.

So in return for the breathing room, the Big Three eventually got fiery competitors right at their doorstep with huge built-in competitive advantages. The Japanese (and then the Germans) have been able to build brand-new ultra-efficient plants in relatively low-cost areas, hire fresh, young workers at near-UAW wages, provide very generous (but nowhere near UAW-level) benefits, and, perhaps most important, don’t have The Big Three’s UAW pension and retiree health-care baggage from the 1960s and 1970s or an aging workforce to worry about.

The Big Three’s lead in SUVs, minivans, and light trucks carried Ford and GM through the 1990s. Chrysler was sold, and even in the midst of the best vehicle market in history, hemorrhaged money in the late 1990s. (I’ll be the first to admit that I don’t understand how the Chrysler situation deteriorated so badly and so quickly, and as far as I can tell, it has never returned to acceptable profitability in the American market. Anyway, it really shouldn’t be considered an American entity any more).

But you knew the Japanese (and the Germans) were going to figure out how to produce good SUVs, and minivans, and light trucks. Now, considering all factors, the Japanese and German versions of these vehicles are often better values. GM and Ford really have no remaining unique product niches or significant competitive advantages. The situation is indeed grim.

It appears from here that Ford may be able to weather this immediate storm, but it won’t be easy. Both the UAW and the company need to redouble their efforts at competitiveness. IF management pays attention to the type of people I’ve met from the shop floor over the years, and IF the younger people on the floor get serious about working (a big problem in recent years), and IF the UAW leadership and Ford’s top leaders can get creative about solving the mess they are in, I think it can be done. The cooperative culture, though frayed, is still largely there to support survival. Product development? There’s no shortage of creative minds in Silicon Valley and elsewhere looking for meaningful work, but the existing engineering culture and organization at Ford needs to be totally revamped, and immediately.

GM? Yikes. I just don’t see the UAW or management summoning up the will to solve the problems. Barring an acquisiton by a competitor (with the legacy costs, you have to wonder who would even consider it), it may be that the unthinkable is just around the bend. The potential impact of a company like GM effectively off-loading a large portion of its pension and retiree health costs on taxpayers in bankruptcy is frankly scary.

Horatio Alger, Charles Stuart Mott, William Durant (scroll down to 1908 at the link), and the others who built what was once the most admired company in the world are spinning in their graves.
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UPDATE: A Biz Weak editorial (link requires subscription) calls GM “a finance company that actually loses money making cars.”

UPDATE 2: More on GM’s mediocre response here (go to third item).

UPDATE 3: George Will on GM as a Welfare State.