Thursday, January 1, 2009

Where did General Motors go Wrong?

GM is the world’s largest automaker that has remained the industry leader for the past 77 years. It employs more than 250,000 people and manufactures in 35 countries. In 2007, more than 9 million vehicles were sold all around the world. The budget of GM is more than that of countries like New Zealand and Pakistan. Management Science books are filled with examples of GM, stating how big the company really is, how well it manages its operations, how efficiently it uses technology, how immaculate its supply chain is, how it cares for the employees, how well it creates economies of scale and so on. This is not just a company; it’s a legend in its own right. Why then are we hearing that General Motors is on the verge of bankruptcy? That doesn’t sound logical. Where did GM go wrong? What happened? Why is it asking for bailouts?

In 1990, GM introduced an electric car with zero emissions, which was marketed in the United States, in some regions. It was called E1. The response was not so good and the project was scrapped. The company was later criticized for abandoning E1.

In 2007, after the union strikes, contracts were signed with worker unions, providing product and employment guarantees. Such strikes not only resulted in lost production but also kept financial burden on the company. Half a million former employees get pensions and health care benefits from GM.

As the Japanese competitors, like Toyota and Honda, continued to produce compact and fuel efficient cars, GM remained committed to making larger vehicles that were not so fuel efficient. It kept changing names for newer models but that did not increase sales as the company had lost respect in consumers’ eyes. Japanese car manufacturers came up with new models while retaining old names to bank on their reputation. In 2004, GM started refurbishing its SUVs for introduction as new models in 2007. The fuel costs increased the same year and people started focusing on fuel efficient vehicles. This trend has continued till today. After the sharp rise in oil prices in 2008, consumers bought more of Japanese cars while sales of SUVs declined. In addition to the issue of fuel efficiency, Japanese competitors continued to offer more interesting and comfortable features in their cars, while GM failed to do so at the same pace. Japanese are also good at cutting costs during production which is another reason they survive even when prices are going down.

GM has a good supply chain and it is amazing to see how it manufactures and supplies cars the world over. However, the supply chain only provides what the manufacturer wants and it does not have control over the upstream market demand. The manufacturer in this case did not produce what it should have. In order to do that, GM had to re-structure and re-align the entire supply chain.

Although GM did introduce the world’s fist hybrid car in 2004, the company sold just 843 hybrid cars in the first quarter of 2008. On the other hand, Ford and Toyota sold 5,225 and 430,000 hybrid cars respectively. This shows that General Motors did not follow up with a good initiative that it had taken, just as it had scrapped the E1 project years back. In 2007, GM lost $50 billion and its stock value decreased by 76% in 2008. The talks of merger with Chrysler failed the same year. By December 2008, GM was almost out of cash and could not survive beyond 2009. The possibility of filing for Chapter 11 bankruptcy began emerging as the company asked the government for billions of dollars from the TARP (Troubled Assets Relief Program). On 19th December 2008, the government approved a $13 billion financing for GM and Chrysler while $4 billion could be provided later. The Detroit big three have to prove their viability by March 2009 before they can receive more cash.

In conclusion, GM failed to see the writing on the wall. This is a classic case of a manufacturer producing what it deems to be suitable for the consumers, rather than what consumers really want. The union contracts must have had negative impact on GM, unlike foreign competitors, but the situation got worse due to wrong product decisions. Past success cannot guarantee future accomplishment. In a fast changing competitive world, companies have to be flexible enough to change along with the changing global conditions, consumer tastes, competitor strategies and government regulations.


  1. Yet another gibberish post from somebody who thinks to know something about the car industry.

    GM produced EV in the 1990's when the average crude oil price was in the $20's through out most of the decade. The demand for the EV was minimal, considering the low oil price. Who in the right mind would forgo big profits on the SUVs that customers demanded in return for producing smaller cars that were less profitable? This is a classic case of law of capitalism that GM/Ford followed by selling big SUVs.

    The other big reason why Japanese didn't sell big trucks in 1990's is because they did not have the "vehicle platform" to produce it. Remember they came from Japan, where no one buys SUVs and the roads are smaller. It's got more to do with historical and geographical reasons that the Japanese companies were late to the SUV game. Today, Toyota has several in-efficient SUVs lined up to compete against the offerings from GM and Ford, which means going after profitable segment of the market. So, please don't give me this crap that Japanese made the choice to offer fuel efficient vehicles to consumers. That's not true.

    Also, for your information, Ford didn't get any funding from TARP, so it's the Big 2 that have to prove their viability by March 2009. Appreciate if you could get your facts correct.


    Arun Kumar

  2. Mr. Arun Kumar (Mec Man) I take your point regarding the fact that at the time EV1 was produced (1990), the demand was not much for such vehicles, and this is exactly what I wrote in my article, if you read it carefully. You wrote in your comment “Who in the right mind would forgo big profits on the SUVs that customers demanded in return for producing smaller cars that were less profitable?”. Well, this is exactly what the problem is with big companies like GM. Short term profit is everything to them. The reason why they were criticized was not because anyone was against their making of SUVs, but because of the way they abandoned the electric car idea and scrapped the whole project. Yes, the price of oil was low at that time, but if GM had visionary outlook, they would predict the problems arising due to the shortage of oil in the near future. Even the First Gulf war started in August 1990 and that could have been a good enough reason to continue the project. Atleast, they could have made improvements to the earlier version of the electric car so that the vehicle could become more acceptable to the public. Generally, many people do respond to products that are environmentally friendly, help in conserving energy and provide good value for money.

    You say “this is a classic case of law of capitalism that GM/Ford followed by selling big SUVs” Dear sir, is it not the classic case of capitalism to make what consumers really want? (Let’s not talk too much of capitalism anyways as it might be on its way out). Once the tide had started turning in favor of smaller and fuel efficient vehicles, the failure of GM was to ignore such a change and continue to push SUVs in the market. This is the precise reason why so many of them are still unsold today.

    Regarding the point that you made about the Japanese entering the SUV market late because initially they didn’t have the platform to build such vehicles, I think there was nothing wrong for the Japanese in going after the profitable segment of the market as SUVs would not just vanish forever from the face of the Earth. However, they were smart enough to learn how to make SUVs while at the same time continue to manufacture and improve on more fuel efficient cars and hybrids as the market trend changed. The ground reality is that it is GM that is on the verge of bankruptcy and not the Japanese manufacturers.

    If you re-read my post correctly, you will find that I never mentioned that Ford got anything from the TARP fund. However, Ford will definitely need to receive funds from the government this year as they have already indicated. Hence, GM and Ford will have to prove their viability to get more funds by March, while Ford would have to show its viability if the company wants to get its first share of funds. Congress is not in the mood to give away “charity”.

    I would appreciate if next time disrespectful or too self-assuring language is not used. Thank you for posting.

  3. Thanks for sharing such a good classified information, am totally agreeing with you, GM failed because it's unable to catch the users expectations, lack of vision, lack of time sense and the biggest factor is unable to change with the time.
    Joshua's Law