Wednesday, June 03, 2009

UAW Killed GM All By Itself?

As the world watches General Motors, once the “bluest” of blue chips, enter bankruptcy court to seek protection from its creditors, pundits roll out explanations for its demise. Missing from almost all of the discussions is monopoly power — the root cause of GM’s troubles. What is in play here is not the monopoly power of what was once the largest corporation in the U. S. — for GM never had such market dominance — but rather the monopoly power granted by law to its workers through its union, the United Automobile Workers. It is this that has brought GM to its knees...General Motors: An Autopsy, Charles DeRussy, Pajamas Media, 6/2/2009

While DeRussy's Pajamas Media article is well-researched and, on its target issue, essentially correct, what he misses entirely is that labor is only 10% of GM's per-vehicle cost. And, if you're going to do an autopsy that actually describes the cause of death, you have to be willing to look at all the contributing factors. In an individual death, did you bother to find out if the corpse belonged to a smoker or an alcoholic? It might matter.

Step back to the late 1970s. GM, Ford, and to a worse extent, requiring a federal bailout, Chrysler, were wallowing in self-doubt, challenged by a Japanese industry that was intent on beating them at a game invented in America: mass production of automobiles at a price a person of average means could readily afford. To be honest, the Big 3, as they were then known, had to confront government-imposed CAFE standards at the same time they had to meet new safety pollution standards. It was a hard row. Altogether now: ahhhhhhhhhhhhh.

Funny thing, though, Honda, Datsun (now Nissan), Toyota, Subaru, and a Chrysler subsidiary (then), Mitsubishi, managed to meet those standards while, at the same time, offering vehicles of a design and quality of finish that astonished Americans used to what was then described by industry magazine Road and Track as the “Federal style” in design. That referred to Detroit's solution to safety, fuel economy, and pollution standards: a heavy, underpowered, difficult to start (and to maintain) behemoth with an almost universal slab sided, 3-box design. The Japanese brought in vehicles that had good fuel economy, were relatively lightweight and fun to drive, and started in cold weather or hot. These late 70s Toyotas, Hondas, and Datsuns also required far less maintenance than the average product from Detroit. What was Detroit's response?

When you say “Detroit” in this context, you mean the management of GM, Ford and Chrysler. They all demanded immediate trade sanctions against the Japanese, whom they accused of “dumping.” Bear in mind that Japanese workers were not slaves, cheap labor, or under a military government. It is also fair to say that all the Japanese companies wanted to turn a profit, which you don't do by selling at less than landed cost.

Then, management at GM in particular, over the next half dozen years, blew fifty billion dollars on a preliminary effort to create a robotic assembly line. In the mid-80s, as problems with this system became more and more difficult, with reliability actually decreasing, GM and Toyota negotiated to build a plant in California where they each built approximately the same vehicle (a Corolla for Toyota, and a Chevy of some variety for GM). Toyota did not use robots. What it did use was just-in-time supplies, statistical modeling for quality control (borrowed from AT&T genius of quality, Walter Deming). For substantially lower costs, despite using the same UAW contract in both plants, Toyota produced a vehicle that had far fewer initial defects, and was far more reliable. GM had forgotten its own lesson. You have to have a team that works together to build a good, reliable vehicle.

GM went through many more “corporate culture” changes over the next twenty years and they still had far higher costs than the competition. Without hesitation, the management of GM always blamed the UAW, despite the fact that the UAW's membership had sharply declined as GM became more automated. Yes, pension and post-employment medical benefits were as foolishly negotiated as earlier disasters had been in the U.S. steel industry, but they can't begin to compare to the vast quantities of money lost on pointless R&D, corporate culture change, and, most of all, the insistence on maintaining six separate brand names, with essentially identical models from top to bottom: Chevrolet, Oldsmobile, Buick, Pontiac, Saturn, Cadillac. Toyota, the obvious Japanese twin of GM, was satisfied with two: Toyota & Lexus.

GM finally saw the light a few years ago and dropped Oldsmobile, but they should have dropped all but Chevrolet and Cadillac, to exactly mirror Toyota. The concentration of the marketing of two brands, one for the masses, and one for the Hamptons and Palm Beach crowd, would have clarified GM's presence. GM management, however, rather like AT&T's in the 1980s, refused to leave the old, familiar world of its predecessors. Five of the brands had originally been separate companies, and Saturn was formed as an independent division in 1989. They would not give them up. There were markets for each label, they insisted. The cost in duplication, not to mention dilution of the GM trademark, is mind boggling.

The easy complaint about GM management was their sheeplike pursuit of the SUV market. Hey, everybody did it, including the Japanese and those very successful new arrivals from Korea. When a market changes, however, the trick is to dump the old, and have something ready to go for the new reality. GM management was not ready for that, preferring to count their money and ignore the oil market's explosive changes from 2007 through 2008. Now, fine, they're introducing models to compensate, but these are not tentative steps to take. When a market dies, you don't make product for it anymore. You have a fire sale on the existing stuff and get on with business. This was too great a stretch for a fat, overpaid management.

Instead, GM management willfully exploited the subprime lending market with GMAC, covering their incredibly sloppy cost controls on production by offering money to buy their products at nearly negative returns from GMAC, the lending wing of General Motors. It was as bad as the federally-inspired subprime mortgage market, giving money to people who could not possibly pay it back. This may, in fact, be the principal reason GM ran out of cash. They gave it all to customers to get them to “buy” their cars. All of this has had consequences.

In the late 1970s, the CEO of GM bragged about their next step being 60% of the market. Before the current debacle, GM had shrunk to far less then thirty. The UAW was at fault only in this fashion: a creative UAW leadership would have gone straight at GM management to demand a true modernization and globalization of the company. Walther Reuther would have done that. But his heirs did not. Instead, they negotiated as if GM's position in the world would never change. It did. As a prize, the UAW gets a big chunk of a company that, without a radical change of direction in management, not to mention a radical diminishment of GM management beyond the front line managers, engineers, marketers, and designers, will be as bust as British Leyland was after a similar effort by a government in the 1960s.


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