A troubled giant is facing change

Once supremely dominant, GM now is challenged by high costs and fierce competition.

April 17, 2005|By Michael Hill | Michael Hill,SUN STAFF

In 1952, General Motors President Charles E. Wilson - nominated by President-elect Dwight D. Eisenhower as Secretary of Defense - was asked if he could make a decision in his new job that would hurt that company.

Wilson said he could, but was unable to envision such a scenario, "because for years I thought what was good for the country was good for General Motors and vice versa."

Often paraphrased to "What is good for General Motors is good for America," Wilson's statement was emblematic of the stature of that automotive giant at the midpoint of the 20th century. Its power seemed unbridled, admired and feared.

In 1955, congressional hearings looked into how GM managed to have such a high rate of return on investment, with legislators suggesting that perhaps the price of a Chevrolet could be lowered instead. GM executives said that they could lower their prices, but if they did, they would drive everyone else out of business.

A half-century later, the unimaginable has become imaginable. People are actually talking about the possibility of General Motors joining Pan-Am, Montgomery Ward and US Steel - each once a seemingly invincible colossus of American commercial, industrial and technological power that wound up on the economic scrap heap.

Such a fate for GM seems inconceivable to anyone who grew up at a time when the introduction of the new Chevrolet model was an event to be marked on the yearly calendar. Everyone, it seemed, drove a Chevy or a Pontiac or a Buick or an Oldsmobile. Except the rich people; they all drove Cadillacs.

As recently as 1980, GM sold 44.5 percent of the cars bought in the United States. Last year - even with heavy discounting - that was down to 27.3 percent.

This month, GM Chief Executive G. Richard "Rick" Wagoner Jr. shook up the top ranks, taking over direct control of North American operations from then-North American Chairman Robert A. Lutz and then-President Gary L. Cowger.

This came as GM said it expected to lose $850 million in the first quarter (the actual numbers are due this week), its bond rating plummeted to near junk status and its stock fell to a 10-year low.

There are many reasons that GM is in such trouble, but the bottom line is that it is not making enough cars that people want to buy.

"I am holding on to what I know and remember as the American automobile industry," says Stewart W. Leslie, a historian of technology at the Johns Hopkins University who teaches a course on the history of the automobile. "A lot of us are desperate for that. But they can't build the cars we want.

"I would love to buy today's version of the '57 Chevy," Leslie says, referring to what is now considered one of the classic cars of the post-World War II era. "Something with cutting-edge style and state-of-the-art technology that says `Made in America' right on the hood. But there's nothing like it.

"It's a shame," says Leslie.

This is a message GM does not like to hear. Not long after Dan Neil, the Los Angeles Times' Pulitzer Prize-winning automobile writer, wrote a scathing review of the new Pontiac G6 that called for top GM management to step aside, Wagoner announced that GM would pull its ads from that paper.

In fact, it's a message that's been delivered by many automobile writers in many ways over the last couple of decades. Instead of leading the way, American automobile makers always appear to be reacting to innovations from Japan and Europe, always one step behind, playing catch up.

Now, it's caught up with GM.

Crunch the numbers - particularly the huge health care and pension obligations it agreed to in labor contracts signed during the salad days - and it is hard to imagine how GM survives.

"GM has become essentially a giant health care provider that also makes some cars," says economic historian David Sicilia of the University of Maryland, College Park.

"It's pretty astounding," he says. "GM only has about 160,000 actual employees, but something like over 1 million people - retirees, retirees' families - are covered under its social umbrella. That's the bind it's gotten itself into."

Even laying workers off doesn't help much. Under their United Auto Workers' contract, laid-off workers get up to 95 percent of their salary for five years.

But Peter Morici, an economist at the Smith School of Business at the University of Maryland, says the problem goes deeper than that.

"The math of General Motors just doesn't make sense," he says. "Basically, they sell cars for less than it costs to make them. They like to blame the legacy of health care and pension costs, but remember, the Japanese who make cars in this country have to pay health care and pension costs, too.

"One problem is that executive compensation is way too high. And the way the company is managed, it is terribly closed and sensitive to outside criticism. Witness what it did to the Los Angeles Times," Morici says. "It is very bureaucratic and slow to move, not very nimble at spotting a new market opportunity and responding to it."

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