Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Monday, June 01, 2009

What's Good for GM is Good for America

In 1953, a General Motors executive, Charles Wilson, who was nominated to be Secretary of Defense said, "Because for years I thought what was good for the country was good for General Motors and vice versa." Today, GM filed for bankruptcy.  As part of the deal the US Government will have a 60% stake in the company.  GM is expected to downsize dramatically. GM subsidiaries in Germany (Opel), the UK (Vauxhall), Sweden (Saab) Australia (Holden), Korea (Daewoo), China (Wuling) and other countries.


The causes of GM's woes are a matter of some controversy.  Populist politicians in Michigan (including the mayor of Lansing who was on CNN this morning), blame free trade.  I disagree (no surprise to the other Citizens on the blog here).  GM executives blame the union and the need for the company to pay pension and health care benefits to an aging workforce.  I disagree with that too.  

In my opinion, the blame for GM's woes lies with GM's executives.  GM makes dozens of models of cars instead of focussing on a few (like Toyota, Honda etc do).  GM insists on getting government subsidies (in the form of easier emissions regulations and tax incentives) to market large, gas guzzling SUVs instead of smaller, more fuel efficient sedans.  GM's response to a reputation for poor reliability is to offer the same car for less money then blame the unions for reduced profitability.  Their reputation for slushy handling and so-so road performance was waved off as catering to different American tastes.  At no point did they make major changes to the models they offer.  The solution was always to either dismiss the bad news/criticism or look for a government hand out.

The Honda Accord and Toyota Camry are the most popular car models in the US because they are well built, reliable and have good performance on the road.  

50 comments:

The Law Talking Guy said...

RBR, now that you and I own a car company, I expect us both to stop badmouthing it. =) Bad for business.

What we will see now is a tussle in Washington between those who want the government to act like an owner and exercise control over GM, and those who want GM's current management to continue business as usual despite new owners.

I think we can use this opportunity to fix the problems in corporate America that led to the current crisis. The basic problem is that corporate executives are not accountable to anyone. They appoint the boards who grant the execs - and themselves - enormous, outlandish multimillion dollar salaries. Plus the perks of kings. Company does well: more money! Does badly? Lay off people and congratulate yourself again with additional bonuses! That's how it's been for 25 years now.

I hope that GM can be a vehicle for showing how corporate governance ought to work: involved shareholders on the board, dramatic reductions in sky-high executive salaries that reduce them to basically the managerial posts they are, rather than today's titles of nobility.

I still hear Liddy of AIG proclaiming that they need to "keep the best" and that means paying millions. Who would work for less? Reminds me of Jerry Brown being asked years ago whether California should divide into three states: "But who would want to be governor of an itty-bitty state?" Maybe better people, that's who.

The backgrounds of most corporate executives show that, to paraphrase Ratatouille, anyone can manage. Certainly, it took no noble genius to send two of America's three car companies into bankruptcy, along with most of the financial sector.

You'll find plenty of talented corporate execs for under $250K. In fact, without the major conflicts of interest that come from stock options, you may find much better and wiser management.

This, to digress further, is why corporate executives make such poor politicians (and why Meg Whitman will be a disaster if elected in CA). Boards of directors should be as maddening as the public: demanding better performance for less all the time.

To add a final related quote to this post: Harry Truman famously said the following of his successor on the eve of his inauguration, "Poor Ike. This isn't like the army at all. He will say 'do this!' and 'do that!' And nothing will happen..."

I'm not sure how well we can run GM, but I am sure that GM was poorly run and that the blame lies not with "a few bad apples" but with a system of corporate governance that has, over the last 30 years, increased the gap in earnings between execs and employees to 400 to 1, FAR above that of the rest of the industrial world.

Raised By Republicans said...

Good point LTG!!

GM cars are the best cars in the world! Don't like the look? Just ad tail fins! Don't like the slushy handling? Maybe it's your driving skills that are the problem - ever thought of that? Commie!

But seriously, I agree with LTG that this is an opportunity for the government to force GM to adapt its thinking to the 21st century - kicking and screaming if need be.

And I agree with LTG that executive compensation is badly out of whack. It's not just the 400-1 ratio that's the problem. Indeed, that in itself is not what brought GM down. What ruined GM and AIG for that matter was executive pay packages that were disconnected from company performance. You can't expect to get good management if you pay managers millions even if they run the company into the ground.

Anonymous said...

As most of you are readers of the Economist, perhaps you will remember that this was all predicted 5 years, that the US auto industry would be non-existent in about 5 years from the time of publication of this particular issue, they were right on target. Not only was this well known, that this would happen, it seems to me to have been done, partly by design...the executives were rewarded for doing what they were supposed to do...drive up the profits with big SUV's (cheaper to build because they do not have the same emissions requirements as a car, they are classified as trucks, er go, cheaper due to fewer parts, testing etc.), and to assist the gas companies to record profits. Toyota, a couple of years ago, eliminated 2,000 parts from the construction of a Camry to cut cost...they engineered it that well. The other party to blame here, in my opinion, is the public. The SUV phenomenon is a product of social engineering..."are you feeling out of control of your life?....buy a big ass car to feel that power and feel like you have some control back in your life!" In LA I can tell you, moms in SUVs with cell phones are a very real and present danger...men too of course, but the times I get anywhere near being in a potential accident, 70% of the time it is a woman in an SUV, with the kids, talking on the cell phone. Americans, frankly, have lost their minds with greed and piggy-ness..from CEOs to the Joe the consumer.

The Law Talking Guy said...

RBR, I should have been clearer. The 400-1 ratio is a symptom of the total lack of accountability, not a cause.

Raised By Republicans said...

SUVs are part social phenomenon perhaps. But it is also true that SUVs were heavily subsidized. Emissions regulations that apply to family cars were waved for SUVs which were classified as "trucks" thus making them far cheaper to build (which Anonymous 9:46 points out). I know several friends and neighbors here in Iowa who bought SUVs or trucks and got tax incentives intended to subsidize farmers.

So, sure, SUVs came with some clever marketing. But the "Big Three" were getting paid to build them and Americans were actually getting paid to buy them too. It was a classic case of the old "iron triangle" problem.

Pombat said...

We seem to need some laws that limit executive salaries to a small multiple of the mean/median salary of the company (not sure which would be better, probably the median), and a bonus structure that is linked to performance such as not laying off staff unnecessarily (perfectly happy to fire non-performers), actually making profits, and not requiring government handouts.

The auto industry is subsidised here in Australia too, which would frustrate me even if Holden wasn't just sending cash home to GM US. If your industry/company needs subsidising, you're doing something wrong - develop cars that people *want* to buy, and you should be right. And if people don't want to buy cars, diversify into trams and bicycles. Or am I being a bit too simplistic here?

Raised By Republicans said...

Yep Pombat,

If your product isn't profitable, you should make something else or make it somewhere else.

The Law Talking Guy said...

There is an argument for bankruptcy reorganization that says: the efficiencies would be there if the debt were gone, so let's allow restructuring. In other words, just because a company isn't efficient or profitable now doesn't mean that it couldn't be, or that we should allow the whole industrial apparatus to go kaput rather than reorganizing it. However, I'm not sure that's applicable to GM's case.

Raised By Republicans said...

Well, even with the restructuring, GM will discontinue many lines of products. They've already sold off Hummer and plan to sell off their European divisions.

USwest said...

here here, Anon! I read the Economist article too. And around the same time, they put out a piece about the effects that Boomer retirements would have on the economy. As they retire, they spend less, and they are a huge hunk of the consumer confidence in this country. Humm . . .

Everyone has pretty much said what I would have said here. So let me contribute one anecdote.

A friend of mine showed up last week with a brand new Ford Mustang. He traded in his 1991 BMW for it. He loves how German cars hug the road and wanted anther BMW. But a 6 year old BMW came with a $34K price tag and, based on his past experience, large repair bills when it occasionally breaks down.

So he thought he'd look at the new Camero. No one at the GM dealership approached him. He said they seemed like they could care less. He opened the door, sat in the car, and hated it. It was cheap, had tons of blind spots, and felt uncomfortable. Another customer there told him that the "Camero is like the Iphone of the car world. Wait to buy the third generation. They will have all the kinks worked out then. You should consider looking at the Mustang. They've nailed that vehicle. It's rock solid."

So my friend went to Ford, got help immediately. He sat in the Mustang, liked it. It felt solid. he drove it and he said it handled like the BMW. It hugged the road and was responsive, got better gas mileage, looked cool, and would be cheaper on his insurance and to maintain. He bought it.

That my friends is why we don't own Ford.

USwest said...

Oh, and the Ford was $10K cheaper than the Camero.

Michael said...

As I document in my blog at www.ProudlyMadeInAmerica.com, GM's problems started at the top. Rick Wagoner got $100Million in bonuses as he will destroying the company.

The real tragedy is the effect a GM failure will have on our nation's ability to compete as a manufacturer in the global economy.

bruce said...

Why the hate of an SUV, it does what a little toy car cannot. It can haul people and things. I think that a family of four on a trip with all of their stuff inside is more efficient than two toys or hondas that it would take to haul the same thing. Or a small car with a topper. Some people cannot afford to own two cars so they need one that will serve for the largest part of thier lives. Like a pickup truck. It gets poor gas mileage but it can haul things. But if a person doesn't have the money to have a car also, they just drive the pickup. Don't hate them. i drive a dodge right now because they had the slapstick transmission that lets me have an automatc or manual transmission in the same car. it is excellent on snow and ice. My other vehicle is a chevy S10 that is 20 years old. Its mileage is poor but it serves my needs when I have to have a pickup. we don't just buy qa vehicle because of gas mileage, but what we can afford and to get.

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