GM at the Abyss

Now that General Motors, Ford Motor Company and Chrysler Corporation have all presented themselves to our elected representatives seeking taxpayer capital to keep whatever semblance of a business model they have alive (for how long?), it seems appropriate to share an excerpt form my upcoming book, "Tea at the Abyss":

On Thursday June 5, 2008, Rick Wagoner, CEO of General Motors attempted to defend recurring criticism of his company’s strategic and financial results. The Financial Times reported that Mr. Wagoner had asked, in an interview with their reporters, “Is it the US manufacturers who are stupid? I don’t think so,” adding that the Japanese car manufacturers had made similar errors in predicting the US car buyer’s demand for large vehicles.
In April of that same year, Alex Taylor published an article in Fortune Magazine entitled “Rick Wagoner's worst nightmare. Events beyond his control are jeopardizing General Motors' fragile recovery”, which listed several factors for the harrowing challenges facing this shrinking industrial giant. Among the ills generally seen to be present at GM, as identified by industry analysts were:
- Production, marketing, product design and other basic components of the company too focused on SUVs and trucks – the products the consumer was running from in droves
- Looming lease liabilities on end-of-term valuations far in excess of reality
- Too many brands, and too many marginally performing (Saturn) or obsolete (Hummer) brands
- Bloated pay & benefits packages
- Subprime loan exposure in the GMAC financing unit
- Too few high-mileage or alternative-powered vehicles
- A possible cash crunch by early 2009
All of this had conspired to create a response from the equities markets that brought GM’s share price down to where the company had last traded back in the mid-1950s. In economic value terms, it was like the company had been on some type of corporate treadmill for 60 odd years. All the results from Cadillac, the SUV program, GMC, the dealer incentives and other marketing creativity, the Corvette, the great sedans of Buick, the innovations of GEO and Saturn, the partnership with Opel AG, and even the legendary muscle cars across the decades – none had brought them an inch ahead.
Taken at face value, Rick’s question is a valid one. Are the US car manufacturers stupid? We might recall actor Tom Hanks’ line from the 1994 film Forest Gump: “stupid is as stupid does”. In this sense, the results, as least in GM’s case, may answer Rick’s question all on their own. In fact, we might wonder that, if these performance results from GM were not the result of stupidity on some level, then what would stupidity for a large automotive company look like?
The other dynamic in the way Rick posed his question is the attempt to answer it himself – going on to cite certain failed strategies of the Japanese carmakers principally Toyota, he pointed out that GM was not the only one to have made errors in its product mix. Yet looking at Toyota as a whole, it is clearly a stronger company. Toyota has Lexus, and shorter product development cycles, and higher resale values, and the world’s top hybrid car program. While GM was developing the Saturn brand, Toyota developed Scion. But even if Toyota were equally out of step strategically as GM seems to be, would that lessen the need for GM, and the other GMs of American business, to develop sound and adaptive strategies that are prepared for shifting external conditions? Attempting to deflect criticism to one’s competitors is hardly adequate evidence of “not being stupid” ones self.
Like many questions posed after a failed strategy has taken a company off the rails, there is much more that is raised by Rick’s questions than appears on the surface:
- Is “not being stupid” a legitimate metric for senior management success?
- If someone else was stupid, does that excuse our stupidity, to whatever degree?
- Won’t there always be others somewhere, in some fashion, which are stupid?
- Don’t we always have an obligation to reduce our own stupidity wherever possible?
- If we can conjure up an explanation for being blindsided, does that suddenly make it OK?
- If the company is put at risk by “unforeseen circumstances”, is the problem our ability to foresee, or is virtually any level of inaccuracy acceptable?
- What level of stupidity and negative surprises should be acceptable in a company that spends billions on “R&D”?
- Where do we draw the line for conditions that we indeed foresee, anticipate, and perhaps plan for?
- What are CEOs paid for by the shareholders, if not to manage the enterprise to deal with conditions “beyond our control”?
While the absence of stupidity is not the metric I would choose for determining a company’s success, it does serve as a proxy for a host of issues we might well summarize as “out of touch”, “unaware”, or “inattentive”. We can think of many organizations, from Xerox PARC to Bell Labs, that were rather low on the stupidity scale yet somehow became irrelevant. In GM’s case, most of the issue here appears to be a company that lost its way over time. While attending to the most minute of internal details, they lost track of the world outside and woke up one day to find that the world had moved on – without them.

Letter in response to the President-Elect's Transition Team

Ladies and Gentlemen,

It is later than we think. The following areas outline specific immediate and longer-term steps we can take together to bring a twenty-first century direction to our country:

1. FINANCIAL SYSTEM:

a. - Promote with the SEC and FASB a more accurate valuation process to replace the deflation-inducing effects of the current “mark-to-market” practices which yield no more accurate values of real estate on the downside then the former valuation standards yielded on the upside

b. - Restore the uptick rule on the floor of all major US-based exchanges, including the NASDAQ, NYSE, CBOE, CME, and NYMEX

c. - Tie remaining capital infusions to money-center banks to lending performance – i.e. Treasury providing 20% additional capital to a bank’s balance sheet must be met with a 20% increase in lending WITHIN 90 DAYS OR THE FUNDS COME BACK TO TREASURY

d. - Direct TARP funds to the Sheila Bair anti-foreclosure plan as laid out by Ms. Bair in congressional testimony Thursday November 20

2. ENERGY:

a. – Replace the current weak CAFÉ standards with the following provisions:

- ALL gasoline-powered vehicles will be produced as 100% flex-fuel compatible (i.e. alcohol-resistant fuel lines, seals, gaskets and flex-fuel chips) beginning March 1, 2009

- 20% of fleet must be natural gas capable or plug-in hybrid by September 1, 2009

- Average fleet mileage at 35 mpg by January 1, 2010

- Relaxed federal crash standards for new “Category II” vehicles – authorized and licensed (yes, by the states) for non-freeway use under 50mph only

b. – Legalize alternative energy:

- Prohibit current contractual restrictions placed on gas station owners by major oil companies in an attempt to prevent dealers from offering alternative fuels including biodiesel, ethanol, recycled oils, etc.

- Expand bicycle lane requirements for new federally-supported roadway construction including underpasses and overpasses for dedicated bicycle transit, requirements for expanded bicycle parking in office buildings, and mandatory sentencing for bicycle-automobile traffic convictions

- Legalize access to biodiesel fuels in all 50 states

- Legalize safe, standards-based retrofit of existing vehicles to natural gas, flex fuels, etc.

- Legalize “Category II” vehicle class for in-town transport (see above) – examples include all-electric vehicles, three-wheel scooters, electric bicycles and motorcycles, etc. (Current federal safety crash standards applied to these vehicles are designed for an earlier age that assumed heavier, 20^th century vehicles only)

- Legalize use of alternative, fuel-saving materials in automotive technology, i.e. carbon fiber, aluminum, fiberglass, etc. – again a review of federal safety standards is in order

- Legalize use of “caissons” on certain portions of the interstate highway system: long-haul truck/trailer combinations designed specifically with more than three trailers

- Legalize establishment of new rail rights-of-way and more aggressive eminent domain approaches of the type used in Europe and Australia for dedicated passenger rail facilities and infrastructure that no longer comingles freight and passenger operations on the same track

- Legalize development, processing and sale of agricultural Jetropha and other non-food based oil seeds as fuels

- Legalize construction of new freight railway corridors in conjunction with a federally-facilitated network of logistics and distribution hubs to benefit otherwise depressed communities and regions

- Legalize fuel-saving measures achievable by port authorities using existing technology and methods through adjustment of work rules, access measures, and outdated safety requirements

- Legalize residential and commercial real estate use of solar panels, geothermal wells, solar water heating systems, greywater/”purple pipe” systems, cistern and catchment systems, insulation, thermal window systems, battery energy storage systems, and energy switching technology. Action should be taken to permit use of all of each of these technologies nationally in all new construction and existing properties by federal action to prohibit all existing restrictions via zoning and other current impediments in place today on the part of state, county, and municipal authorities and extending to attempts to limit or prohibit alternative energy measures on the part of homeowners associations

- Legalize use of non-coal coal in conventional coal-fired powerplants - i.e. newearth: http://www.newearth1.net/

- Legalize fast-track permitting of nuclear generating plants nationwide

c. - Fund 21^st-century energy:

- Immediate gasoline tax of 30 cents per gallon February 1, 2009 going to 50 cents per gallon January 1 2010. Conventional diesel fuels: 20 cents and 40 cents respectively

- Immediate tax under bilateral air transport agreements on non-US airline flights arriving or departing US airports not using alternative fuels. Similar program for dry bulk ships, and container ships arriving at US ports

- Incremental, annually-increasing federal taxes applied extensively to burning of fossil fuels where alternative energies are available, as in coal-fired powerplants and petroleum-fired powerplants which can be converted to non-food

- Institute recovery fees for environmentally-damaging fuels production to shoulder the full burden of mountaintop removal, chemical destruction of air, land and water, health and safety costs on communities, and projected post-exploitation cleanup measures (there are several independent entities including our experienced and trusted accounting firms that can provide an entirely apolitical estimate of these costs)

3. FOREIGN AFFAIRS

- Establish March-class airbase in SW Al-Anbar province west of An Nukhayb, on a 99-year lease from the Iraqi government. Establish Iraqi training base in conjunction with the facilities, and gain parliamentary approval under a comprehensive package to include mutually preferential sourcing of oil and LNG, US-provided federal troops training and federal law enforcement and anti-insurgent training, and Iraqi participation in economic and mutual defense programs

Sincerely,

- David Moon