GM's John Smith extols productivity, cars that excite A giant strains to turnaround

THE BALTIMORE SUN

Detroit -- The year was 1967 and it seemed half of America was taking Dinah Shore to heart when she sang "See the USA in your Chevrolet."

It was the heyday of the big car and of General Motors Corp. It dominated the domestic market, selling more cars than all other U.S. companies and importers combined.

The bestselling car in America was GM's Chevrolet and the automaker had three others in the top six.

In Baltimore, the General Motors plant had 6,000 workers building the Chevrolet Chevelle, the Pontiac Tempest and GTO and Buick Special along with Chevrolet and GMC pickup trucks.

The company so dominated the auto scene that Sen. Philip A. Hart, the powerful Michigan Democrat who headed the subcommittee on antitrust and monopoly, was moved to join a growing chorus in Congress calling for the breakup of GM. "It's too big," he declared. "It is not good for the economy to have one company so dominant. There is not enough competition."

But it wouldn't take an act of Congress to bring General Motors down. GM did that itself.

The company that had made big profits from producing big cars found it extremely difficult to adjust to the dramatic changes in the auto market and in the American lifestyle brought on by two crippling energy crises and the government's insistence that cars be more fuel efficient and less polluting.

It sputtered through the l970s and 1980s as its market share plummeted to one-third of U.S. sales, and then nearly crashed in the early '90s when it posted huge losses and was on the verge of bankruptcy.

"There's no doubt about it, GM was into a death spiral," says David E. Cole, director of the University of Michigan's Office for the Study of Automotive Transportation and the son of former GM President Edward Cole. "It was a near death experience."

To save itself, General Motors was forced into a sweeping restructuring -- changes in attitudes and methods from top to bottom. But it is a strategy that seems to be paying off.

Under the leadership of John F. Smith Jr., the low-keyed president who took over as chief executive 20 months ago, and his two predecessors, the world's largest manufacturing company is in the midst of what many say could be one of the greatest turnarounds in American corporate history.

GM has posted the biggest gains in productivity among the domestic automakers over the past two years. Its North American operation -- the core of the company -- has emerged from being billions of dollars in the red. And its new cars are stirring excitement -- unlike the so-called "cookie cutter" models in the mid-1980s, when GM last revamped its car fleet, that all looked alike.

GM's stock has risen nearly 80 percent over the past 21 months and analysts have sharply raised earning projections for the company. Some predict gains in earnings of more than 200 percent this year and another 30 percent in 1995.

Although its future looks brighter than its past, Mr. Smith acknowledges the job is far from completed.

The company faces two key questions that analysts say will bear heavily on the future of GM: Can it continue to slash its operating costs, which remain the highest in the industry? And will the overhaul of virtually all of its vehicles result in models that people will want to buy?

The need to do both is undisputed. The company's North American Operations -- which accounts for as much as 70 percent of total GM sales -- has lost more than $15 billion since 1991 and until the final quarter of last year had not posted a quarterly profit since 1989.

GM had only two models among the Top Ten sellers last year -- the full-size Chevrolet pickup truck and the compact Cavalier. And the Chevrolet division, the heart of the company that historically has accounted for half of vehicle total sales, saw its shipments drop to 2.4 million last year from 3.7 million in 1978.

To underscore the seriousness of the situation, GM announced a major reshuffling of top management 20 days ago, including naming its chief financial officer, G. Richard Wagoner Jr., president of its North American Operations, and saying it will seek a new person -- perhaps from outside the giant corporation -- to head marketing.

"General Motors is a classic example of a company that was not using its strengths associated with its size and technical sophistication," Mr. Cole said. "It was really saying [to other car companies], 'We are so big and powerful that we are going to put one hand behind our back and we are going to tie our legs together so that we can compete with you on a fair and square basis.' "

"Now they didn't do that consciously, but that is what they did by just not thoroughly using their heads in designing and building cars. That is really what it amounted to," he added.

GM's problems and lost stature is the result of "billy goat management," said Rodney A. Trump, the president of United Auto Workers Local 239, which represents the 3,200 hourly workers at GM's van production plant in Baltimore.

"Baaaad management. They were fat, dumb and happy."

GM's costly mistakes

The mistakes, which permeated every level of the company, were costly:

* A corporate structure that until as recently as 1989 not only permitted but essentially encouraged waste.

Driven by managers' desire to boost sales of their particular product, each division competed for development and marketing funds. For instance, while Pontiac struggled to establish an image as GM's producer of performance cars, Buick introduced its own muscle car.

"That's how we got our jollies. While the rest of the world was beating our brains out, we were still competing inside," said GM Executive Vice President William E. Hoglund.

* The absence of coordination and cooperation between those who designed cars and those who had to build them.

Designers would draw the body of a car and send the blueprint over to the assembly division with the message: "Okay, you build if you can, you SOB," auto analyst, Maryann Keller, quotes former GM Chairman Roger Smith as saying in her book, "Rude Awakening." The assembly division would respond, "Well, Jesus, there's no damn way you can stamp metal like that and there's no way we can weld this stuff together," Mrs. Keller, managing director of Furman Selz Inc. in New York, wrote.

While GM was bogged down in its own bureaucracy and rivalries, its Japanese competitors were scoring big gains in quality and cutting production costs by having designers, engineers, manufacturers and marketing people all working together during the early stages of product conception and development.

* Assuming the price of gasoline would reach $3 per gallon.

With this in mind, the company in 1979 ordered its high-profit luxury cars -- Cadillac Eldorado and Seville, Buick Riviera and Oldsmobile Tornado -- made lighter, smaller and more fuel efficient. By the time they reached the market in 1985, gas prices had fallen and consumers wouldn't buy the cars. Within six months GM cut production in half.

* The company's almost blind belief that technology could solve its massive problems.

In the early to mid '80s it went on a multibillion-dollar spree to produce the most automated auto factories in the world. The solution to production problems was to purchase robots to do the work.

"They were overly reliant on technology and it cost them dearly," Mr. Cole said. "It drained a lot of money out of the till. GM was throwing money -- lots of money -- at problems in the form of expensive robotics and automation when the situation could have been solved easier with better management people."

GM's American counterparts -- Ford Motor Co. and Chrysler Corp. -- took the opposite approach, which helped them restore their financial health and succeed in the marketplace.

"They had no choice," Mr. Cole said of Ford and Chrysler. "They didn't have the money so they had to get smarter. . . . To lead with capital and then activate your brain is the wrong order. Frankly, they [GM] got things out of order and that was an unfortunate mistake."

From 1980 to 1985, GM spent $45 billion on capital improvements. The result was a scant 1 percent gain in its share of the world auto market, to 22 percent. The plan called for an additional $35 billion, but it was finally scrapped.

With that same investment, F. Alan Smith, executive vice president of GM at the time, told a management meeting, General Motors could have acquired Toyota and Nissan and boosted its share of the international market 40 percent almost overnight, according to Mrs. Keller.

* Quality problems throughout its lineup.

"Quality went south" in the 1970s and early 1980s as GM devoted much of its engineering talent to making cars more fuel efficient and less polluting, said one company spokesman. It was most apparent in its import-fighting cars, the Vega -- introduced in 1970 and championed as "the little car that does everything well" -- and the Chevette, that followed.

But poor quality did not stop with those offerings. GM's diesel engine, introduced in the late '70s, was a disaster. So was the ill-fated Cadillac V-8-6-4 engines that came out in 1981. The engine was designed to operate on four, six or eight cylinders depending on traffic conditions. But owners complained that it stalled at high speeds, had power surges at low speeds and suffered from uneven engine firing.

One Cadillac dealer summed up those efforts this way: "The diesel engine was a piece of junk, and the V-8-6-4 was more crap in the marketplace."

No sooner had GM yanked that product than it became plagued by serious problems with some of its automatic transmissions.

John H. Hammond, senior partner with J. D. Power and Associates in Agoura Hills, Calif., said quality varied from car to car, but he noted that Pontiac had "enormous problems" with the Fiero, the sporty two-seater introduced in 1984 and discontinued just four years later, and at the top of the line the Cadillac Seville and Eldorado suffered in the late '80s from "serious electrical problems."

The ill-fated Allante

Hoping to restore Cadillac's lost prestige, General Motors teamed up with Pininfarina of Italy to design a $60,000 two-seat convertible. The car -- the Allante -- was introduced in 1987 and was intended to go head-to-head with the Mercedes 380SL.

But the Allante turned out to be a fiasco and an example of the company's arrogant attitude toward its customers.

No sooner had the car hit the market than a flood of complaints started coming back to dealers. The car leaked in the rain. It squeaked and rattled. The windshield had a ripple and the seat adjusters had a tendency to break, causing the seat to rock back and forth.

General Motors had knowledge of the serious defects before ever shipping the car, but chose to ignore them. The company's approach was that it would fix the problems later if customers complained, Mrs. Keller wrote.

GM was forced to discontinue the Allante at the end of 1992 when sales dropped to about one third of projections. Mercedes never felt threatened, but Cadillac's reputation had been severely damaged.

The fall of GM is even more evident in the failure of the important midsize car market in the late 1980s. Some say this is when the company hit rock bottom.

GM's share of the midsize car market -- the single largest segment of American auto sales -- fell from 60 percent in the middle of the 1980s to approximately 30 percent last year, according to Mr. Hoglund.

GM's problems can best be documented by the way it was trounced by Ford as the two companies each sought to reach the market with a new midsize car.

Ford invested more than $5 billion and essentially its entire future on the Taurus. General Motors countered with the GM-10 series of cars -- the Chevrolet Lumina, Pontiac Grand Prix, Oldsmobile Cutlass Supreme and the Buick Regal.

These were to be GM's bread-and-butter cars and it was planned for them to hit the market at least a year before Ford's twin offerings, the Taurus and Sable.

It wasn't even a contest. Ford got its products to the market in early 1985. Because of a number of delays, the first of GM's models didn't make it to dealers until 1988, with the others following the next year.

And when they did, they were already outdated. "They were old. You cannot do that," Mr. Hoglund said, recalling how they failed to interest consumers.

Compounding the problem, GM made the mistake of introducing those cars as two-door models when 70 percent of the market was in four-door sedans, Mr. Cole said.

While the Ford Taurus became the nation's best-selling car, GM's offerings stalled, and, according to Mr. Hoglund, the company was forced to slash production by about 60 percent.

Although GM officials decline to discuss it, others in the industry say that GM was losing $1,500 on each of the 10-series cars it sold while Ford was pocketing a $1,500 profit on each Taurus and Sable delivered.

"We really got clobbered," Mr. Hoglund said. "And the first guy that took the chunk out of us was Taurus/Sable and then the imports, the Accords and the Camrys. And it's the place we got hurt the worst."

The turnaround

General Motors tried to stem its problems. Beginning in 1986 it began closing some assembly and manufacturing plants -- a number that is now up to 23 -- and eliminating more than 240,000 jobs.

But it was still in a desperate situation when Mr. Smith and his cadre of baby-boomer lieutenants took over in November 1992, faced with the task of halting the record losses and the falling market share, reducing the bureaucracy and building cars that people would buy.

GM was about to close the books on a net loss of more than $23 billion. The board of directors had just booted out Robert Stempel, a 34-year veteran of the company who had served as chairman for two years.

Some GM executives said at the time that the board's ouster of Mr. Stempel was a mandate for radical change, a strong message to his successor to accelerate steps to turn the company around.

Jack Smith -- who was credited with reviving GM's struggling European operations in the 1980s -- heard that message.

He began with a strangely subtle move -- declaring Fridays as casual day, freeing executives on the 14th floor at GM headquarters to take off suit coats and ties and unbutton their collars.

"It was a symbol of the new thinking at General Motors," said William H. Noack, a company spokesman. "It had nothing to do with product, but it was a signal that the attitude was changing at GM."

Since then, Mr. Smith has overhauled every significant operation of the company.

He reorganized its parts purchasing business into a single global purchasing office and reformed the North American Operations.

He cut the corporate staff by 80 percent, reduced the number of car models being produced and slashed the unprofitable sales to auto rental fleets.

One of the brightest parts of GM's recovery -- and a critical element to its future -- has been the North American Operations. NAO, as the company calls it, had an $11 billion improvement between 1991 and 1993.

Part of that has been driven by GM's new strategy of using common parts.

The old competition between divisions had fostered costly duplication of parts that made it more expensive for GM to compete.

For example, GM had 17 different ignition systems and 68 different steering columns. That is being reduced to three ignition systems and 25 steering columns, according to Mr. Hoglund.

The use of common parts will reduce GM's cost of building a car by as much as $1,000 within the next two to three years, said Mr. Cole, who is predicting NAO could be $15 billion to $20 billion in the black in two years.

GM is making major improvements in bringing new cars to the market faster and with less investment and labor costs, according to Wendy B. Needham, who followed the company for Smith Barney Shearson. She recently joined Donaldson Lufkin & Jenrette.

GM's redesigned 1988 models, for instance, involved an investment of $5.9 billion, used 418 body stamping dies and 3,200 parts, took 72 months to bring to market and needed 39 hours of labor to build.

But Ms. Needham forecasts that the 1996 models will require an investment of $1.6 billion and use only 260 dies and 2,300 parts, take 37 months to get to market and involve 18.9 hours of labor to build.

"General Motors has shown the most improvement in productivity" of any domestic automaker over the past two years, said James E. Harbour, president of Harbour and Associates, a Troy, Mich.-based automotive research firm.

It now takes 3.95 workers to build a GM vehicle -- down from 4.55 in 1992, he said.

Among the domestics, Ford continues to have the best productivity rating, using only 2.99 workers to build each vehicle, but it has shown no improvement over the past two years, Mr. Harbour said.

GM's Auto Component Group, a $24-billion-a-year business that supplies parts, went through a dramatic restructuring in 1992 and boosted its operating income by nearly $2 billion, Ms. Needham said.

Before this restructuring, which included the sale of some parts plants and the closing of others, Ms. Needham noted, the components group had 210 product lines and only 45 percent were profitable. That has been cut to 174 products, with 70 percent of them profitable.

A successful, although controversial, part of GM's restructuring involved the reform of its auto parts purchasing operations under J. Ignacio Lopez de Arriortua, the vice president who oversaw GM's giant $50 billion purchasing budget before defecting to Volkswagen last year.

With Mr. Smith's backing, Mr. Lopez reorganized 27 separate purchasing agents into a single entity that could take greater advantage of its enormous purchasing power.

Although Mr. Lopez upset many outside suppliers with his brash manner and demands for double-digit price cuts, he is credited with slashing about $4 billion from the company's purchasing budget at a time when cash was in extremely short supply.

It was not all bully tactics, a GM spokesman said of Mr. Lopez.

"He would send engineering teams into a supplier's plant to help them with their own restructuring so that they could reduce their costs and wastes, improve quality and streamline their operations to be more competitive," the spokesman said.

Despite GM's recent gains, Mr. Smith insists "the job is only half done. We still have a long way to go."

And Mr. Hoglund said that when GM compares its own productivity, quality and profitability with some of its competitors, "we can clearly see that we've made good progress . . . but until we're clearly the world leader in cost and quality, the journey's not over."

Political time bomb

Analysts say there is a political time bomb that GM must confront before the company's health can be restored -- the guaranteed-pay provisions in its contract with the United Auto -- Workers.

The company is required to pay virtually full salaries to about 8,000 idle workers. At the same time, it is hiring temporary workers at assembly plants -- including the one in Baltimore -- and in some cases is offering a one-time bonus of $60,000 to get people to relocate to plants in other parts of the country.

"They have tried to make the best of a bad situation, but they are not getting any help from the UAW," said Joseph Phillippi, an analyst for Lehman Brothers in New York. "The union doesn't care to come to the party and they have taken only diminutive steps to help GM in its down-sizing. They have absolutely no intention to help GM."

Mr. Phillippi said the company "has got to take a stand some day. A showdown will come. It will either happen in 1996 or 1999," when new contracts are negotiated. "It has got to happen."

The contract signed in 1990 provided that workers were entitled to either a job or their pay.

Owen Bieber, president of the UAW, however, is not ready to roll over on the issue of job security, which the union battled for during the past decade. "We told them, 'If you keep putting work out [to outside contractors], you are going to pay for it because you are just not going to be able to throw people out on the !! streets,' " the union executive said.

Mr. Bieber said that GM will have to look for other ways, including doing a better job of designing cars for production, to reduce labor costs.

Still, Mr. Cole says GM has pulled out of its free fall. "Its future is very bright," he said. "General Motors has the horsepower to make things very difficult on its competitors."

D8 Tomorrow: Can GM's products sell in the marketplace?

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