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As a retiree from General Motors, I was very interested in the financial downfall of an American icon. It is particularly disappointing because GM was known for very competent financial management. The information in this post was part of correspondence with a non-GM colleague started as a result of a 2009 Jun 07 Detroit Free Press column, "The real reasons for the auto crisis" which is reprinted in Appendix A. My view was/is that the column reflects the excuses and denials that were a very strong factor in General Motors' decline for many years.
I have a different outlook on this subject. Regardless of the circumstances, the board and the officers of a company have the responsibility and obligation to lead and manage the affairs of the company to produce favorable results. This requires an understanding of external factors which management may not be able to control but should be able to influence. In any event, the leadership must deal with the external factors. The board and the officers are accountable for the results.
This post is long, but hopefully is an easy read. This post is the result of my personal review to check and adjust my observations and recollections about GM.
The continuation of this post describes many of the facts and observations.
Don Nordeen
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Continue reading On the Demise General Motors.
- Key Words: KeyWords
On the Demise General Motors (continued)
Introduction
Looking back is beneficial if done for the purpose of understanding what caused/influenced the results — in this case results that are unfavorable for the Detroit 3. Professor Jeffrey Sonneberg of Yale University Business School recently published the article, How Rick Wagoner Lost GM, in Business Week. This article has a strong focus on governance and the board of directors. If the same management and decision processes are continued, the future results are likely to be similarly unfavorable. I believe that is a very significant possibility. Cultural change is difficult.
I agree that the straw (or maybe a bale of straws) that broke the camel's back was the massive mismanagement of the mortgage and financial markets by the federal government (congress, the president, federal reserve, banking and financial market regulators, SEC). Should the Detroit 3 have been better prepared for a major downturn in sales? The believe the answer is "yes". In providing a partial answer to this question, I will confine my comments to General Motors. My direct experience ended in 1991, but I maintained contacts and of course read many articles in the press.
Discussion
I seriously doubt that GM's planning included the possibility of a serious downturn in sales. A related issue is the lack of scenario planning or equivalent. GM’s investment decisions were obviously not based on realistic financial and sales considerations, and planning for the possibility of major downturn in sales. My experience is that alternative planning was never taken seriously in GM. Contingency planning was for conditions no one expected to occur, and therefore was a paper exercise and not taken seriously. Scenario planning was not used in my time frame at GM. It considers reasonable and plausible alternatives, mostly based on the unpredictable but foreseeable external factors: changes in market, customer demographics, customer preferences, operational costs, government regulation. Scenario planning helps (1) to identify sound investments as those in all, or most, of the scenarios and (2) to identify risky investments as those which are part of only one scenario.
I believe that GM's cash reserves were so low in 2008Q4 that GM would not have been able to sustain the reduced sales in a typical recession — typically 15-20%.
The questionableness of GM product and manufacturing decisions is brought in sharp focus by noting what is in the "bad" GM that has either been sold or will be liquidated: Hummer, Saab, Saturn, assembly plants idled by the building of new super assembly plants. Add to the unsuccessful, the myriad of unsuccessful specialty products: "dustbuster" minivan, Pontiac Aztek, Buick Ranier, Buick Terraza just to name a few. Also add the total investment made in engines in relation to the number of units produced. These seem to be driven by the long-standing decision criteria of big, powerful, V8, and major emphasis on investment to solve problems. Rather, GM should have been focusing on creating best-in-class core products including those required to respond to the changing marketplace and other considerations.
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Unfunded Liabilities
Historical Perspective — GM's financial mismanagement goes back over 25 years. The first wake-up call was the underfunding of salaried retirement and hourly pension programs. The systemic underfunding was addressed by the Employee Retirement Income Security Act of 1974 (ERISA) which also established the The Pension Benefit Guaranty Corporation (or PBGC). My understanding is that ERISA also directly or indirectly established the funding requirements for retirement and pension programs. No legislative equivalent was enacted for retirement health care benefits, other retirement and benefits post employment benefits (or OPEB).
However, unfunded liabilities were addressed in GASB 45 in 2004. This accounting standard appears to apply only to government employers (cities, counties, etc.) and not to corporations. However, the scope of GASB 45 covers the types of unfunded liabilities that GM did not book. Consequently, the professionals in the accounting field including those in GM were certainly aware of the concept of unfunded liabilities. Not only was the funding not set aside, but the benefit costs were not even booked as expenses and unfunded liabilities in the years in which they were incurred.
I remember the many debates among my colleagues in the middle 1980s about whether or not the benefit costs should be booked. The arguments against were four:
- The future costs could not be estimated.
- If the benefits were booked as expenses and unfunded liabilities for the current year, the UAW would use the numbers for additional leverage in the next contract negotiations.
- Booking the expenses would adversely affect the short-term profits.
- Business will be better in the future making it easier to pay with future dollars.
Memo: The accounting standards also lagged the large changes in unfunded liabilities occurring in many companies. The SEC was not proactive. It is interesting to note that booking of stock options as a current expense just occurred in the last two years. The arguments against booking stock options as an expense when awarded are similar to the arguments in the bullets above.
Other retirement benefits were similarly not booked as unfunded liabilities. The benefits were paid from current operations, not from set-asides when the liabilities were incurred. Apparently, GM continued to annually buy term insurance rather than a paid-up policy for the stated retirement benefits.The early retirement programs made matters worse. Those typically provided a Social Security equivalent paid by GM until eligibility for Social Security at age 62. Also, full health care benefits were paid to early retirees from GM funds until eligibility for Medicare at age 65 which reduced GM's retiree health care costs to GM's version of a "Medicare supplement" which included a prescription drug benefit. Ignoring the unfunded liabilities went on for 20 years or more with tens of directors and officers allowing this lack of financial integrity to continue. It may be that those involved considered that raising the issue would have been a career-limiting action. Short-term considerations dominated. The financial statements overstated the financial viability of the company, and likely misled the decision makers in GM. There was some recognition of the unfunded liabilities in the 1990s with Devine's initiatives to borrow at low interest rates. Perhaps, this was a second wake-up call. If GM had short-term profits, why was it necessary to borrow? GM's unfunded liabilities are just GM's version of a systemic problem of accounting for future commitments. The granddaddy of unfunded liabilities is described in I.O.U.S.A.. Almost everyone in the country has been asleep at the switch.
To understand the significance of the omissions, an important analysis would be to restate GM's financial reports beginning in 1975 by applying the requirements and principles in GASB 45. Annual profits would have been less each year and the balance sheets would have shown progressively smaller amounts of cash for expansion and capital investment. Financial forecasting would have produced very different results. GM would have been forced to immediately address the mismatch between sales and capacity. GM might have been forced to recognize that the company had to earn its way to best in class products and efficient operation. GM would have had more leverage with the UAW to resist their demands.
Enter the Legacy Costs — Rather than to acknowledge that the accounting was incorrect when it became obvious that GM has huge unfunded liabilities, the problem was dressed up as "legacy costs". This perpetuated the accounting errors and the misleading financial statements. With defined retirement benefits, a part of the future expenditures for those future benefits is incurred each year for each employee. The obligation for the future expenditures is created in the current year as part of the total employee compensation including benefits, and is therefore a current-year expense. Since the cash isn't paid out in the current year, GM incurred a deferred expense (liability) for each year for each employee. GM and other companies decided to book the expense when paid (in the future), rather than when incurred, and to ignore the deferred expense (unfunded liability). This obviously created misleading financial statements. As late as the 2007 GM Annual Report at page 7, the magnitude of the unfunded liabilities was only vaguely described.
"ADDRESSING THE LEGACY COST BURDENNote that it states a $103 billion figure over a 15-year period, but is silent on the remaining unfunded liabilities. The last of the excuses I have found concerns the difficulty of paying with now-current funds is in the 2005 Annual Report at page 5: GM's Legacy Costs, reproduced in Appendix E. See GM's discussion of GM's Legacy Challenge, and specifically the table near the end of the discussion. This illustrates that the retiree expenses were still being booked when paid rather than when incurred.
We’ve also made tremendous progress on what has been probably our single-most challenging issue in recent years: GM’s healthcare and legacy cost burden. Our progress has been the result of a series of actions and agreements over the last several years affecting both salaried and hourly workers. In total, they represent a major milestone in reestablishing GM’s ability to be fully cost competitive in the U.S.
Consider that from 1993 through 2007, GM has spent a total of $103 billion in the U.S. to fund legacy pensions and retiree healthcare – an average of about $7 billion a year – a dramatic competitive and cash-flow disadvantage. Based on our recent actions and agreements, our U.S. hourly and salaried pension plans were over-funded by more than 20 percent at year-end 2007, and we do not expect to be required to make any cash contributions to these plans for the foreseeable future. In addition, U.S. salaried retiree healthcare has been capped beginning this year, and UAW retiree healthcare is scheduled to be paid exclusively from a new independent trust that we will establish on the later of January 1, 2010, or receipt of the necessary approvals.
The result of these and other actions in this area: we expect our cash spending on U.S. pensions and retiree healthcare to decline from the annual average of $7 billion over the last 15 years, to about $1 billion per year starting in 2010. That savings of approximately $6 billion a year offers us a tremendous opportunity to improve GM’s earnings and balance sheet, and to invest in new products and advanced propulsion technology."
The table also illustrates the large effects of productivity improvements and other factors on (decreasing) employment. Identifying these factors and estimating their effects are part of a competent planning process. GM's persistence in booking the expense when paid inflated the labor costs when the deferred expenses became due. I believe this all came crashing down with the new UAW contract in 2007 which established VEBA and required the GM payments into the VEBA fund for both current and future retiree benefits. This may have been the first publicly-available recognition of the size of the unfunded liabilities — perhaps about $50 billion. That still is not the whole story. The 2009 May 30 Detroit News article, "General Motors stock dives; Opel sold" describes remaining obligations at the end of 2008 as
""We suspect that the New GM will also be responsible for GM's legacy liabilities," Kirk Ludtke, an auto analyst at CRT Capital Group, wrote in a report. "At year-end 2008, GM's unfunded pension and other post employment benefits (OPEB) liabilities were $25.2 billion and $28.9 billion, respectively. Although the agreement between GM and the UAW is designed to eliminate about $20 billion of the unfunded OPEB liability, it appears that a sizable unfunded OPEB liability will remain with the New GM.""
The above numbers are difficult to confirm since a 2008 annual report is not available. I presume that OPEB also includes employee buyouts with plant closings. Again, there is an accounting question since employee buyout expenses are not likely to be booked until firm plant closing decisions are made. The incentive on the short term is not to announce plant closings, since the announcement would likely require booking a one-time charge including the OPEB costs which include the employee buyouts.But there is more! — In addition, an expense of $37 billion was taken in 2007 to adjust income tax credits. Obviously, the discretion in accounting was used in prior years to (incorrectly) claim the tax credits. This further inflated the short-term profits in those years. It has been widely reported that GM lost $82 billion since 2004. See 2009 Mar 30 article in, "GM CEO Wagoner forced out as part of gov't plan". This is presumably for the four years 2004 through 2007. But most of these losses really occurred in the 20+ years prior to 2007, but were not booked when incurred.
An obvious indicator of the financial stress was GM's decision to sell GMAC, which had been a financial powerhouse for many years. However, GMAC moved into the mortgage and real estate businesses on which they had little expertise. The end result was the sale of 51% of GMAC to Cerberus Capital Management in 2006.
Wrong Decisions based on the Faulty Financial Statements
The most obvious of the unfunded liability decisions are those involving Delphi and American Axle. When the realities of unfunded liabilities for those two new companies became apparent, GM voluntarily paid billions of dollars to (partially) cover the unfunded liabilities. The inaccurate financial information also likely influenced investment decisions in product, plant and equipment. It is obvious that GM overspent and depleted its cash to the point of inability to remain viable for any downturn in sales.
Some of the Poor Decisions
Some Positive Results First — First some examples of decisions with favorable results.
- Redefinition of the Cadillac division and its line of vehicles. However, Cadillac sales are still declining, and are only about 55% of the sales of BMW, Lexus and Mercedes-Benz. Detroit News, 2009 Jul 09, pA1.
- Revived Chevrolet Impala. It is one of the only vehicles to show sales increases in recent years. It is a fuel economy leader using less costly powertrain technologies in its base products. I believe it is GM's sales leader in 2009. Yet the value of this product has not been promoted.
Any project had to show success whether or not success could realistically be achieved. Not enough challenges to the sales forecasts. The marketing sales projections were "V" shaped. The actuals for parameters that should be favorable trended down, but the projected results trended up. Hindsight indicates that the projected results should have trended down. The projected upward trends were not sufficiently challenged. Without the significant challenges to the projected sales, the deficiencies in the new product concepts were not sufficiently debated and changed to be best in class. GM never seemed to have the patience for sales to increase with the introduction of a new and attractive product. Consider the patience of Toyota and Honda in the minivan market (Sienna and Odyssey, respectively).
Many of the problems are related to lack of a realistic planning process. Properly done, Scenario Planning, would have uncovered the folly of the accounting and financial reporting that did not consider unfunded liabilities. It would also have shown which product proposals are/were sensitive to external factors. Scenario planning provides the facts and considerations needed for a healthy debate. The lack of scenario planning, or equivalent, is evident in GM's inability to respond to the recent changes in external factors.
Obvious scenarios relate to possible fuel economy legislation from the federal government, California and other states that adopt California standards, and to the ongoing slide in sales. Product and plant investment should have emphasized the common elements in the various scenarios.
Maybe it changed after I retired in 1991, but GM had great difficulty responding to external changes. After years and years of success, it is a hard pill to swallow to believe that doing more of the same is not the answer. The "good news" syndrome is part of the adversity to change.
Some Examples of Poor Decisions — It may be helpful to start with the previously-successful multiple nameplate divisions in prior times. The Sloan model was not sustainable because it became incompatible with the evolving economies of scale. Sloan's model was independent divisions with coordinated control achieved by having the committees composed of the various division executives. With that arrangement, there was no question about who owned the recommendations — precisely the executives who would have the responsibility to implement the recommendations or policy. Over time, the responsibility for implementation became separated from the responsibility for recommendations and policy.
GM rightfully eliminated the multiple engines with each nameplate having its own family of engines. However, even though the divisional engines may not have been significantly different with regard to function, power and fuel economy, they were different to customers. Some vehicle product distinction was lost. GM made matters worse for Buick, Oldsmobile and Pontiac by extending the scope of the Chevrolet products to maintain sales leadership over Ford. The nameplate differences became blurred, but GM continued with five car divisions, and added more. There is no evidence of any serious 10-year scenario planning to guide decisions on how many nameplate divisions, on how to merge of nameplate divisions, on how many engine families other major features to respond to the many internal and external changes.
A related factor is not responding to the customer preference changes from high-styled coupes to sedans which occurred in the 1980s. GM persisted with the high-styled coupes (Cutlass Supreme, Buick Regal, Grand Prix and Monte Carlo) long after customer preferences shifted to sedans. This is most obvious was GM grandiose redesign of the Eldorado, Toronado and Riviera in the mid-1980s with all the hoopla over the new capital intensive Hamtramck plant which didn't work very well. The Monte Carlo was continued through 2007, even in the presence of declining sales. Customers wanted high-styled sedans. The Oldsmobile Aurora might have successfully demonstrated the high-styled sedan but failed because of the termination of the Oldsmobile name.
GM killed the Oldsmobile division by a series of terrible decisions. GM didn't understand that the product innovation was occurring the the division product engineering departments. When those product engineering departments were removed from the nameplate divisions in the 1980 reorganization, the innovative capability suffered. Because the actions concerning Oldsmobile are so relevant, a more-detailed description of the demise of Oldsmobile is provided in Appendix B. Oldsmobile had uncompetitive products in the late 1980s and foolish ad campaigns of "This isn't your father's Oldsmobile" and "import fighter' which did nothing to redefine the division and its products. The division was lost, but GM persisted. Because the Oldsmobile models had been so discredited by the poor product decisions, completely new model names were required (Alero, Intrigue, and Aurora). The Aurora finally responded to customer preference for high-styles sedans. These were good products, but GM didn't have the patience to accept the gradual growth in sales with new models.
The plug on Oldsmobile should have been pulled before making the investments in Alero, Intrigue and Aurora. The investment in Aurora should have been made as a Buick. Intrigue investment into Saturn.
The Saturn project was not planned for success. The intent to introduce new designs, new manufacturing processes and a new way of doing business — a new car company. Unfortunately, the product concept was not compatible with economies of scale. The product line was minimal with only the S-Series (coupe, sedan and station wagon) with a single platform. There was a lack of shared objectives with some of the objectives threatening the established cultures and the UAW. The limited product line was expanded hodge-podge with the addition of the plain-Jane L-series (mid-size), Vue (compact crossover), and Relay (minivan). The concept of a new car company was lost by 2004 except for the specific Saturn dealers. While the intent may have been for Saturn to establish new and better ways that could then be adopted by GM, the opposite occurred with Saturn's poor profitability causing integration into GM's product line and GM practices and bureaucracy.
A fresh and attractive Saturn family product line was not achieved until 2007-2008 (Astra, Vue, Aura, Outlook, and Sky) though Outlook seems large for the Saturn family. But it takes time for a new and attractive product line to produce higher sales. So the reinvented GM is now selling the Saturn brand. The number of interested buyers suggests the value of the new fresh product line. The similarities and complementary aspects of the Oldsmobile and Saturn products, objectives and challenges seem rather obvious. Yet GM persisted in treating the two brands as independent, and invested in new product in both nameplates in their waning days. If GM had the wherewithal to continue Saturn, a good fit would have been to offer the Volt as a Saturn model. The dealer body was of the right size and in the right locations. A great way to increase show room traffic!
See Appendix C for a list of many other poor decisions.
Culture will likely cause the problems to repeat.
The above are the results of decisions and the decision process. Management and decision makers at all levels understand the GM decision process. David Brooks wrote about these challenges in the NY Times (See Appendix D below.)
The challenges are also described by Albert Koch who has been hired to liquidate the old GM. He is paraphrased in a 2009 Jul 05 Detroit Free Press article on pA1:
"Meanwhile, GM's culture must become quicker and more responsive, and that won't happen overnight . It will take five years or longer, he said he believes."
Yet, none of the executives in the new GM is representing the challenge as that difficult.
A major effort will be required to create much of a change. Certainly, scenario planning for both products and operations will be an important part. Accounting and financial management integrity must be restored. Major changes in management style and practices will be required.Misinformation
As stated in the Free Press column, some believe that Greta Van Susteren didn't have her facts correct. I saw the first part of the interview and concluded the same. I clicked to another channel.
The responsibility for the misinformation about GM rests with GM leadership. They did not get out the correct messages. Historically, this has not been important to GM. It is hard to do when there is very little good news. The information vacuum was filled by information from other source — a classic example of perceptions becoming reality. While some of the facts may have been wrong, the perception of mismanagement over a long time period is probably correct.
It is all about leadership.
GM directors and top leadership are responsible and accountable for what happened. They will also be responsible and accountable for the necessary changes and corrective action in a reinvented GM.
I will be interested in reading your analysis and comments. Your perspective is different from mine.
Appendix A — The real roots of the auto crisis
Detroit Free Press June 7, 2009
BY CAROL CAIN FREE PRESS COLUMNIST
Listening to Fox News' Greta Van Susteren talk about auto woes last week left David Cole grinding his teeth.
So, too, about a dozen other national reporters and anchors who have called the usually mild-mannered expert in recent weeks for his wisdom on the trials and tribulations of the Detroit Three and broader auto industry.
It's obvious from their questions and comments they just don't understand the reasons for the problems. More important, he said, is that collective lack of knowledge causes many people to get bad information.
"This entire conversation is about the industrial future of our country," Cole told me at the recent Detroit Regional Chamber Policy Conference on Mackinac Island.
"I was watching Greta Van Susteren and she was talking about how this is all management's fault. That just isn't so," said Cole. "She's a smart woman. She just doesn't know what she's talking about."
Cole, a scientist and engineer by training, is chairman of the Center for Automotive Research in Ann Arbor and has been seen on nearly every national TV news program explaining the challenges, woes and perils of the troubled industry.
"The local media is well-informed and some of the national level who are assigned to cover autos. It's when you get to the general national media that things fall apart," he said.
Cole said this auto crisis is not a result of a management problem, but is attributable to the massive collapse of financial markets.
And not having a true national energy policy.
And that most automakers around the world have received aid from their governments. America is the only one that has not supported its manufacturers -- that is, until recently.
Experts questioned
Cole added that it isn't only some journalists who don't get it.
"I did an interview with (PBS) 'NewsHour' and they had Peter Morici, an economics person at University of Maryland, with me, and he didn't know what he was talking about," said Cole.
"Too many people are listening to what these experts and pundits are saying, and it isn't only hurting Detroit, but the nation," he said.
Now 71, at an age where many peers have retired, Cole is going to continue to beat the drum on behalf of the auto industry he loves.
Like father, like son
The conversation about autos and management impact is somewhat personal. His father, the late Edward Cole, grew up working for GM and served as president of the carmaker from 1968 to 1974.
Edward Cole was also a man trying to beat the drum for a new auto future. While at GM, he ordered engine-compression ratios reduced after 1970, knowing regulations would tighten.
And he helped wean American cars off leaded gasoline and prepared GM for catalytic converters in the 1970s. He retired in 1974 and died a few years later in a plane crash.
The reason the younger Cole says he is pushing so vigorously to educate people is that he is convinced that the current crisis creates an opportunity for the public and government to learn more about manufacturing, which can only help.
"Of all the industrialized countries in the world, we are the only country that does not understand the role manufacturing plays in our economy," Cole said. "It is so important in our economy ... and it is right on the edge of a cliff."
He added: "If GM doesn't make it through this bankruptcy in a surgical way, this will be a catastrophe for Detroit and the nation."
CAROL CAIN hosts "Michigan Matters" at 11 a.m. Sundays on WWJ-TV, CBS Detroit 62. She can be reached at 313-222-6732 or clcain@cbs.com
Appendix B — The Demise of Oldsmobile
These observations are based on working in Oldsmobile product engineering from 1970-1977 and continued interest when I moved to other positions within GM. Many of the facts are taken from Wikipedia. For a listing of vehicles, models by year, click on Oldsmobile. Then scroll down to the end of the webpage and click on "show" Oldsmobile road car timeline, 1980s–2004 near the bottom of the webpage.
- 1977 — Successful introduction of a downsized full size (GM B&C platforms) cars.
- 1977 — Use of a Chevy 350 cid engine in some 88 models because of insufficient production capacity of the Oldsmobile Rocket V8 engines. This basically destroyed the marketability of the Rocket name. The 88s with Chevy engines were called Chevymobiles. In subsequent years the Buick V6 engine was used in the 88 models.
- 1978 — Introduction of a downsized mid-sized car line that continued the emphasis on high-styled coupes (Cutlass Supremes). Two sedans including an aeroback were introduced. Styling and design were not up to Oldsmobile standards. No longer had only an Oldsmobile Rocket engine to market. Engines included the Buick V6.
- 1979 or 1980 — Oldsmobile X car introduced. This first front drive car was lacking in many ways and not helpful for the Oldsmobile product line. "Iron duke" 4-cyl engine and new 2.8 V6 optional.
- 1982 — Introduced a formal four-door mid-size rear-wheel-drive sedan to address the prior shortfall in styling and design. Designated the G platform.
- 1982 — Introduced the front wheel drive mid-size sedan which carried the Cutlass Ciera name and the A platform. These were look-alike sedans with Chevrolet, Pontiac and Buick. Improved over the X car, but not competitive and certainly not best in class.
- 1982 — Introduced new Oldsmobile Firenza (Chev Cavalier). Underpowered. Not competitive.
- 1982-1984 — Diesel engines. Major durability problems.
- 1986 — Introduced the new front-wheel-drive 88s and 98s. Not competitive. Major problems with transmissions and overall reliability.
- 1986 — Introduced the new front-wheel-drive Toronado that was smaller in size, and continued to focus on high-styled coupes when the market was shifting to high-styled sedans. Design assumed $3.00 gas prices that was grossly wrong. Used Buick V6 fuel injected engine. Many problems with the new product technology and plant technology at Hamtramck. Sportier Trefeo model introduced in 1998. End result was the demise of Toronado, Riviera and Eldorado.
- 1987 — First new cars following GM's reorganization. Olds product engineering, which provided the product innovation, no longer existed.
- late 1980s — Successively tried marketing schemes of "This isn't your father's Oldsmobile" and "import fighter". Neither described what the Oldsmobile products were.
- 1988 — Introduced new W platform (GM-10) vehicles. Replaced the GM A and G platforms. Still introduced the coupes first in 1988 and the sedans in 1989. Multiple engines including the Quad-4 introduced in 1990.
- 1990 — Silhouette minivan introduced. Dustbuster variant.
- 1991 — The "badged" Oldsmobile Bravada was a mid-size sport utility vehicle (SUV) was introduced.
- 1992 — End of Toronado production. Recognition for Ciera: "During its run, the Cutlass Ciera was Oldsmobile's best-selling model. It consistently ranked among the highest rated vehicles by J.D. Power and Associates; it was ranked the "Best in Price Class" on July 30, 1992 and the "Top-Ranked American-Made Car" on May 28, 1992. It was also named "Safe Car of the Year" by Prevention Magazine on March 6, 1992." Wikipedia. This is the front-wheel-drive A platform which was 1992 was a competitive design.
- 1995 — Aurora introduced. Competitive. Met market demand for high-styled sedans. Clearly part of Oldsmobile family (Alero and Intrigue). First generation Aurora continued through 1999.
- 1997-1999 — Cutlass name continued as a badged Chevrolet Malibu. Because this car did not represent the content of prior Cutlasses, it basically terminated any usefulness of the Cutlass name.
- 1998-1999 — End of the 88s and 98s and their variants.
- 1999 — Introduced the 3.5L 90 degree V6 variant of the Northstar engine. Used in 1999-2002 Oldsmobile Intrigue and 2001-2002 Oldsmobile Aurora. Much specific content for the low volume production. Competitive engine for market but not for production.
- 2000 December — Announcement that Oldsmobile would be phased out. Sales went downhill even though there were new models in the pipeline.
- 1999-2002 — New or updated products included Intrigue, Alero, Aurora and Bravada.
Appendix C — Other Examples of Poor Decisions
Listing of other examples — These are provided with minimal explanation.
- Hummer. Fringe vehicle very sensitive to changes in external
factors but consistent with big, V8, powerful, etc. The Hummer
mentality is illustrated in some of GM's advertising.
- During the run-up of gas prices when gas prices reached $3.00/gal, the Hummer was featured with free gas for a year.
- One of the lead ads when the powertrain warranty was extended to 100,000 miles was with a Hummer.
- Emphasis in new products — perhaps in preference to devoting
resources to making the core products best in class and surpassing
customers' expectations.
- 2010 Camaro. Limited to muscle coupe with three engines with associated high development costs
- Pontiac Soltice and Saturn Sky. Fringe or niche two-seater sports car with limited sales potential — a product for a successful company to consider.
- 5.3L V8 in front wheel drive vehicles. See "Short runs for engines" below.
- Yet competitive hybrid vehicles are still not available in the compact and mid-size ranges. An email from the new GM to retirees et al states " Today we are pleased to announce there is a new GM. ... GM also expects to have 14 hybrid models in production by 2012." This statement only confirms that GM was not ready. Apparently to get a large enough number, the year had to be extended to 2012.
- Short runs for engines
- 4.3L I6 for Blazer, Envoy and related products from 2002-2009. This engine was on the Ward's 10 Best Engines list for 2002 through 2005. A best in class engine now out of production.
- Quad 4. This engine went from dirt to dirt (new design, new machinery, new plant to disposal of plant) in about 16 years.
- 3.5L V6 (short star from the Northstar design). Used only in 1999-2002 Oldsmobile Intrigue and 2001-2002 Oldsmobile Aurora.
- 3.4L V6 DOHC (1991-1997) used only in specialty cars. This engine was built on the second generation of GM's 60° engine line, sharing a similar block with its push-rod cousins, the 3.1L V6.
- Supercharged 3.8L V6.
- 5.3L V8 engines (aluminum block and other changes) in front-wheel-drive 2006-2009 Chevrolet Impala SS, 2006-2007 Chevrolet Monte Carlo SS, 2005-2008 Pontiac Grand Prix GXP, 2008 Buick LaCrosse Super (mindset for V8s) (limited sales)
- There are others including use of a Honda engine, and a 54 deg V6. A table showing all the engines, their variations, their usage, capital investment, units produced is needed.
- A baseline might be the Chevrolet small block V8 which has had a 60+ year design longevity. The initial design was done with slide rules and mechanical calculators.
- Even with higher volume engines, there were major changes in geometry (possible high tooling cost) as the designs evolved.
- New products not best in class
- 2006 Buick LaCrosse was smaller and heavier than its Buick Century predecessor.
- 2007 Malibu was smaller and heavier than its predecessor.
- Honda Accord became a full-size care at lower weight than anything in GM's fleet.
- Unable to provide a competitive minivan. GM now has no offerings, though the market may be shifting to 8-passenger crossovers.
- The 3.5L V6 and 3.8L V6 (push rod, two valves per cylinder) with four-speed automatic transmissions are or have been the fuel economy leaders among the V6 engines. None of the new high tech engines match in 2009 even with six-speed transmissions and more engine features. Yet this high-value technologies are being phased out.
- Recent statements by both Mr. Wagoner and Mr. Henderson that new introductions must be best in class implying that recent products were not always best in class.
- Best in class was a focus in the 1980s though expertise in achievement was slow in developing.
- Many new niche and special products came and went. None of the concepts were adopted by other car companies.
- GM's first minivan with plastic panels and unique (dust buster) styling.
- Pontiac Aztek. Innovative and clever design from functional standpoint, but very ugly. Extremely disappointing sales. Serious questions about market research and sales estimates.
- Buick Rendezvous. Brought convenience, comfort and utility but not obvious from its appearance. Owners satisfied with the product. Very convenient for seniors with the higher seating and easier ingress/egress including for the rear seats. Needed better styling and promotion of the unique features. Lost opportunity with no follow through. Replaced by Buick Ranier and Buick Terraza for a year or two and now the larger Buick Enclave.
- Other unsuccessful products: Buick Reatta, Cadillac Allanté, Chevrolet SSR (Super Sport Roadster), Pontiac Fiero, Envoy XUV (an attempt to create a combination of pickup truck and SUV), pickup with rear steer, Cadillac Cimarron, Cadillac Cetera.
- GM was willing to take the product risks of doing something different. However, the marketing and sales projections were consistently wrong — a failure of product planning and its related decision process.
- Long line of uncompetitive, unsuccessful Chevrolet small cars from 1980-2000: Monza, Sprint, Geo Metro, Geo Metro / Metro, Chevette, Spectrum, Geo Storm, Nova, Geo Prizm, Citation, Prizm, Cavalier, Tracker. The current models — HHR, Aveo and Cobalt — appear to be better.
- Disaster products
- Cadillac Cimarron, Pontiac Aztek
- Oldsmobile diesel engines
- "Stop gap products". These are short-lived products that didn't fit the nameplate family. Buick Ranier, Buick Terraza, Saturn Relay.
- Questionable management of name plate and model brand equity
- Buick Century (high customer satisfaction, reliability recommendation from Consumer Reports) discontinued and new name LaCrosse introduced.
- Buick LeSabre (high customer satisfaction, reliability recommendation from Consumer Reports) discontinued and new name Lucerne introduced.
- Satisfied customers couldn't buy a new Century or a new LeSabre. Confusion. Disappointing to satisfied and loyal customers.
- GMC Envoy (high customer satisfaction, good product) discontinued and new name of slightly smaller GMC Terrain being introduced.
- Chevrolet Equinox introduced which was a slightly smaller Blazer. Using the Blazer name would have complemented the Trail Blazer name and the Chevrolet brand image.
- Chevrolet Impala name discontinued, but was re-introduced and is now a successful product.
- Pontiac model name changes from names to G numbers.
- Toyota and Honda have emphasized and retained model names for their high volume vehicles (Camry and Corolla for Toyota and Accord and Civic for Honda)
- Not taking advantage of a high-value competitive product — the Chevrolet Impala
- 3.5L V6 high-value engine with four-speed transmission matches Honda Accord (3.5 high-tech V6 with five-speed transmission) on fuel economy.
- Impala is slightly larger than Honda with a larger trunk.
- Customers have made Impala the highest selling passenger vehicle in the GM fleet.
- Yet little or no advertising promoting this high-value product.
- Not taking advantage of JD Power Most Reliable ratings (2009 results for 2006 vehicles)
- 2006 Buick LaCrosse (base engine was the 3.8L V6 two-valve push-rod)
- 2006 Buick Lucerne (base engine was the 3.8L V6 two-valve push-rod)
- some 2006 Cadillac models
- understand why other projects are not best in class
- Never addressing the Consumer Reports issues: why GM products are rated lower, what was needed to get better ratings. See Appendix C, "G.M. has steadily lost U.S. market share, from 54 to 19 percent. Consumer Reports now recommends 70 percent of Ford’s vehicles, but only 19 percent of G.M.’s."
- Elimination of new product development engineering departments/staff to explore alternatives and demonstrate feasibility.
- may be factor in ongoing retooling of engines — not fully engineered before the initial tooling
- electric, hybrid, hydrogen vehicles. insufficient study of alternative designs
- GM has not had a consistent message with regard to hydrogen (fuel cell), hybrids, specific designs of hybrids
- GM may have been the leader with its field trial of the EV-1 around 1990. GM pulled the plug.
- Expansion purchases and investments when volume was contracting
- GM's offer to buy a failing Fiat ultimately cost GM $2.5 billion.
- Saab. May have been strongly influenced by new Saab plants.
- Hummer. See above.
- Saturn.
- Purchase of EDS. Mixed bag. GM had much difficulty managing the growth in information technology. EDS brought some order to the development. But at what cost?
- Purchase of Hughes. Another example of GM's penchant for capital investment as a primary strategy. This was basically an unrelated business but did provide the OnStar technology.
- Rebuilding of Oklahoma City plant after destruction by tornado only to close the renovated plant.
- New super assembly plants (Delta Township, Lordstown, other) which increased the idle capacity at other plants.
- illustrates the mindset toward big, complex, capital investment, grandiose
- GM had access to the technology and production systems used at NUMMI (joint venture of GM and Toyota) which could have been applied to existing plants. GM has now terminated the joint venture, and has stated that the plant is uncompetitive. NUMMI may be a closed corporation so the financial information may not be available. Did NUMMI follow the pattern from the Detroit 3 not to book the unfunded liabilities? Will the UAW accept a new contract that has the same substantive content as in the new UAW agreement with GM?
- NUMMI plant in Fremont is a union plant and apparently operated successfully (competitively) by Toyota.
- The result is not only increased capital investment but costs to close idle plants including the post employment expenses including employee buyouts.
- The investment and cost penalty is likely in excess of $3 billion.
- GM didn't need new plants; it needed to make better use of existing ones.
- UAW contracts
- short-term focus created a major (unsurmountable) long-term challenge
- UAW was focused on the long term with new provisions becoming the baseline in the next round of negotiations.
- GM management applied pressure to work on local contracts only after national agreement when GM's thrust was to avoid or settle strikes.
- failure to account for unfunded liabilities likely disguised the long-term challenge.
Appendix D — The Quagmire Ahead
By DAVID BROOKS
Published: June 1, 2009, New York Times
On Jan. 21, 1988, a General Motors executive named Elmer Johnson wrote a brave and prophetic memo. Its main point was contained in this sentence: “We have vastly underestimated how deeply ingrained are the organizational and cultural rigidities that hamper our ability to execute.”
On Jan. 26, 2009, Rob Kleinbaum, a former G.M. employee and consultant, wrote his own memo. Kleinbaum’s argument was eerily similar: “It is apparent that unless G.M.’s culture is fundamentally changed, especially in North America, its true heart, G.M. will likely be back at the public trough again and again.”
These two memos, written by men devoted to the company, get to the heart of G.M.’s problems. Bureaucratic restructuring won’t fix the company. Clever financing schemes won’t fix the company. G.M.’s core problem is its corporate and workplace culture — the unquantifiable but essential attitudes, mind-sets and relationship patterns that are passed down, year after year.
Over the last five decades, this company has progressively lost touch with car buyers, especially the educated car buyers who flock to European and Japanese brands. Over five decades, this company has tolerated labor practices that seem insane to outsiders. Over these decades, it has tolerated bureaucratic structures that repel top talent. It has evaded the relentless quality focus that has helped companies like Toyota prosper.
As a result, G.M. has steadily lost U.S. market share, from 54 to 19 percent. Consumer Reports now recommends 70 percent of Ford’s vehicles, but only 19 percent of G.M.’s.
The problems have not gone unrecognized and heroic measures have been undertaken, but technocratic reforms from within have not changed the culture. Technocratic reforms from Washington won’t either. For the elemental facts about the Obama restructuring plan are these: Bureaucratically, the plan is smart. Financially, it is tough-minded. But when it comes to the corporate culture that is at the core of G.M.’s woes, the Obama approach is strangely oblivious. The Obama plan won’t revolutionize G.M.’s corporate culture. It could make things worse.
First, the Obama plan will reduce the influence of commercial outsiders. The best place for fresh thinking could come from outside private investors. But the Obama plan rides roughshod over the current private investors and so discourages future investors. G.M. is now a pariah on Wall Street. Say farewell to a potentially powerful source of external commercial pressure.
Second, the Obama plan entrenches the ancien régime. The old C.E.O. is gone, but he’s been replaced by a veteran insider and similar executive coterie. Meanwhile, the U.A.W. has been given a bigger leadership role. This is the union that fought for job banks, where employees get paid for doing nothing. This is the organization that championed retirement with full benefits at around age 50. This is not an organization that represents fundamental cultural change.
Third, the Obama approach reduces the fear that impels change. The U.S. government will own most of G.M. It would be politically suicidal for the Democrats, or whoever is in power, to pull the plug on the company — now or ever. Therefore, the current managers can rest assured that they never need to fear liquidation again. There will always be federal subsidies for their own mediocrity.
Fourth, the Obama plan dilutes the company’s focus. Instead of thinking obsessively about profitability and quality, G.M. will also have to meet the administration’s environmental goals. There is no evidence G.M. is good at building the sort of small cars the administration demands. There is no evidence that there is a large American market for these cars. But G.M. now has to serve two masters, the market and the administration’s policy goals.
Fifth, G.M.’s executives and unions now have an incentive to see Washington as a prime revenue center. Already, the union has successfully lobbied to move production centers back from overseas. Already, the company has successfully sought to restrict the import of cars that might compete with G.M. brands. In the years ahead, G.M.’s management will have a strong incentive to spend time in Washington, urging the company’s owner, the federal government, to issue laws to help it against Ford and Honda.
Sixth, the new plan will create an ever-thickening set of relationships between G.M.’s new owners — in government, management and unions. These thickening bonds between public and private bureaucrats will fundamentally alter the corporate culture, and not for the better. Members of Congress are also getting more involved in the company they own, and will have their own quaint impact.
The end result is that G.M. will not become more like successful car companies. It will become less like them. The federal merger will not accelerate the company’s viability. It will impede it. We’ve seen this before, albeit in different context: An overconfident government throws itself into a dysfunctional culture it doesn’t really understand. The result is quagmire. The costs escalate. There is no exit strategy.
Appendix E — GM and Other Reports
From MotorsLiquidation.Com — Most of the reports are no longer available on the internet.
Investor Information
Important Information
The historical information on this page and on any linked documents pertains to Motors Liquidation Company (formerly named "General Motors Corporation"), which, on June 1, 2009 filed a voluntary petition under chapter 11 of the Bankruptcy Code. On July 10, 2009, General Motors Corporation under its new name, "Motors Liquidation Company", sold substantially all of its assets to General Motors Company, a separate independent company, pursuant to the provisions of section 363 of the Bankruptcy Code. The information provided on this web site does not refer to the new General Motors Company.
Annual Reports
Legacy Costs
Excerpt from General Motors Corporation 2005 Annual Report, page 5
Google Search ["legacy costs" "general motors"] provides many references and explanations.
Deferred Income Taxes
The following is from the 2007 GM Annual Report at page
Important Information
The historical information on this page and on any linked documents pertains to Motors Liquidation Company (formerly named "General Motors Corporation"), which, on June 1, 2009 filed a voluntary petition under chapter 11 of the Bankruptcy Code. On July 10, 2009, General Motors Corporation under its new name, "Motors Liquidation Company", sold substantially all of its assets to General Motors Company, a separate independent company, pursuant to the provisions of section 363 of the Bankruptcy Code. The information provided on this web site does not refer to the new General Motors Company.
Annual Reports
- 2003 Annual Report (Size: 3.68 MB)
- 2004 Annual Report (Size: 4.58 MB)
- 2005 Annual Report (Size: 8.80 MB)
- 2006 Annual Report (Size: 5.87 MB)
- 2007 Annual Report (Size: 5.30 MB)
For the 2008 Annual Report on Form 10-K, filed with the SEC on March 5, 2009, and as updated to reflect a retrospective change in the organization and presentation of financial information relative to operating segments and to reflect the retrospective adoption of SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51,” and FSP No. APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) and filed on Form 8-K filed with the SEC on May 14, 2009, click on Historical SEC Filings for a link to the SEC EDGAR site.
Letters to Stockholders
The information in the letters is similar to that in the Annual Reports. However, some of the information only appears in the letters. Legacy Costs
Excerpt from General Motors Corporation 2005 Annual Report, page 5
"GM’S LEGACY CHALLENGE
The weight of history on our results has been significant.
GM has been in business for nearly a century, and in the last four decades, our business has undergone tremendous structural change. Vastly improved productivity, greater reliance on suppliers, and large growth in the number of competitors in our largest market have all had an impact. But while GM today is a far leaner, more productive automaker, we still carry a significant financial burden of the past.
Consider that in 1962, we employed 605,000 people around the world. Of those, 464,000 were in the United States, where we sold 4.2 million cars and trucks. With only two major competitors, GM reached a record U.S. market share of 51 percent.
Fast-forward to 2005: GM employed 335,000 employees world- wide. Of those, 141,000 were in the United States, where we sold 4.5 million cars and trucks. While last year we competed against 11 major automakers from around the world, GM still led the market with a 26 percent share.
Over those 43 years, new technologies and downsizing resulted in a much leaner GM, producing more vehicles with far fewer employees. But the growth of our retiree population exploded in those decades, leaving GM today with the financial weight of outsized “legacy costs” for health care and pensions.
The chart below illustrates the scope of this obligation.
Stated another way, for every active GM employee in the United States last year, GM supported 3.2 retirees and surviving spouses. Back in 1962, the employee/retiree ratio was reverse: GM had 11.5 active employees for every retiree or surviving spouse in our pension plans.
1962 2005 U.S. Employees 464,000 141,000 Hourly Pension Plan* 31,351 337,588 Salaried Pension Plan* 8,885 115,762 Total Health Plan Recipients** 1,360,000 1,075,00
GM’s health-care bill in 2005 – for every U.S. employee, dependant, retiree and surviving spouse – totaled $5.3 billion. No other company in the world has that kind of health-care obligation. Today we compete mostly against foreign-owned companies whose governments cover much of their employee and retiree health-care and pension costs."
__________
* Number of U.S. retirees and surviving spouses who received pension plan benefits
**Est. number of U.S. employees, dependents, retirees and surviving spouses covered by health benefits
Google Search ["legacy costs" "general motors"] provides many references and explanations.
Deferred Income Taxes
The following is from the 2007 GM Annual Report at page
"Deferred Income Taxes
In the third quarter of 2007, we recorded a charge of $39 billion related to establishing full valuation allowances against our deferred tax assets in the United States, Canada and Germany. See “Critical Accounting Estimates” in this MD&A for a discussion of the specific factors which lead us to this conclusion. We had determined in prior periods that valuation allowances were not necessary for our deferred tax assets in the United States, Canada and Germany based on several factors including: (1) degree to which our three-year historical cumulative losses were attributable to unusual items or charges, several of which were incurred as a result of actions to improve future profitability; (2) long duration of our deferred tax assets; and (3) expectation of continued strong earnings at GMAC and improved earnings in GMNA."
In the third quarter of 2007, we recorded a charge of $39 billion related to establishing full valuation allowances against our deferred tax assets in the United States, Canada and Germany. See “Critical Accounting Estimates” in this MD&A for a discussion of the specific factors which lead us to this conclusion. We had determined in prior periods that valuation allowances were not necessary for our deferred tax assets in the United States, Canada and Germany based on several factors including: (1) degree to which our three-year historical cumulative losses were attributable to unusual items or charges, several of which were incurred as a result of actions to improve future profitability; (2) long duration of our deferred tax assets; and (3) expectation of continued strong earnings at GMAC and improved earnings in GMNA."
- History: Changes are usually identified in the text with the date which facilitates searching by date. Edits are usually noted by add and
deletechanges. - 2009 Jun 15 — Initial Post
- Links: On the Demise General Motors at [http://curntbk.blogspot.com/2009/07/on-demise-general-motors.html]
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Copyright 2005-2012 © Donald L. Nordeen. All Rights Reserved. See Copying Posts on This Weblog.
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Copyright 2005-2012 © Donald L. Nordeen. All Rights Reserved. See Copying Posts on This Weblog.
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