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Lessons learned from General Motors’ collapse

[SERI FOCUS]GM concentrated on larger-sized products that were popular more or less only in the U.S. market.

July 27,2009
On June 1, 2009, General Motors (GM), the automaker that has been a symbol of the United States manufacturing industry for over 100 years since its establishment in 1908, filed for bankruptcy protection.

GM had introduced the “mass consumption” system following Ford’s adoption of the “mass production” system. The company’s collapse ? at least from a financial perspective ? signifies the end of the 20th century’s “mass production/mass consumption” manufacturing corporations.

GM’s bankruptcy was directly caused by two factors: a high cost structure and chronic liquidity shortage resulting from declining sales revenue because of a product portfolio vulnerable to the economic crisis.

However, that is only the tip of the iceberg. The true fundamental causes lie hidden below the surface.

When the economic crisis hit, GM products mainly consisted of high-priced, fuel-inefficient minivans, sport-utility vehicles and pickup trucks.

As a result, the crisis hit GM harder than other automakers.

The first reason behind this is that GM’s product portfolio was too exposed to light trucks, based on a “Galapagos Islands” strategy focused on the U.S. market. In other words, the company’s market developed into one that was entirely unique and completely isolated from the global market ? much in the same way that the Galapagos Islands have developed. Due to relatively high per capita income, low fuel costs, broad roads, long-distance driving and inadequate public transportation, the U.S. auto market mainly consisted of medium and large-sized vehicles. Hence, GM concentrated on larger-sized products that were popular more or less only in the U.S. market.

Without truly realizing how inward-looking it had become, GM failed to keep an eye on Japanese automakers that focused more on smaller vehicles. As demand for small, fuel-efficient vehicles rose with a spike in oil prices, GM came to face a crisis not only in export markets but also at home.

A second root cause of the company’s financial problems was GM’s failure to innovate when it came to production methods. As a result, GM lagged behind its Japanese rivals in terms of productivity, product quality and price competitiveness. GM attempted to adopt a Japanese-style production method by establishing a joint venture called New United Motor Manufacturing, Inc. with Toyota in the mid-1980s. But the initiative failed. Eventually, GM products came to be viewed as expensive and of low quality compared to those of its Japanese rivals.

A third cause was the U.S. government’s policies that protected light trucks from fuel-efficiency regulations and tariffs, thus encouraging GM to focus on these vehicles.

Specifically, when fuel efficiency regulations were introduced following the 1973 oil shock, the U.S. government imposed less stringent regulations on light trucks than on other passenger cars. The government also protected the market for light trucks by boosting import tariffs on such vehicles by 25 percent. The tariffs had been at 8.5 percent since a trade dispute with Germany in 1963 (the so-called “chicken tax”). As a result of such protective measures, U.S. automakers, including GM, started to aggressively target the market for light trucks rather than the one for passenger cars in general.

Turning to GM’s high-cost structure, the exorbitant legacy costs stem from an insufficient U.S. public health insurance system and labor union negotiation strategies that disregarded management difficulties. U.S. auto manufacturers, including GM, have to bear the medical insurance costs of not only current employees and their families but also those of retirees and their families as well.

This reflects the strong demands of the United Automobile Workers (UAW). During the 1950s, the UAW aggressively pushed for the measure as an incentive to organize non-unionized workers. At the time, management ? concerned about loss of output from strikes ? conceded to these demands. Having experienced a prolonged strike in 1946 that lasted for 113 days, one of the longest strikes in U.S. history, management feared a repeat of such losses. From 1993 to 2007 the company incurred roughly $103 billion in medical insurance costs.

The GM case illustrates how even companies boasting a long history and an excellent market position can collapse if fundamental problems are long neglected. To avoid such failure, the following lessons should be kept in mind.

First, continuous efforts to innovate and reform are essential. Not resting on past successes and adapting to a rapidly changing environment are crucial.

Second, bolstering the competitiveness of one’s core business is just as important. GM’s strategy prioritized its profits from financial activities over that of its automobile manufacturing business. As a result, it handed over the U.S. auto market to its overseas rivals, particularly Japanese firms.

Third, the GM experience illustrates the necessity of setting management goals that pursue both profit and growth at the same time (profitable growth), rather than short-term-based profit.

Fourth, the government should strengthen its social safety net so that companies do not suffer from a loss of competitiveness arising from excessive cost burdens.

Finally, it is important to remember that there must be a capability to execute required actions. Prior to GM’s collapse, many had pointed out the various problems that GM had. Yet a lack of action led to GM’s bankruptcy.



The writer is a research fellow in the Technology & Industry Department at Samsung Economic Research Institute. For more SERI reports, please visit www.seriworld.org.


By Bok Deuk-Kyu




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