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  The General Motors Debacle: A View from the Back Seat

The General Motors Debacle A View from the Back Seat

By David Welch

Part 2: Not Solely Labor's Fault

By 2006, GM was running low on cash. As its options narrowed, GM had to sell 51 percent of GMAC to raise cash and the strategy of waiting out the problems gave way to a different kind of groupthink. GM figured it would buy its way out of its problems. And in fairness, labor contracts and dealer franchise laws meant that whenever GM wanted to make major changes, someone had to be bought out. A few billion in restructuring costs thinned the workforce and in 2007, GM planned to hand the United Auto Workers $35 billion to set up a trust fund that would take care of retiree costs. It was a big change for Detroit and its union, but the company needed everything to break right: The car market needed to stay healthy until 2010, when the health-care fund would take over and give GM a new lease on life. As we know, it didn't work out that way.

Let's be fair to the UAW. This isn't solely labor's fault. Thanks to the SUV boom of the '90s, there was money sloshing around inside GM. Longtime GM watcher Maryann Keller has noted that GM has paid in the neighborhood of $20 billion in stock dividends and for share buybacks since the mid-1990s. That cash could have been socked away to pay for health care instead of giving it to investors, or invested into R&D. But stockholders want a return and executives get bonuses if stockholders are happy. By the way, while GM was paying a dividend, the company cut capital spending and borrowed $14 billion to shore up the pension fund.

Another great example of how things looked from within the GM bubble: When former Chrysler star Lutz emerged from retirement in September 2001 to join the company as vice-chairman, it was common industry wisdom that GM's cars and trucks suffered from the corners that were cut on GM's product decisions by bean counters and manufacturing gurus.

Lutz Fought for Style

Styling isn't free; the stamping machines that make more curvaceous car bodies cost a lot of money, as do posh interiors. Lutz fought for these enhancements, knowing that Toyota's and Honda's emphasis on aesthetics was one of the reasons why they dominated the car market. One GM executive told me that, before Lutz, the company figured its dealer network and market presence were so big that cutting corners on their new models would be fine. They would get the buyers anyway and save a few bucks on everything they sold. The rest, as they say, is history.

A similar kind of thinking went into GM's battle against fuel economy. With its labor costs and retiree burden holding GM back-and no will to change that-GM ignored cars and plowed money into higher-margin trucks. In September 2004, when oil prices started flirting with $50 a barrel, I wrote a column entitled "Detroit Is Over a $50 Barrel." It argued that if fuel prices stayed high, Detroit wouldn't be able to react. While GM was introducing the Chevy SSR, a combination of a hot rod and a pickup, Toyota was boosting production for the Prius hybrid. Toyota was ready, GM was not.

Blame Wagoner if you want. But he inherited many of these problems and was making some of the right moves before he was fired. He couldn't get the company and those who depended on it to make enough sacrifices to get the job done. However, even an outsider like Bob Nardelli, a lauded cost-cutter who came to Chrysler after turns at General Electric and Home Depot, found few options in Detroit.

Wiping Out Debt

Now, with the guiding hand of the Treasury Dept. and the Obama Administration leading GM through what looks to be a fast bankruptcy, many of its intractable problems will be addressed. Billions in debt will go away, leaving a relatively clean balance sheet. Stock in a new, leaner company will seed the health-care trust; that will get GM out of the medical-benefits business. The UAW has made other concessions to align factory costs with those of Toyota. Four weak brands are going away, giving GM a crack at building four strong ones.

In about three months, Treasury has enabled GM to accomplish what decades of managers, dealers, and labor leaders were unable or unwilling to do. It's a shame than many of them won't be around to benefit from that.

Welch is BusinessWeek's Detroit bureau chief.