Why GM's bankruptcy matters

Our formerly weak peers are picking up the pieces of a once world leading auto giant. That's the latest chapter in a story which ends on Monday with the nearly guaranteed bankruptcy of General Motors (GM). In a loss to Italy's Fiat, a Russian bank and a Canadian auto parts makers are poised to buy GM's European operations. Does it matter?

GM's pending bankruptcy is an example of how success leads to failure. And failure is fine in an economy that thrives on creative destruction -- the doctrine that growth springs from industrial churn. That's because for every business that fails, creative destruction dictates that there ought to be 10 new ones scrambling to snag its customers and make better use of its people.

But the U.S. has strayed from that vision of creative destruction. Now we can't even fail right -- we have companies that are simply too big to fail without massive government intervention. Our biggest banks have gotten trillions to keep them from failing and two of our three auto giants are failing with the aid of billions in taxpayer money.

More importantly, the great engine of U.S. economic growth -- our system of venture-backed innovation -- has been nearly snuffed out for a decade by too little technological innovation and a dormant market for venture-backed initial public offerings (IPOs).

Meanwhile, GM's deal to sell its European operations should help speed up its pending bankruptcy. GM's two million vehicles a year European business -- including Germany's Opel and Britain's Vauxhall -- will merge with Magna, a Canadian auto parts maker, giving GM a 35 percent stake in the new company, with Sberbank, a bank controlled by the Russian government, taking 35 percent, Magna holding 20 percent and Opel's employees controlling the remaining 10 percent. The deal will save 25,000 German jobs and let Magna sell 500,000 cars in Russia.

Why did GM fail? It was too successful for too long and its managers did not pay attention to changes in consumer tastes, in the competitive environment, and in technology because all these changes would have required GM managers to change.

And it stopped making better cars than the competition -- instead using cheap ones as a delivery system for loans. As I posted back in January 2006 when the economy was in relatively good shape, one of the most dramatic examples was Ford (F) which specialized in using cars -- on which it lost $4 billion in 2005 -- as a delivery system for car loans on which it earned a $6 billion profit. GM's results were similar.

GM's failure to make cars that people wanted to buy -- more than those of Toyota Motor Co. (TM) and its peers -- was the ultimate management mistake. So when finance -- which had became the tail that wagged the U.S. auto industry dog -- collapsed, so did the industry.

If America has any hope of growing again, it needs to spur more startup companies -- electric car maker Tesla is one that, despite its financial troubles -- comes to mind. When GM got started in 1908, it was buying up such startups to create a full-line of cars spanning the economic life of a family -- from Chevrolet to Cadillac (interestingly, these economic bookends will be all that remains of the new GM).

GM's bankruptcy, almost 101 years after its founding, marks the pinnacle of the destruction part of the creative destruction formula. Now we need lots more of the creative part.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.

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