After 101 years, why GM failed
General Motors (GM) was founded in September of 1908. On June 1, 2009, at 8 a.m. -- almost 101 years later -- it ceased to exist, and control was handed over to turnaround executive Al Koch. Thanks to $19.4 billion in loans and $30.1 billion more in debtor-in-possession financing, a huge amount of effort by the U.S. government and GM's management, unions, dealers, suppliers and bondholders, the effects of that failure will be terrible, but not catastrophic.
The U.S. will own 60 percent of the new GM, which will include Chevy, Buick, GMC and Cadillac. Canada will take 12 percent after lending GM $9.5 billion, the UAW 17.5 percent (as payment for $9.4 billion of its $20 billion in health care obligations) with warrants to buy 2.5 percent more, the bondholders 10 percent to as high as 25 percent through warrants, and old GM common shareholders roughly zero. Twelve to 20 more GM factories will close, 21,000 union workers will be fired, and 2,400 GM dealers will shut down.
To help other companies avoid GM's fate, it's worth exploring the five reasons that GM failed:
1. Bad financial policies. You might be surprised to learn that GM has been bankrupt since 2006 and has avoided a filing for years thanks to the graces of the banks and bondholders. But for years it has used cars as razors to sell consumers a monthly package of razor blades -- in the form of highly profitable car loans.
And the two Harvard MBAs who drove GM to bankruptcy -- Rick Wagoner and Fritz Henderson -- both rose up from GM's finance division, rather than its vehicle design operation. (Read more about GM's bad financial policies here.)
2. Uncompetitive vehicles. Compared to its toughest competitors -- like Toyota Motor Co. (TM) -- GM's cars were poorly designed and built, took too long to manufacture at costs that were too high, and as a result, fewer people bought them, leaving GM with excess production capacity. (Read more about GM's uncompetitive vehicles here.)
3. Ignoring competition. GM has been ignoring competition -- with a brief interruption (Saturn in the 1980s) -- for about 50 years. At its peak, in 1954, GM controlled 54 percent of the North American vehicle market. Last year, that figure had tumbled to 19 percent. Toyota and its peers took over that market share. (Read more about GM ignoring the competition here.)
4. Failure to innovate. Since GM was focused on profiting from finance, it did not really care that much about building better vehicles. GM's management failed to adapt GM to changes in customer needs, upstart competitors, and new technologies. (Read more about GM's failure to innovate here.)
5. Managing in the bubble. GM managers got promoted by toeing the CEO's line and ignoring external changes. What looked stupid from the perspective of customer and competitors was smart for those bucking for promotions. (Read more about GM's managing in the bubble here.)
GM's failure after 101 years is an indictment of American management in general. It highlights the damage to our economy that results when finance becomes the tail that wags the economic dog. And it shows what happens to any company that rests on its laurels and fails to adapt to change.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.