G M Bankruptcy

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Well, General Motors has achieved another milestone on its way back to the future. The black hole of arrogance, greed and cowardice has pulled the once iconic American company into the bankruptcy abyss. As a former Chevrolet dealership general and executive manager, I have some insight based on that experience. The future of GM is hard to prognosticate. However, if history is any indicator, this company has little chance at long-term viability if they do not seize this opportunity and start over with a clean sheet of paper.

During WW II, a gentleman named W Edward Deming Ph. D., helped American manufactures transition from peacetime production of their products to a wartime footing. Production of the material and equipment needed to fight the war was critical and Dr Deming’s contribution helped the transition. It is a well-known and documented story that prominently features Rosie the Riveter but not Dr. Deming. In fact, though he was instrumental in transforming the industrial production capability during the war and instituted quality control concepts that ensured the armed services got high quality material with which to wage the war, he was little known in the US.

After the war, the demand for American products increased dramatically. Efforts at quality control were sacrificed on the alter of higher volume and profit. Managerial focus drifted toward short term results as opposed to long-term viability. With the stock price driving everything, poor quality control and management was inevitable. Then Dr Deming was called to Japan.

He went over in 1947 to assist in preparing for the Japanese census that was to take place in 1951. The Japanese Union of Scientist and Engineers invited him to teach them statistical process control and concepts of quality. He willingly complied and in the summer of 1950 lectured extensively on these subjects. His message was simple. Constant quality improvement will reduce cost, improve productivity and market share. The Japanese took his message to heart and commenced to create a huge demand for their products over the following decades. American manufacturers were not listening, including the big three automakers.

There are two stories that exemplify our refusal to embrace quality. One is about a picture I saw in a book about Deming in the early seventies when I first started selling vehicles. The title and author escape me but the picture is indelibly imprinted in my memory. In the picture, Deming is holding the piston of a Mitsubishi truck in one hand and the piston of an American truck in the other. The caption quotes his saying that one is a finely crafted piece of precision steel and the other looks like the jawbone of an ass.

The other story is about Ford Motor Company’s solicitation of Dr Deming’s help. Finally, in 1981 while their sales were falling precipitously they turned to him for assistance. The company lost some three billion dollars between 1979 and 1982. By 1986, their profits had exceeded General Motors and the change in the management culture and new emphasis on quality was attributed to Dr Deming.
He stressed that better management techniques along with quality improvement were necessary to restore long-term viability. His philosophy and teachings are widely available if not widely accepted in this country. I recommend them to GM’s new board of directors, the auto advisory council appointed by President Obama and the management of GM.

This final restructuring of all the restructurings GM has been through will be extremely painful for a myriad of people. The terminated employees of both GM and its affected vendors and their family’s will pay a heavy price. Stockholders and bondholders stand to lose their investments. Dealers and their employees, vendors and the communities they serve will suffer as much as anyone will. Those needing assistance through this transition will be turning to state and local agencies that are struggling with increased demand for their services and reduced revenues.

Government intervention is a seemingly two-edged sword. If it works all the naysayers will be denying they ever thought it would fail. If it does not work, the current recession will look like a kindergarten tea party compared to the catastrophic financial consequences to follow. As it is, interest rates are likely to increase at least for the short term based on investor caution created by the way the bondholders were placed behind the unions in this case. Changing the rules midstream does nothing for investor confidence and until the results are in, they will be cautious.

I hope that the management will take advantage of this opportunity to completely reinvent GM in a progressive and well thought out manner. There are numerous product strategies, distribution-channeling strategies, marketing strategies and long-term opportunities created by the negation of unbearable legacy cost. If they come out of this with the same old mindset, they are doomed to failure.

The old GM failed because it was poorly managed for a long time. The new GM needs to learn from that history and embrace a management style that values long-term gain over short-term stock performance. They need to make partners of their employees, vendors and potential customers. They need to embrace quality as never before. They can do it. We want them to do it. No one in his or her right mind wants this chance to recreate GM to fail. We will be watching and hoping that the management team just does it.

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Chrysler, GM and the Dealer Fiasco

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Chrysler and GM needed to pair their dealer count. Some of the dealers they got rid of needed to go. They were under performing in sales, service and customer satisfaction. Some were in markets that had too many dealers. Some did not fit the channeling guidelines of all models under one roof. Others were just not politically astute and had made the wrong person angry. Still others and perhaps the majority had done nothing wrong.

Family owned and operated stores serve most of the smaller markets. Many are second, third or even fourth generation operations. They provide some of the best paying jobs in their respective markets. They pay a higher amount of taxes then most other businesses. They pay sales tax on high-ticket items, inventory taxes on high value inventories, real estate taxes on large pieces of valuable property and so on ad infinitum.

They are among the pillars of their communities. They fund charities, community sports and other things that will now go begging. The loss of these classic small town enterprises will have devastating ripple effects across their communities. They were generally the largest advertiser in town. They bought oil, gasoline, tires and auto parts in large quantities. Many were large contributors to local churches, schools and hospitals. Their loss will be felt in many ways and by many people across their communities.

The big three have been trying to pare their dealer counts for years. The competition has been selling more vehicles out of fewer stores for some time. That has more to do with the quality of the product though then the quality of the dealer. That and the fact that the import manufactures have not diluted their sales per store by over dealering in the first place. State franchise laws have prevented, and rightly so, much of what Ford, Chrysler and GM have wanted to do. The bankruptcies’ made those laws mute though.

The Supreme Court refused to hear argument on behalf of the dismissed dealers. That is to be expected because federal bankruptcy law trumps state franchise law. There is a movement in congress to pass legislation to either slow or reverse the terminations. It is too early to tell what effect if any that will have, but it looks like too little too late for most of the Chrysler dealers. GM’s dealers do have an appeal process available to them and time will tell how that plays out.

Better management of Chrysler and GM., could have avoided this whole scenario. The management teams at all of the big three tend to have a short-term point of view driven primarily by the stock price. That has a lot to do, maybe everything to do, with the way top executives are compensated. Little good it has done them in recent years as the stock price slipped ever lower.

In their management, quality takes a back seat to artificial cost control. Union negotiations were handled like there was no tomorrow. Tough decisions were put off until it was too late to matter. Too much time and effort were put into incredibly complex customer satisfaction efforts; designed to make all customer issues, the dealers fault. Finally, way too much effort has gone into trying to change the distribution system. High quality products sell themselves regardless of the perceived problems in the distribution system. The horrifically poor management of these two American behemoths made the slaughter of their dealers a self-fulfilling prophecy.

Many of the dealers have questioned why, if they are profitable and have good customer satisfaction scores are they being terminated. They point out that their existence does not cost the manufacture anything. This is true. They pay for their vehicles, parts, co-op advertising and point of sale material. The dealers get nothing free. The manufacture has a holdback account on each dealer in case of default that they can apply to any delinquent amounts owed to them. To be terminated by letter or hearing it on the news like some did is unconscionable on the part of Chrysler and GM. These dealers deserve an answer to their questions if not full reinstatement.

When someone has to drive over a hundred miles to get a Chrysler or GM car serviced, or worse yet to buy one, you wonder. How long will it be before somebody’s nephew or friend gets an add point store in that market. Neither GM nor Chrysler will abandon all of these markets permanently. Some dealers in peripheral markets, closely adjacent to bigger stores in large markets, will be gone for good. Other markets though will be redealered at some point. It will be interesting to watch how long that will take and who will get the stores.

The real problem though is that all this pain and suffering is likely just delaying the inevitable. Regardless of any restructuring, debt elimination or infusions of taxpayer dollars the same management is in charge. Without an honest look at how they got where they are they are doomed to repeat the same mistakes. If they charge into the future, thinking the past was somebody else’s fault it will lead back to the past. If quality is not a priority and innovation a mandate then nothing changes. For the sake of the country and all the remaining stakeholders, I hope they get it right.

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