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- Remembering Gary Condit by Gregory Hilton
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Category Archives: Auto Industry
It was revealed today that the Chairman of the DC City Council violated regulations when he signed a one year lease for a Lincoln Navigator at over $2000/month. The Chairman rejected the first Lincoln because he did not like the color of its interior, and now the city is stuck paying for two leases. The violation was because the Lincoln receives less than 22 mpg, not because it was too expensive. Continue reading
It has taken decades, but the United States has finally beaten Toyota Camry and the Honda Accord in the all important reliability category. The data comes from Consumer Reports which gives its highest possible distinction, the Excellent Rating, to the Ford Fusion.
They describe Fusion as a car that performs 60% better than its peers, and will last for 200,000 miles. It is the Motor Trend Car of the Year and its hybrid version won the 2010 North American Car of the Year Award. Continue reading
After 51 years in production, General Motors this week produced its last big block V8 engine. These were the power plants for the high performance cars – Corvette, Camaro, Impala SS, GTO, Firebird, and numerous heavy duty pickups. The autos were at first called muscle cars, and over five million big blocks were built at six GM plants.
The engine design was updated many times since 1958, and its versatility and power was the reason it stayed in production. According to “Car and Driver” magazine, “The only people who could possibly be happy at the death of the big blocks are ones who haven’t owned or experienced one. If you wanted an engine that could pull your house trailer up Pike’s Peak, this was it.”
Unfortunately, they were also beasts at the fuel pump. The future now belongs to small displacement V6 turbo engines which will meet the new fuel economy requirements. Times do change but that in no way makes the accomplishments of the big blocks any less impressive.
Today the two extra cylinders in a V8 are considered a waste of gasoline, and this is apparent in the current Corvette which is rated at 16 city and 19 highway mpg.
That will change. By 2016, automobiles manufactured in the United States will have to operate at 35.5 miles per gallon. Europe already has a 40 mpg standard. The new requirements will cost Americans an average of $1300 a vehicle.
The increased CAFE standards (Corporate Average Fuel Economy) will also mean an increase in automobile accident fatalities. This is because manufacturers will meet the new fuel standards by building smaller cars and trucks with lighter but more fragile material. This will protect motorists less during automobile accidents.
The National Academy of Sciences estimates the increased motorist deaths from small cars at 1,300 to 2,600/year. That is far higher than our casualties in Iraq and Afghanistan combined, and it is on the magnitude of the Vietnam War.
The major reason for increasing the CAFE standards is to reduce greenhouse gases. According to the Heritage Foundation, cars and trucks subject to the increase CAFÉ standards generate only 1.5% of greenhouse gases. The new standards will decrease greenhouse gases by only one half of one percent.
The 20th Anniversary of “Roger and Me”- A Look Back at Roger Smith and Michael Moore by Gregory Hilton
The 20th Anniversary of “Roger and Me”- A Look Back at Roger Smith and Michael Moore by Gregory Hilton–
The fastest thing at General Motors today is the approaching bankruptcy. This morning the company reported revenues during the first quarter dropped by a staggering $20 billion, or 47 percent. The cash burn (it spent $10.2 billion more than it took in) is massive, and it is difficult to imagine how they will avoid a bankruptcy filing in June. It is also difficult to imagine how they could possibly pay back the $16 billion they have received in federal bailout funds.
Many observers are expressing shock at GM’s decline, but stark warnings from the very top of the company were heard 30 years ago. Roger Smith (1925 – 2007) took over as GM’s Chairman and CEO when it was operating at a loss. He ran the world’s largest company from 1981 to 1990, and repeatedly said massive change was necessary. Smith said “I will seek out change instead of having it thrust upon me.”
A number of his major initiatives were failures, but in hindsight the accusations made by his many left wing critics appear to be ridiculous. Smith came out of GM’s accounting department, and more than anyone else he saw the writing on the wall. The company had unsustainable overhead, poor quality, and fierce competition that was rapidly gaining market share.
His efforts to rush modernization, close plants and reduce the work force resulted in his being named the “Worst American CEO of All Time” by CNBC. Self proclaimed consumer advocate Ralph Nader said Smith’s tenure “was one of the darkest in General Motors’ history, for customers, workers and for residents of G.M.’s factory towns.”
Smith also gained national notoriety as the subject of Michael Moore’s powerful and well publicized 1989 documentary, “Roger and Me,” which won 8 prestigious awards. The movie is now 20 years old and Moore describes it as “a compelling indictment of an American Dream gone awry.”
The movie was about the pain of unemployment associated with plant closings in Flint, Michigan. Flint was the birthplace of both GM and the United Auto Workers (UAW), and in 1970 the company work force in the city was 82,000. Over 90% of them were destined to lose their jobs during the next 30 years as Flint’s Buick City and other local plants closed. Production was shifted to more modern and larger plants, primarily in Hamtramck, Michigan. GM now employees about 7,000 people in Flint, and the departing workers were given generous severance packages. However, it is always painful to lose a job.
Moore makes it appear that all of these workers lost their jobs in two years rather than over decades. The movie is filled with well documented factual errors and entire segments are completely false. He said “Roger and Me” was “a quest to discover why GM would want to do such a thing to Flint.” Moore was looking in the wrong place if he wanted to learn the reasons for closing Buick City. The answers would not be found in Flint but in Japan’s Toyota City or in the fully automated assembly lines of Lexus and Audi.
Roger Smith is portrayed in the film as a callous corporate leader who preferred robots over American workers. The GM Chairman is blamed for the rising rates of suicide, spousal abuse, alcoholism and violent crime in Flint. The documentary launched Michael Moore’s career and he closed the film by saying “The rich are just getting richer.” We now know the truth. The “rich” General Motors was struggling to survive.
The official website of “Roger and Me” claims the layoffs in Flint were not necessary: “Since 1983 car sales have steadily risen and GM has posted record profits of nearly $19 billion. So why lay off all of these people?” In another interview Moore says “GM is cutting costs so they can make more money. It’s not that they’re hurting. This isn’t Chrysler. This isn’t U.S. Steel, which lost a billion dollars in one year. This is General Motors.”
What Moore did not realize and Smith knew all too well is that GM was hurting badly. When Moore was asked by “Newsday” if GM should keep open unprofitable factories he responded, “They are profitable! They want to be more profitable! They’re greedy! You will never hear them utter the words “enough is enough.” They’ll close down all the factories in this country if they believe that they’re going to make more money in Mexico and Taiwan.”
A number of scenes in the film depict Flint’s prosperity during GM’s heyday in the 1950’s and ’60’s when Buick’s, Cadillac’s, Chevrolet Impala’s and AC spark plus were all produced in Flint. What the movie omits is that Cadillac had 85% of the American luxury car market in those days and now they are trying to hold on to 15%. Furthermore, GM was losing money on the Buick’s it produced in Flint.
The overseas factories were built to expand GM’s market because Smith knew the business was now on a global scale. Primarily because of Smith, the four year old “voluntary import restraints” on Japanese cars were lifted in March of 1985. The GM profit Moore mentions was the result of the import quotas. Ford and Chrysler wanted the quotas to remain, but Smith gambled that GM could modernize and meet the import challenge. He said “We can meet the discipline of worldwide competition. We can do it through technological innovation and industrial modernization.” Unfortunately for Smith, GM’s progress was disappointing and Toyota and Honda sales skyrocketed when the quotas were lifted. GM could not compete on price or quality in the small car market.
Michael Moore consistently said Smith’s cutbacks were unnecessary because the company “had record profits,” and “greed was the only reason to put people out of work” in Flint. “Roger and Me” failed to include Roger’s response. GM had three options according to the Chairman. They could close factories and reduce staff, ask for continued protectionism to keep foreign cars out of the U.S., or they could request a government bailout. Smith said the obvious decision was to cut back.
Roger Smith was filmed answering Michael Moore’s questions, but this was not shown in the documentary, and the entire premise was that Smith was avoiding Moore. The exact opposite was true. Smith never avoided journalists, even when the questions were painful. Another theme in the movie was that it was wrong of GM to outsource jobs to foreign countries when there was high unemployment in Flint. In recent years the only profitable part of GM has been its foreign sales.
Roger Smith was both a workaholic and a technology visionary. A major part of his legacy was advocating radical change in the GM culture. The company had astronomical overhead costs because of 145 underutilized North American plants and a workforce of over 880,000 employees. As Smith noted, its sheer size was its greatest burden. The legacy costs of the retirees alone meant it was impossible to cut vehicle prices.
Michael Moore was correct in noting Smith’s fondness for robotics, and his desire to transform GM with a high-tech spending splurge. The GM CEO said robots would improve quality because they “eliminate mistakes of human frailty.” Of course, Smith also wanted to chop his work force significantly but the UAW proved to be an insurmountable obstacle.
After GM moved some equipment at factories in Flint against the UAW’s wishes, workers went on strike for 54 days, costing the company over $3 billion. Technological changes were finally allowed in the Lordstown, Ohio plant put only after GM caved in to a UAW demand to pay departing workers with three years of salary and benefits.
Automated guided vehicles were installed at the factory in Hamtramck and they were designed to replace old-fashioned fork lifts. The new machines were rarely used because the programming algorithms were too complicated for the union workers. The spray-painting robots were constantly sabotaged. The bottom line is that the UAW never agreed to Smith’s proposed automated assembly line, but it later proved to be a big success for Lexus and Audi.
Smith must have envied General Electric CEO Jack Welsh. During the early 1980s he was dubbed “Neutron Jack” (in reference to the neutron bomb) for eliminating employees while leaving buildings intact. Welsh fired 112,000 employees (25% of his staff) but he was still named “Manager of the Century” by Fortune magazine.
It was Smith who moved the company into Electronic Data Systems, satellite television, and the acquisition of Hughes Aircraft. All of those investments made major profits for GM. Indeed, it was to offset the capital gain on the satellite TV unit that GM killed Oldsmobile. It was because of GM’s work with EDS and Hughes that we today have the OnStar system. Both EDS and Hughes have now been sold, but they were wise investments for GM.
While Michael Moore and CNBC thought Smith was moving too quickly, but we now know that far more radical change was needed. GM was moving too slowly to close unneeded plants, cut workers and close dealerships in a shrinking market. Smith’s efforts to streamline product design, development and procurement operations largely went unheralded. Quality did improve but the change was too late. The 1989 Buick LeSabre built in Buick City was ranked the top sedan in the world by J.D. Power and Associates, and it was the first American built car to show up on the list. In 1999, the year the Buick City plant was closed, the facility won the Platinum Award. As of 2009, it is the only General Motors plant to be given this award.
GM has now received $16 billion in federal bailout funds and more money is in the pipeline. It is somewhat amusing to reflect on TIME magazine’s 1992 criticism of the former CEO:
“Smith occupies a comfortable $26,000-a-year seat on the GM board. Each time he actually attends a board meeting, he gets an extra $1,000. He earns an additional $12,000 a year for sharing his thoughts with the other members of the finance committee. GM provides him with a company car and an office as well.”
GM did lose 10% of its market share during the Smith era. That was a major disappointment but it was nothing compared to the 98% stock decline and junk bond status of recent years. Smith was always worried about the rise of Toyota and he spent $5 billion to create Saturn as an attempt to compete with the Japanese and German small car manufacturers. Saturn had a unique manufacturing agreement with the UAW as well as a “no-haggle” sales policy. The Saturn brand operated as a separate company within GM to shield it from the automaker’s bureaucracy and politics. The move produced critically acclaimed and popular vehicles, but it was also seen as recognition that GM’s business model was so broken it could be fixed only by starting from scratch. In addition, the Saturn launch meant the other GM divisions were cash starved and had to cut back on development.
It is fair to blame Smith for several bad decisions, but he inherited a culture that was difficult to change. Smith found that any new idea, or component, took so long to get from the drawing board to the factory that it was sometimes obsolete on arrival. It was especially painful for him that it took 7 years to develop the first Saturn.
During the Smith era there was bland styling and cookie cutter cars with shared components. This occurred as a means of cutting costs. The look-alike models blurred the historical marketing distinctions GM had carefully cultivated between Chevrolet at the bottom of the market, Cadillac at the top and Pontiac, Oldsmobile and Buick in between. It was an experiment that ultimately cost the company $7 billion.
Another result was that GM lost younger buyers in droves. The company was also not able to match the popularity of the Ford Taurus which was the world’s best selling car at that time, and Chrysler had great success with the mini-van.
Smith’s biggest public relations mistake came when Honda opened its manufacturing plant in Ohio. When presented with the stark contrast in wages the UAW did agree to a salary cut. The decision was announced on the same day that bonus payments for GM executives were revealed.
Smith left the company in July of 1990, one day after Saturn’s debut. For the next two years customers had to sign up on a waiting list for new Saturn’s. At that point the GM revenues were $123 billion/year, and under Smith the work force had declined to 717,000 employees in 35 countries. Far more cuts would be necessary. Cities such as Flint were devastated by GM’s cutback. A century ago Flint had to reinvent itself and hopefully they will be able to do that again. In 1900 over 100,000 horse drawn carriages were produced in Flint, but the entire industry was lost with the invention of the automobile. Hopefully industrial cities such as Flint will be able to rise again, but the struggle today is more difficult because of corporate taxes and the many regulations on businesses in Michigan.
Roger Smith is now considered GM’s most controversial Chairman. His critics said he was heartless and greedy, and it is never easy to close plants and fire employees. We now know he was fighting a losing battle with global economic forces, and he met huge obstacles in trying to prepare GM for a new era. He was one of the first to recognize that the car market was no longer North America, but survival depended on global sales. He did not create GM’s problems, but he did try to solve them. Many of Roger Smith’s reforms were not successful, but all of his warnings were accurate.
Pontiac Enters Car Heaven by Gregory Hilton–General Motors made if official today. The Pontiac brand name will cease to exist at the end of next year, and an additional 21,000 employees have been fired. It was also revealed that the number of GM dealers will decline by 42%, and the company is currently negotiating with over 2,600 dealers that are on the chopping block. In addition, 28% of all plants will be closed by the end of next year. The automaker announced the sweeping moves as part of a revised business plan it is submitting to the Treasury Department.
The key elements of the new business plan are not surprising, and they are a result of an astounding 97% fall in GM’s stock value since 2000. When I grew up the world’s largest and most profitable corporation was General Motors. By 1980 they had a staggering 853,000 employees, and the most respected figure in the American business community was the GM chairman. He always led the “Big Three” (GM, Ford and Chrysler), and the sentiments of 1950s CEO Charles Wilson were still accepted, “What’s good for General Motors is good for the country.”
GM was always considered a blue chip stock, but now it is struggling to stay out of bankruptcy, which remains a very real option. A final decision will be made by June 1st and GM’s fate is now in the hands of President Obama’s auto task force. The current reorganization plan would give the U.S. government at least a 50% stake in the automaker, with the union holding up to 39% and bondholders with an additional 10% share. Current shareholders would effectively be wiped out.
The market capitalization of GM is now below Oprah Winfrey’s net worth. Pontiac is not alone among the major changes. Saab has already entered bankruptcy protection and is being separated from GM. Saturn will be phased out in 2012, and this blow is particularly painful because the brand was once seen as GM’s future. Saturn began 19 years ago as an effort to attract owners of small Japanese cars. GM also announced that it plans to sell or close Hummer. For the next year Pontiac will be reduced to a few sporty models, primarily the Solstice and Vibe.
All baby boomers will remember Pontiac’s “wide track” hey day when the brand included GTO, Firebird, Grand Prix, Trans Am, LeMans, Catalina, Tempest, Ventura and Bonneville. Now those models will join Oldsmobile, Plymouth, Packard, Hudson, Nash, Kaiser-Frazer, Duesenberg, Tucker and American Motors in U.S. automobile history. As Pontiac enters car heaven we will thank them for giving the world its first true muscle car (GTO), as well as distinctive styling that will long be remembered.
Pontiac’s greatest moment was the GTO. This car was produced in spite of GM management, not because of it. The GTO was assembled in violation of GM’s corporate rules against putting big block engines in that type of body shell. John DeLorean did it in secret and by the time GM could do anything about it, the car had become too big of a hit for the home office to do anything about it.
GM was the largest U.S. corporation by revenue as recently as 2000. The company had 50% or more of new-car sales for decades, peaking at 55% in 1956. In 2008, that figure fell to less than 22%. Market capitalization peaked at $52 billion in 2000. In February, after GM revealed its survival plans, the figure was $1.33. Toyota’s market cap is now $103.6 billion.
In the late 1960s both Pontiac and GM were at a pinnacle of success. The impact of the Japanese imports would not be relevant in the American market until after the oil shock of 1973. The beginning of the energy crisis was when the GM story became a tale of accelerating irrelevance. The company was also slow to recover from the long UAW strike of 1970, when over 400,000 workers walked off their jobs.
The UAW won, and they would continue to win in show downs with the Big Three. They soon acquired the nick name “Generous Motors” because of the wage and benefits being received by UAW members. The cost of those benefits would bedevil GM for the next 35 years. But they didn’t buy union peace. Rancorous relations and periodic strikes remained a fact of life at GM.
Customer preferences changed, competition tightened, technology made big leaps, and GM was always driving a lap behind. GM has been losing market share in the U.S. since then, destroying capital for years, and returning no share price appreciation to investors.
A “Fortune” magazine cover story about GM in August of 2008 by Alex Taylor (who has written about the company for four decades) concluded with this observation: “If Washington wants to bail out GM, it’s fine with me. A lot of short-term angst will be avoided, and taxpayer money has been spent for worse purposes. But you have to wonder whether the insular, self-absorbed culture that still dominates GM is up to the job of restructuring the company quickly enough to make it profitable and competitive again.
“GM has been on a downward path ever since I began covering it. What is going to make it different this time? As painful as bankruptcy may be, it would give GM the leverage it needs to redo its labor contracts and dealer franchise agreements, downsize the company, recruit new management, and position itself for an economic upturn in 2010 that would enable it to regain some fraction of its former glory.”
It is now apparent that the Chrysler Corporation will soon file for bankruptcy. This is not the first time the automaker has faced this prospect. Sen. William Proxmire (D-WI) died in 2005 but if he was alive today he could say “I told you so.” He opposed the Lockheed and Chrysler bailouts of the 1970s. He said both companies need to go through bankruptcy to obtain the necessary concessions. He was worried not that the bailouts would fail but that they would work, thereby “inflaming government’s interventionist proclivities to future bailouts.”
Proxmire served on Capitol Hill for 32 years (1957 – 1989) and was Chairman of the Banking Committee. He was a liberal Democrat but a fiscal hawk. He was well known for his “Golden Fleece Awards” which went to people who cheated the taxpayers.
He blasted the 1979 Chrysler bailout as “a massive giveaway for the taxpayers, and a massive windfall for the banks, stockholders and others who have the main stake in a Chrysler bailout.” The loan was repaid in 1983 but Proxmire was still not satisfied because “the terms should have been tougher.”
Chrysler is not alone. GM has also avoided tough choices for three decades, and now it will enter bankruptcy. GM lost $31 billion in 2008, and the stock lost 97% of its value since 2000. My generation well remembers when GM was the world’s largest and most profitable corporation. In 1980 it had 833,000 employees. The new GM products: Camaro, CTS, Enclave, Acadia, Silverado, Malibu, and the Hybrids are all hits. They can be the basis of a new GM.
According General Motors own auditors, the world’s largest automaker is on the brink of collapse and bankruptcy. General Motors and Chrysler have received more than $17 billion in government loans and the new U.S. auto task force is now in Detroit to determine if they should receive additional funding. The holders of GM debt would most likely receive 30 cents on the dollar if bankruptcy is declared. Parts suppliers would receive a major blow and retires would see health benefits cut back drastically.
House Republican Leader John Boehner (OH) and Senator John McCain (R-AZ) have both said chapter 11 bankruptcy is the best option for GM. Boehner said GM has avoided tough choices during the past 3 decades and now it should work with employees and creditors to plan a stable future. Anything short of that would be “throwing good money after bad,” he said. GM lost $31 billion in 2008, and it needs $30 billion to stay afloat.
I recently wrote an in-depth analysis of General Motors, and three weeks ago I was asked if GM was a good buy because the stock had fallen so low. Many other corporate icons are in a similar position, and last month I wrote the following:
“We have a saying in venture capital,’The people who make the big bucks are the ones who have the most guts.’ I definitely do not have the guts for a GM buy.
“GM has lost 95% of its value since 2000, and that includes $73 billion in the past three years. The bailout funds should keep GM in business, but if they do go bankrupt shares that are purchased today would be worthless. Even if they stay in business that does not mean the stock will rise. If GM is acquired by another company the stock would be exchanged and it might not be a good deal. The new GM products: CTS, Enclave, Acadia, Silverado, Malibu, and the Hybrids are all hits, but I would not recommend the stock.”
Many analysts are now predicting GM will file a Chapter 7 bankruptcy, meaning that it will be forced into liquidation, not reorganization. GM is experiencing its worst sales slump, and according to Bloomberg, if GM fails, Ford and Chrysler will not be far behind. The total GM loans are in the neighborhood of $50 billion.
The collapse of the big three would eliminate three million jobs, and the loss of just GM would mean a minimum loss of one million jobs. The repercussion to the economy are incalculable. GM has said Chapter 11 bankruptcy — under which the automaker would continue to operate while holding its creditors at bay and overhauling its finances — is not an option because that would scare away customers.
Some industry analysts say doubts about the company’s chances of survival have already driven away would-be buyers, who worry that their warranties might not be honored or that they might not be able to get replacement parts. Chapter 11 bankruptcy may be of little use anyway, because GM may not be able to get the necessary financing to reorganize itself. That could lead to Chapter 7 liquidation, in which the automaker’s assets would be sold off piecemeal.