Short-term thinking costs General Motors, US taxpayers

Just after Thanksgiving, General Motors made the jarring announcement that it was closing five factories in Ohio, Michigan, and Ontario, killing the production of several models including the Cadillac CT6, the Chevrolet Cruze compact, the Buick LaCrosse, the Volt plug-in hybrid, and cutting about 14,700 jobs. This is the firm’s largest cost-saving plan since the taxpayer-funded bankruptcy bailout in 2009.

GM received more than $50 billion of taxpayer assistance through the Troubled Asset Relief Program during the financial crisis. While the feds recovered $39 billion, the firm’s management failures cost taxpayers $10.5 billion. General Motors had racked up more than $40 billion in losses since 2005 alone, losses that had little to do with the financial crisis.

Many of the jobs to be eliminated are populated by those who are perpetually in debt, no matter how hard they work. And if you believe senior GM executives will not receive their annual bonuses, then you believe pigs can fly.

The automaker, the leading automobile manufacturer of the 20th century, expects to free up $6 billion in cash flow by the end of 2020, which will enable it to double down on its investment in electric and autonomous vehicles to stay competitive in a fast-changing market and sluggish sales.

The automobile industry is simultaneously facing multiple disruptions. For example, young, environmentally conscious, technology-oriented urban residents increasingly shun car ownership in favor of more convenient, less expensive mobility options. Owning a car and getting a driver’s license aren’t the life milestones they once were.

For years, General Motors has not been building the vehicles American consumers want. As a result, their car lineup has had more misses than hits. It has been slow to respond to competitive pressures and to align firm resources with changing market demands. For example, the rapid rise of Tesla Motors in the electric vehicle market, Toyota gaining market share with its eco-friendly Prius and the subsequent GM bankruptcy suggest that the firm made the wrong decision when it aborted its electric vehicle program in 2002.

In the ultimate irony, General Motors had a head start with electric vehicles. The firm introduced the “Impact,” a concept electric car, at the Los Angeles Auto Show in January 1990. The Impact was met with immediate praise and GM announced that it would become a production vehicle. Based on the proof of concept electric vehicle, the California Air Resources Board passed a zero-emissions vehicle mandate that required all major automobile suppliers to develop them if they wanted to continue to sell in California.

General Motors became the world’s first mass-produced electric vehicle retailer when, in a blaze of glory, it released the EV1 in 1996. The vehicle could only be leased, despite requests by many customers to purchase it.

But in 2002, the firm cancelled the model that might have been its best hope for the future, citing high costs, a limited market for electric vehicles, and the lack of technology to make high-performance cars. GM recalled all the EV1 and, in one of its worst public relations moves, recycled them, meaning the recalled vehicles were taken to Arizona and crushed. The electric powertrain that powered Tesla vehicles was based on the prototype developed for the EV1.

Once again, GM management demonstrated that short-term thinking is extremely costly in the long term. It is a reflection of the firm’s slow adjustment to changing consumer tastes and the failure to tailor the firm’s resources and business strategy to rapidly changing market forces.

General Motors may have been a 20th-century giant with a large past but today its future may be getting smaller. The sands of time may well be running out for the firm to prepare for the automobile industry’s still-uncertain future.

Originally Posted: December 22, 2018

Fiat’s Sergio Marchionne leaves a legacy worth remembering

Many CEOs know how to soar, but few know how to land the plane. One exception was Sergio Marchionne. The Canadian-Italian leader was one of those dynamic, old school executives who was grounded and anchored in reality, a rarity in the contemporary world. He died on July 25 at the age of 66.

Marchionne first saved FIAT and then did the same thing five years later when FIAT took control of Chrysler from the United States government and turned the combination into a profit generator.

He took the driver’s seat at a battered and indebted FIAT in June 2004, an accountant and tax specialist who described himself as a corporate fixer. He had no previous automobile industry experience and was FIAT’s fifth CEO in less than two years.

Thus began his first remarkable turnaround. FIAT was near death when Marchionne became CEO. It was heavily indebted, had suffered huge losses, and was running out of cash. He took dramatic measures to get FIAT off its knees and return it to financial health, including shuttering factories, laying off thousands of employees, and cutting the time it took to bring new models to market from four years to just 18 months.

A key issue for FIAT was its relationship with General Motors. In 2001, the two had entered into a partnership that gave FIAT a put option to sell the 80 percent of the company it still owned to GM. Sergio Marchionne decided to play hardball, persuading GM to pay $2 billion to sever its ties and end its troubled alliance with FIAT. General Motors paid that huge sum not to buy FIAT.

Equally important, he dismantled the bureaucracy and focused on developing leaders, promoting high-potential young managers to senior positions, creating a flat organizational structure, and linking and leveraging information and knowledge throughout the firm. He constantly reminded the organization that he could not make all the decisions and created an entrepreneurial environment. By 2005, FIAT had returned to profitability.

In 2008, the global automotive industry was in a deep crisis. The following year, Mr. Marchionne found himself in a familiar situation. FIAT struck a deal with the United States government to take on the ailing Chrysler group and save several hundred thousand jobs in exchange for providing small-car technology. There was much skepticism about his ability to turn the firm around and grow the combined FIAT Chrysler into a profitable global automaker.

Marchionne chose an office in the industrial engineering department on the fourth floor of Chrysler’s headquarters, sending a clear message that he was accessible and wanted to be where the action was. He understood that Fiat Chrysler Automobiles was too large and complicated for one person to lead, and that human capital is a scarce strategic resource.

Just as he had done at FIAT, Marchionne fired most of the top management at Chrysler in 2009 and installed a dozen newcomers. By the end of the year, almost no one from the previous senior leadership team remained.

As he explained, “It is not a matter of how good they are at their jobs; it is a matter of change. I can spend 12 months arguing with them about what and how to change, but this won’t work and will take a lot of time. I look for the youngster. They don’t have seniority, they don’t play the corporate habits; they’re pure.”

The chain-smoking, espresso drinking CEO was direct and demanding, requiring his senior managers to be available 24/7 to match his own commitment. Like other successful executives he focused on setting stretch goals, developing a clear strategy, constantly communicating it, and ensuring proper execution of the strategy – all while managing to stay cool.

The combined Fiat Chrysler Automobiles group’s stock price nearly quadrupled over the past four years of his stewardship. Last year, the firm posted $4.4 billion in pre-tax profits.

Grazie mille.

Originally Published: August 18, 2018

Corporations, integrity and dead customers

These days, saying that no one much likes captains of industry is to exaggerate very little. It is as American as pizza, unwed mothers, cheating on your taxes and hating the Yankees.

But the actions of one corporate titan more than 30 years ago stand out from the crowd and prove that it doesn’t need to be that way.

On Sept. 29, 1982, Johnson & Johnson executives learned that seven people from the Chicago-area died after swallowing Tylenol capsules laced with cyanide. Nothing of this sort had ever happened in the industry.

That summer, J&J’s Tylenol pain medication was by far the country’s leading analgesic with a 35 percent market share. The brand seemed unstoppable, until the unimaginable happened.

J&J’s handling of the crisis was a textbook example of doing the right thing and putting the customer first. The firm took immediate steps to recall and destroy the 31 million bottles on American shelves and it developed the first tamper-resistant packaging. The moves cost over $100 million, and that doesn’t include the effects of plummeting sales in the wake of the recall.

But the firm was ultimately rewarded for putting customer safety first. A year later, Tylenol was once again the nation’s top-selling analgesic. After two years. Tylenol was back to capturing 33 percent of the analgesic market.

Acting to protect customers in the earliest stages of the crisis was consistent with the first stanza of J&J’s corporate statement of purpose: “We believe that our first responsibility is to the doctors, nurses , and patients , to mothers and all others who use our products and services.” Senior managers understood that you protect the brand by protecting the customer. If you put the customer first, employees, stockholders and other stakeholders all do better in the long run; it’s about customer trust.

General Motors is the latest example of bad corporate behavior. We recently learned that GM waited over a decade to recall 1.6 million compact cars with faulty ignition switches that contributed to more than a dozen deaths across the country. When they finally did act, it was by sending technical service bulletins to dealers instead of immediately recalling cars. GM’s current CEO Mary Barra called the firm’s slow response an “extraordinary” situation and said she didn’t know why it took so long to fix the ignition.

To make matters worse, this comes just five years after the federal government became the de facto owner of General Motors when it invested more than $100 billion in taxpayer money to bail out the troubled automaker. The feds of course swear on a stack of bibles that the bailout was a rousing success, resulting in more than a million jobs being saved and GM again becoming the number one automaker in the world.

Barra must have felt something go dead inside her as she realized she was saying so little and saying it so late. After all, this is the new GM, a far different company today than before bankruptcy. We know this because GM keeps telling us, even though there’s no evidence to back it up. One can only assume if they say it often enough, it will be true.

GM remains unwilling to admit the company made mistakes. The automaker recently filed a motion asking a federal bankruptcy court to enforce a provision that shields the “new GM” from liability for incidents that took place before it emerged from its whirlwind Chapter 11 bankruptcy in July 2009.

GM could have learned a thing or two from J&J, whose response to the 1982 Tylenol poisonings did justice to the company’s stakeholders. Though the person or persons responsible for tampering with the pills has never been found, J&J’s reputation wasn’t lost.

It is not surprising that in the weeks and months following the crisis, J&J was praised in the court of public opinion for demonstrating that doing the right thing matters and that making the customer the first priority is good business. It’s a lesson GM’s top executives never learned.

originally published: May 10, 2014

‘Too big to fail’ GM already has

General Motors waited more than a decade to recall 1.6 million defective Chevy Cobalts, Saturns and Pontiac G-Ss with faulty ignition switches that could cut off engine power and electrical systems, disabling the air bag and leaving occupants vulnerable to serious injury. Thus far, the defect has been linked to 13 deaths.

GM’s corporate delinquency and callous disregard for persistent quality control problems are so disturbing that many find it difficult to reconcile them with company leaders’ constant claims that the company has a different organizational culture than the one that was in place when these lapses occurred. GM has reinvented itself, the story goes, and now builds the safest and best cars in the world.

The coming months will tell us a lot about whether those claims are just talking points or if new CEO Mary T. Barra, a 33-year veteran of the company, has truly transformed GM.

Last month Barra told a congressional hearing about the overhaul of GM’s corporate culture. These days, “creating a new culture” is one of the phrases CEOs need to wield to make their way in corporate America. The new CEO is going to push middle management and old timers to think and act differently, shedding its hidebound culture and putting the customer first.

After dominating the U.S. car market for most of the 20th century, the glory days of GM and the American auto industry began to unravel in the early 1970s. GM, for example, had a majority of the U.S. market in 1962 and was the undisputed leader in global car sales between 1931 and 2008. By 2009, this great American icon’s market share had fallen to less than 20 percent.

One reason GM and other American automakers lost their way is because senior management built strategies around the flawed assumptions that oil would be readily available and cheap, and American drivers would continue to buy large vehicles. Given their inflated cost structures, these were the only vehicles American car manufacturers could sell at a profit. On average, GM spent about $1,600 per car more than their foreign counterparts on pension, health, life insurance and other worker and retiree benefits.

The 2008 financial crisis hit the industry hard. U.S. auto sales declined by 18 percent from 16.1 million units in 2007 to 13.2 million units in 2008. Meanwhile, the price of a gallon of gas rose to over $4 in the summer of2008, up from about $2 in 2005. In 2009, the credit crisis, coupled with an already-declining market share, redundant product offerings, huge legacy costs and customer perceptions of poor quality pushed GM into bankruptcy court protection.

By handing GM close to $58 billion under the Troubled Asset Relief Program, the feds became the company’s de facto owner. Washington provided additional help by waiving the payment of $45.4  billion in taxes on future company profits, offering a $7,500 tax credit to consumers who bought the Chevy Volt, the Cash for Clunkers program, and an exemption from product liability on cars sold before the bailout.

In November 2010, GM returned to private ownership by launching a successful initial public offering.

But just as people have distinct personalities, so too do organizations. Transformation takes time.  Culture is the product of the firm’s organizational structure, the system used to reward senior management and motivate and shape employee behavior. Old loyalties, behaviors and identities are hard to change. They produce a massive amount of inertia which has to be overcome.

Does Mary Barra’s long tenure at GM doom her to repeat past strategies and traditions such as the slow response to safety issues? Can a company lifer drive the kind of major change Ford saw after it recruited Alan Mulally from Boeing in 2006 and he pulled the company back from the brink of collapse just two years later?

General Motors again faces the risk of years of costly litigation and a significant loss of brand equity and market share. Hey, no problem. GM is too big to fail.

originally published: May 3, 2014