TIME: Almanac of the 20th Century

home *** CD-ROM | disk | FTP | other *** search

/ TIME: Almanac of the 20th Century / TIME, Almanac of the 20th Century.ISO / 1990 / 92 / oct_dec / 11099927.000 < prev next >

Wrap

Text File | 1994-02-27 | 19KB | 366 lines

<text> <title> (Nov. 09, 1992) GM:What Went Wrong? </title> <history> TIME--The Weekly Newsmagazine--1992 Nov. 09, 1992 Can GM Survive in Today's World? </history> <article> <source>Time Magazine</source> <hdr> COVER STORIES, Page 42 GENERAL MOTORS What Went Wrong? </hdr> <body> Everything at once. How the world's largest corporation broke down, and why the human cost of repairs will be brutal By John Greenwald--With reporting by William McWhirter and Joseph R. Szczesny/Detroit The end came with all the bitterness of a military surrender. For weeks General Motors chairman Robert Stempel had tried to ignore the signals of discontent radiating from a hostile band of outside directors. When Stempel was hospitalized with an attack of high blood pressure, board members did not bother to phone him get-well wishes. When rumors flew that Stempel was about to be ousted, the board issued a statement that conspicuously lacked a denial. Finally, Stempel, 59, bowed to a point-blank demand from a third-generation GM board member, who told him it was time to leave the post he had taken scarcely two years ago. Even then, Stempel showed flashes of defiance, disdaining an offer that would have allowed him to save face by resigning for health reasons. Instead, he laid the cause of his departure at the feet of the directors, thereby calling attention to the board's handling of the coup they seemed to be planning. Declaring that "the effects of rumor and speculation" had crippled his chairmanship, Stempel stepped down on Oct. 26 from the helm of the world's largest company. The resignation of Stempel, a popular "car guy" who was the first engineer since the 1950s to run the company, stunned employees who had heralded him not long ago as an automotive redeemer who would bring out the best in GM. Like soldiers in a conquered army, many roamed aimlessly last week along the corridors of the company's limestone-clad Detroit headquarters. The ouster shook even Stempel's union adversaries, who feared what life would be like after the boardroom coup led by John Smale, 65, the hard-charging retired chairman of Procter & Gamble. Smale has emerged as a possible Stempel successor and the real power inside the embattled company. Employees braced for a take-no-prisoners conquest. Together with president Jack Smith, 54, the former head of GM's profitable overseas operations, Smale and the board seemed poised to purge Stempel's top lieutenants and embark on a sweeping new round of layoffs to restructure the former flagship of American industry. "GM is spooked and in complete turmoil," said a longtime supplier. "It is faced with total upheaval caused by an outside force--something that once was unthinkable." The bloodletting promises to be deep and wide and painful. Impatient with Stempel's slowness in carrying out plans to close 21 of GM's 120 North American plants and cut 74,000 of its 370,000 employees over three years, directors now want to eliminate a total of 120,000 jobs during the decade. A major goal: to slash GM's labor costs of nearly $2,360 per car, which is almost $800 more than Ford's and $500 more than Chrysler's. "It's going to be brutal," warns a GM director. "If the unions won't cooperate, GM will have to play real hardball. We don't even have the luxury of thinking about a product strategy. We aren't going to be thinking great thoughts. GM has a three-year mission to restore its financial soundness." That won't be easy for a company whose U.S. market share has plunged from a peak of 52% in the early 1960s to just 35% today. GM last week reported a $753 million loss for the third quarter and is careering through its third straight year of deficits. GM's North American division, the heart of its business, lost an astonishing $7.1 billion last year--$1,700 for every car, truck and van it sold in the U.S., Canada and Mexico. The red ink was stanched somewhat by GM's car business outside North America, whose $2.1 billion profit helped cut the overall yearly loss to $4.5 billion--still the most dismal showing ever by an American company. The automaking losses have put GM in the kind of financial position lately associated with dying airlines and retail chains. The company has been frantically seeking cash to meet its financial obligations. GM has sold stock and tapped credit markets to raise $5 billion in the past year alone, mostly to pay operating expenses. If the financial squeeze grows too tight, GM might even file for bankruptcy protection under Chapter 11 to force concessions in its wage, pension and benefit packages. "This is not the company it once was," says a GM director. "There is going to have to be special oversight by the board for the next three years. Our credibility is at stake in the credit markets." As rumor and anxiety racked the company last week, GM resembled a nation in search of a leader. "People are waiting for someone to step up and announce they are in control," said a senior executive of a major supplier. The betting was that Smale and Smith would divvy up Stempel's job, with Smale becoming chairman and Smith assuming the post of chief executive officer. Smith has been virtually running the company since April, when the directors installed him as president and told him to speed up the pace of corporate restructuring. Once he gets his new job, Smith is apt to launch the new round of layoffs immediately, since he will be under as much pressure as Stempel to let the ax fall. Board members picked up tough ideas about what needs to be done in talks last month with General Electric chairman Jack Welch, who earned the nickname "Neutron Jack" by slashing GE's work force in the 1980s. Welch reportedly huddled with Smale and several other directors during a two-day forum of CEOs in Hot Springs, Virginia. Stempel's ouster is a landmark in the growing shift of power from U.S. managers to corporate directors, who had traditionally been viewed more as rubber-stampers than real decision makers. As recently as the mid-1980s, not even the bellicose presence of Ross Perot on GM's board could persuade the firm to shift gears or change direction. "I did everything I could to get General Motors to face its problems," Perot said in the presidential debates. "They just wouldn't do it." Rather than heed Perot's exhortations to cut executive perquisites and streamline the bureaucracy, GM spent $750 million to buy out his stock and shut him up. In more than just symbolic terms, GM's crisis ranks as the most dramatic culture shock in the transition of American industry from the fat years of the postwar era to the lean years of today. During the 1950s, GM's gas-hogging V-8s and exuberant tail-finned sedans reflected the confidence of a nation newly arrived at superpower status, with seemingly unlimited resources and skyrocketing productivity. "With GM, you were really talking about a bold vision of America," says Harley Shaiken, a professor of work and technology at the University of California at San Diego. Former chairman Charles ("Engine Charlie") Wilson immortalized GM's role when he told a congressional committee in 1952 that "what is good for the country is good for General Motors, and what is good for General Motors is good for the country." While Big Business has become far more circumspect since then, it has also become more global. The fate of GM (1991 revenues: $123 billion) has an impact on millions of people around the world. With more than 715,000 employees in 35 countries, GM meets $22.5 billion in payrolls from Prague to Kuala Lumpur and buys supplies from 28,000 companies. GM's U.S. auto business accounts for roughly 1.5% of the American economy, down from about 5% in the 1950s. Its sheer size, however, is one of GM's greatest burdens. Because of arrogance and inertia, GM has fallen out of touch with its customers. Except for products of GM's Saturn and Pontiac divisions, young drivers increasingly spurn the company's cars for Japanese makes or other U.S. models. The median ages for buyers of GM's bread-and-butter midsize lines are 45 for Chevrolet, 55 for Oldsmobile and 60 for Buick. By contrast, the ages of U.S. buyers of Japanese cars range from 35 to 40. GM has foundered while the more nimble Ford and Chrysler, which had long scrambled for niches in the GM-dominated marketplace, cut costs and brought out popular models like the Ford Taurus and Chrysler's minivans. GM has consistently ignored showroom signals about its cars. The company failed, for example, to develop a new sports utility vehicle like the Ford Explorer, which represents one of the hottest market segments. When buyers yearned for minivans, GM simply slapped new plastic panels on a seven-year-old chassis and rolled out the Chevy Lumina All-Purpose Vehicle. Result: while GM has made steady improvements in car quality, its selection and styling have tended to lag far behind its U.S. and Japanese rivals. "GM hasn't listened to its dealers," says an Atlanta Buick dealer. "They haven't paid any attention to the comments of the owners. We've had problems with supply and the design of the cars, and Ford and Chrysler and the Japanese have beaten GM all over the lot." How did GM, whose charismatic leader Alfred Sloan pioneered modern corporate management, get into this fix? In large part, the company has been a victim of its past success and an insular culture that has refused to change. For 70 years, GM has operated along lines that Sloan first laid down in a 1919 memo to top managers of what was then a struggling company. Sloan separated the firm into operating groups and divisions, which were presided over by executive committees that set corporate policy. This blend of top-down control and decentralized execution helped GM build cars at lower cost than its rivals, while charging more for the quality and popularity of its models. "That's a wonderful position to be in if you're a manufacturer," says James Womack, an M.I.T. researcher and co-author of The Machine That Changed the World, an influential study of the auto industry. "GM was a fantastic success." But by the early 1960s GM was having trouble building small cars to compete with imports like the Volkswagen Beetle. Chevrolet's ill-fated Corvair, which Ralph Nader judged to be "unsafe at any speed," made few inroads against imports. Yet GM was lulled into complacency by the success of its Pontiac GTO and other trend-setting muscle cars. When buyers flocked to small cars during oil crises in the 1970s, GM's failure to produce a winning model was ominous. "They had become so arrogant and efficient at defining trends that when a fundamental shift took place, they failed to adapt," says Shaiken. "They couldn't do anything radically different from what they had done before." The company's rush to downsize at the end of the decade led to the notoriously shabby quality of its X-car line. GM moved boldly under Roger B. Smith, chairman in the 1980s, but often in the wrong direction. Smith's stated aim was to gear up the company for the 21st century. Along the way, GM spent $70 billion on everything from industrial robots to the purchase of Hughes Aircraft and Perot's Electronic Data Systems. But despite the spending spree, GM's market share fell from 46% to 35% during the decade as consumers turned away from its unattractive products. Nor did GM have much success in transferring Hughes' electronic wizardry to auto assembly lines, or in using EDS to standardize its computer systems. Perhaps GM's crowning folly during the '80s was the reorganization of its North American operations into two clumsy megagroups. The plan gave responsibility for small cars to GM's Chevrolet, Pontiac and Canadian divisions, and handed large cars to the Buick, Oldsmobile and Cadillac units. While that may have seemed sensible at the time, it created a new level of bureaucracy sandwiched between the automaking divisions and GM's corporate headquarters. The results ranged from mass confusion to a proliferation of look-alike models. "Everything Roger Smith tried failed," says Womack. "The screwball capital investment, the screwball reorganization. Smith was a guy who didn't want to hear the bad news." Smith's failures put Stempel in an awkward position when the latter took over GM at the start of the '90s. As Smith's handpicked heir apparent, Stempel had loyally seconded the chairman's plans. "Stempel always voted with Roger on everything," says a GM insider, "even though he used to tell me he knew things were wrong and disagreed." So even as Stempel went along with GM's wild ride through the Smith era, he learned the hazards of sweeping change. That helped make Stempel wary of new directions when he became chairman, just as GM directors began calling for a major overhaul to fix the company. "We could never get a clear answer from him on anything," says a disgruntled board member. "Everything got muddled and waffled. There was never a critical mass. He was just not up to it. The good news, to his credit, is that Bob finally did the right thing" when he resigned. Stempel's defenders portray him as a scapegoat for errors that GM's now militant directors did nothing to stop. "He became captain after the Titanic had already hit the iceberg," Shaiken says. A strapping 6-ft. 4-in. former college football tackle with a booming voice but a gentle nature, Stempel took a conciliatory approach toward downsizing the work force. When a United Auto Workers strike shut down 14 of GM's factories in August and September, Stempel agreed to add 900 jobs at two Lordstown, Ohio, plants where workers had complained about being shorthanded. Earlier, Stempel had signed a U.A.W. contract that let workers draw 95% of their wages for three years after being laid off as a result of technological change. Stempel had the misfortune of becoming chairman just as the U.S. was sliding into recession. That hindered sales of GM's 1991 fall line, one of its best in years. The redesigned models included the full-bodied Buick Park Avenue and the luxurious Cadillac Seville. "Our sales depend on the economy," says Jamal Karmouta, who manages a Chevrolet dealership in Southern California. "When the economy moves up a little, we'll be selling more cars." But with GM strapped for cash, its new offerings for 1993 are limited mainly to a redesigned Cadillac Brougham and sporty Camaros and Firebirds. In the layoffs to come, brutality will have to be tempered. GM must restructure its business without further alienating workers whose cooperation will be crucial to the company's success. While the U.A.W.'s relations with GM have generally been much stormier than those with Ford or Chrysler, the union seems willing to give the new management a chance. Says former U.A.W. president Douglas Fraser: "There's a fundamental truth--the workers can't survive unless GM survives." And Stephen Yokich, head of the union's GM department, says he wants to help the company become more productive. But Yokich adamantly opposes GM plans to increase its purchase of materials from nonunion firms. GM must also mollify suppliers outraged by the high-handed tactics of J. Ignacio Lopez de Arriortua, a former European colleague of Jack Smith's who manages GM purchasing and is reportedly under orders to cut the company's $500 million weekly supply bill at least 20%. To do that, Lopez has been jeopardizing GM's long-term relations with its partners by demanding that they constantly resubmit their bids. At the same time, GM has been dragging its heels when paying bills. "GM's reputation as a gentleman in the industry is disappearing very quickly," says a leading supplier. "It's sad to see what's happening." GM's biggest challenge will be to shift from the top-down style of management that has characterized the company since Alfred Sloan to a more collegial style in which everyone from the shop floor to the executive suite participates in decision making. That is no longer a revolutionary idea among GM's rivals or industry at large. Ford developed its Taurus using nearly autonomous teams of workers, and Chrysler last year opened a mammoth $1 billion technical center that will bring together 6,000 technicians, designers and engineers to work on joint car projects. Perhaps not surprisingly, Ford and Chrysler have recently reclaimed market share from Japanese automakers, while GM keeps losing ground. The laboratory for organizational change at GM is supposed to be its built-from-scratch Saturn division, but so far the results have been mixed. Saturn's long and costly gestation--it took seven years before the first model rolled out of its Tennessee factory--drained $5 billion from other car projects and stirred anger and envy within GM ranks. And Saturn's special status as a stand-alone company within GM has created a snooty attitude on the part of its dealers toward the turmoil in Detroit. "Most of our customers don't know who makes the car," says a Los Angeles Saturn dealer. "So when people come into the showroom and we explain that Saturn is a separate corporation, they think of it as Saturn first and GM second." The division has yet to make money for the company, in part because GM reportedly sells the car at a loss to build up its market share. All told, Saturn ran a deficit of $1 billion last year, according to U.A.W. estimates. But Saturn has in abundance what many of GM's other products so desperately need: prestige. The upstart division's high-quality products have proved so popular that customers have to put their names on waiting lists. If Saturn can translate its popularity into profits, the formula could help save the rest of the giant company. Yet large corporations like GM often stubbornly resist change, as underscored by the crises now gripping such American giants as IBM, Sears and Citicorp. "Big organizations that last a long time are usually very conservative, like churches or armies," Womack says. Their size usually helps them forestall change for too long, so that when the forces finally become irresistible, the upheaval resembles the centrifugal breakup of the Soviet Union. In GM's case, the company that once bestrode the world now has trouble paying its bills. "We wasted too much time and money, and we're finally down to the point where it's nip and tuck," says a senior GM executive. "To me, the sad part is, Couldn't we have done it any other way?" Apparently not. But besides cutting costs, GM must now focus its attention on something the company has too often seemed to forget: how to build cars, trucks and vans that more people are happy to pay money for. </body> </article> </text>