How GM Betrayed Its Founding Genius

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Mr. Weisberger taught history at Antioch, Wayne State, the University of Chicago, the University of Rochester and Vassar before becoming a full time freelance historian. His latest published book is When Chicago Ruled Baseball: The Cubs-White Sox World Series of 1906 . In 1979 Little Brown published his biography of William C. Durant, the founder of GM.

Nota Bene: This article was published in November 2008. As GM staggers towards either bailout or bankruptcy,  I am reminded that the big financial meltdown of this Autumn began just around the 100th anniversary of its founding, September 16th.  Some birthday gift!  The giant corporation's present misery has a personal resonance for me because thirty years ago I completed a biography of its founder, William C. Durant, who was the very antithesis of the GM leadership of recent years--unimaginative, stodgy, wedded to old ways of doing things, fiercely resisting for the last 20 years all efforts to nudge it in the direction of smaller, fuel-efficient, pollution-reducing cars instead of heavyweight gas-guzzlers.

Durant was no ordinary entrepreneur, but a strange combination of supersalesman,  visionary and risk-loving  long shot gambler. Already a millionaire carriage builder in 1904 he saw the revolutionary potential of the dawning auto age and got into the  motor game by buying into and reorganizing a struggling little Flint, Michigan concern called the Buick Corporation, then dashing off to a New York auto show and securing  immediate orders for some 1,100 Buicks, or thirty times more than the company's entire previous year's production.  In 1908 he started GM by combining Buick with the merry Oldsmobile, which he bought, and soon thereafter added what became the Pontiac and Cadillac lines--along with a long list of companies that made various experimental cars that were flops.   

Durant foresaw that in a few years there would be two million cars on America's roads--for which he was considered crazy--and looked beyond that, correctly and virtually alone, to the day when the mere possession of an auto  would be  commonplace, and buyers would want variety.  He meant to produce cars for every purse and preference--"getting every car in sight."  As he put it in explaining one of the bad acquisitions, an outfit named Cartercar:  "how was anyone to know that Cartercar wasn't going to be the thing? It had the friction drive and nobody else had it." He financed these purchases by paying the buyers with newly issued  GM stock each time, absolutely always convincing them that with their addition to the firm, the stock was certain to rise.

A chaotic manager, and always short of operating cash,  he had GM drowning in unpaid bills by 1910, and his board of directors removed him from the chairmanship and installed a cautious,  creditor-friendly regime  much to his disgust.  He then went out and created the Chevrolet Company, turned it into Number One on auto sales charts, and used his winnings to buy back control of "his baby," GM in 1916.  Another four year wild ride of sprawling growth and frenzied financing ensued, and when Durant got himself into a personal hole that also threatened a catastrophic fall in the value of GM stock, his corporate partners threw him out again.  He started a rival company but had lost his touch; then turned increasingly to Wall St. operations as one of the biggest bulls in the Great Bull Market.   When the crash came he lost everything and died broke.  Meanwhile his successor at GM's helm, Alfred P. Sloan, successfully rationalized and reorganized the corporation until it became, by the 1950s, a thriving empire, the monarch of the Big Three American automakers, who together accounted for a gigantic share of America's industrial profit and prowess.

There's no knowing  how Durant would have reacted to the collapse of his brain-child. But as an incorrigible optimist and rock-ribbed believer in the free market,  I suspect he would have disapproved of  the automakers' rush to Washington with the begging bowls extended.   What I am relatively certain of, however, is that given his almost childlike excitement over new technologies,  if he had been running GM for the last thirty years, there would been a heavier investment in experiments with at least a few companies making hybrid cars, electric cars, biofuel-run cars, and for all I know, cars run by sails or pedals. And one of those cars might have been "the thing."  Durant was not one to sit on a lead.  That kind of boldness might have given GM's bookkeepers temporary headaches--and might also have saved the entire industry more lasting ones.

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Randll Reese Besch - 6/3/2009

Was good at picking technology to introduce to the market but he was a poor businessman. Why else was he be tossed out of GM twice.

He would have stuck with the EM-1 electric car was created in 1992, but then was withdrawn, and scrapped no matter how many wanted it. 1992 we could have had one! Now we get the Volt which is too expensive which is the opposite of what we need. Durant would have seen that.

Arnold Shcherban - 11/27/2008

Current (and future) financial and economic depressions the capitalist system got (will get) itself into
are essentially caused by one major factor: monopolization of financial and industrial resources, i.e. extreme concentration of those in the
possession of a a few mega-corporations. When just one of those
multinational corps collapses or threatens to collapse it pulls down the whole respective world sector. Not already mentioning the potential disaster of two or three of such behemoths stagerring at the same time.
That's exactly what caused current crisis in financial and auto-manufacturing sphere. Just recall a recent and continuing case of Lehman Brothers, GM, and a few others.
Already Marx, and later Lenin, unambigiously indicated that the monopolization of capital is the start
of the end of a capitalist system as a viable socio-economic society.
Not mentioning purely mathematical models that have proved the extreme difficulties of controlling and preventing eventual self-destruction of too big and complicated economic and financial coglomerates.
But promise of ultra profits makes ideologues of Big Business deaf and blind to even scientific findings (the attitude which also have been predicted long ago.)
Supergreed and arrogance of American multinationals and subserviant to them politicians plays a main role in this scenario of doom that eventually will first destroy the world economy, then self-destruct. It is going to happen sooner or later.

Lawrence Brooks Hughes - 11/26/2008

Alfred P. Sloan was the man who really built General Motors, taking over in 1923. After he retired somebody asked him what was the biggest mistake he made when running GM into the largest and most profitable business in the history of the world. He said while allowing for enormous growth in his various projections, he had again and again underestimated the growth which was to occur, and he could certainly have expanded the business much more than he did.

vaughn davis bornet - 11/25/2008

Reading mine, should say the Mercedes fifteen thousand included paint jobs and tires; but mostly transmission, clutch, carb, odd body things, and rear end damage when it drifted out of the driveway down the hill, demolishing the trunk. Oh, well. Still was a monthly drain.

Vaughn Davis Bornet

vaughn davis bornet - 11/24/2008

Having owned automobiles since 1934 (not including my Father's cars of the 1920s and even earlier (Chandler, LaSalle, and Alsace--which he developed and sold only in France), I have something to say.

I owned a Model A Ford, then a 1940 Pontiac, then a second hand Packard and second hand Hudson Jet (!), then a Pontiac Grand Pre. We're up to 1959.

I'm trying to remember when the gospel began that "Japanese cars are better." Surely not when my second car was a Honda 600; maybe the Civic that replaced it. Anyway, here's the Thing:

In the 1960s, I think, Consumer Reports began preaching its Gospel that American cars were no damn good and that everybody knows it.

I've never known the motive for the SLY, CLEVER, UNFAIR, and generally NASTY crusade against GM, Ford and Chrysler in Consumer Reports. Anybody with a passing knowledge of "bias in journalism" could see that with words of commission, and often with selective omission, the magazine was KNIFING the American car industry.

At the time, I was thoroughly enjoying an Olds 88, then a 98; my Pontiac Bonneville of 1969 ran and ran and is still running. I gave it to a non-profit bird outfit three years ago when it had 230,000 miles on its first and only engine.

Today, I run two Oldsmobiles, a 98 Aurora and a 2000 Intrigue. I couldn't be more pleased, although at 100,000 miles the former had a cooling system problem; fixed it.

I really do believe that one of the things that crushed GM, at least, was the elitist insistence of the consumer press on the alleged quality of foreign cars and the lack of quality alleged to lie in domestic cars. The drumbeat was not answered with effort and facts. It should have been.

In my lifetime, I could get pieces and parts for my cars anywhere and everywhere: fanbelts, shocks, plugs, tires, bulbs, and if I wanted, engines. I was a confident driver, pulling a travel trailer 180,000 miles in remotest Texas, Oklahoma, or wherever. Hoses, filters, name it. You couldn't have given me a Datsun. My hobby Mercedes 4-door, 1958 ran up $15,000 in bills during 40 years of snobbish ownership. Not that Pontiac! Enough.

Vaughn Davis Bornet Ashland, Oregon

Andrew D. Todd - 11/24/2008

The difficulties of the automobile industry grow out of its labor policies over the last sixty years.

The automobile industry's labor policies were historically driven by the need to recruit strong young men. Back during the Second World War, the industry found itself competing with the infantry for manpower-- and losing. The industry would recruit strong young men, insisting it needed them-- and the draft board, impervious to all pleas, would reclassify these young men as 1-A, and send them off to boot camp. In _Working_ (1972), Studs Terkel provides a picture of labor conditions as they existed circa 1970, in a series of interview-portraits of typical autoworkers. The automobile industry would recruit young men with the understanding that they would work on the assembly line for about ten years, then be shifted to light duties (utility worker, expediter, etc.) for another twenty years, under a system of strict seniority, and then collect retirement with health benefits after thirty years. Considering the conditions of assembly-line work, the automakers simply couldn't get labor cheaper. A sizable fraction of newly recruited American autoworkers quit during the first day, or the first week, and stomped out without even troubling to collect their pay.

Very well, the class of 1970 completed their thirty years in the year 2000, and will become eligible for Social Security and Medicare, circa 2015. Of course, by 1990, the automakers were actually putting together buyout packages. They had installed significant numbers of robots to take over the more arduous jobs such as welding, painting, and heavy lifting, and they were moving the manufacture of all kinds of small subassemblies overseas. The pace of offshoring stepped up after NAFTA. However, the Japanese manufacturers had set up American plants, and could use the same class of manufacturing techniques. Since they had not been producing in the United States in 1970, they did not have the same kind of lifetime employment/retirement obligations. In Japan, in 1970, it was still possible to recruit autoworkers on a temporary basis, for three or six months with no long term obligations (*), something which had not been possible in the United States since the 1920's. This difference in long-term commitments inevitably meant that the Japanese could undersell the American companies, either in the form of lower prices or higher quality for the same price.

(*) see Satoshi Kamata, _Japan in the Passing Lane_ (1982, orig. pub in Japanese, 1973, 1980, with the title: Auto Factory of Despair)

Given the facts which eventually emerged, about how much protectionism was politically feasible, and how much was not, the American automobile companies were probably insolvent by 1985 or 1990. It simply took a while for the unacknowledged long-term notes to mature, and the fact to become apparent. Of course, at a certain point, the advantage will shift to the Americans, assuming they can stay in business, eg. going through Chapter 11 bankruptcy successfully, or getting a government bailout with sufficiently few conditions. They will reach a point where their autoworkers are all in Mexico or China, whereas the Japanese will be forced to produce in the United States, to be "more American than thou" to avoid discriminatory tariffs. However, the price of automobiles will be bid down steadily towards a level indicated by Chinese wages.

At Ford, Henry Ford II really was conservative in business matters, as witness his negative response to front-wheel drive. However, at GM, Roger Smith was something of a throwback to W. C. Durant. He sponsored Saturn and electric cars; high-tech acquisitions such as EDS and Hughes; and a labor buy-out, in exchange for increased flexibility. None of it did much good, in the end-- that is, it did not produce the kind of Silicon Valley growth necessary to pull away from the company's inherited liabilities. Regardless of policies, the different automakers ended up at the same place. The basic labor policies put in place about 1950 dictated that if the automakers became unable to grow their core business, they would run into difficulties paying for their internal welfare state.

The overriding problem is that for fifty years, no one in the global auto industry-- and this includes the Japanese and Germans-- has been able to come up with a fundamentally better automobile, and put it into practice. A hybrid car saves gasoline, but it does not change what an automobile can do. In a rush-hour traffic jam, an old rattletrap goes just as fast as a Ferrari, that is, 0 MPH, and occasionally, 5 MPH. There is no compelling reason not to make do with a cheap used car. In the 1970's and 1980's, when Detroit's distress was becoming publicly apparent, a new word processor really was obviously better than a used typewriter, and now, of course, we have the internet. The auto industry didn't have anything like that to sell.

Compare the response of the automobile industry to that of the steel industry. They had the same basic business problem-- indeed the automobile industry was the steel industry's major customer. However, the steel industry's response was basically to downsize to profitability, and to repudiate whatever obligations it had to its workers. Steel is a much more homogeneous product than automobiles of course. It was simpler to just close down selected mills, which produced the same product as other mills, and operate without them. Independently owned minimills (eg. Nucor), running on junked automobiles, displaced integrated steel mills with blast furnaces, especially in the production of structural steel.

Tiger Cosmos - 11/24/2008

Rick Wagner was the GM's CFO in 1992 and then promoted to run GM North America operations in 1994. With the same board confident with in same Admiral at the helm GM went for trading over $60 a share to less than $3 a share. In this period GM's market share had a steady decline of ~34% to ~19% and the strategy went from increasing market share to simply trying to maintain.

GM announced numerous turnaround plans, one every two years, sometimes every year. Some plans accelerated in their failure at the urging of activist shareholders. Rick would appear on the cable news channels to sell the latest plan - spewing the latest shortsighted solution - build more and better trucks. Twenty years of following trends versus making trends. Always behind the market.

Now GM attempts to sell the idea that it is the current financial crisis that brought them to this point. No one in GM is taking any responsibility yet it is the same leadership in place as it was in the the early 1990s. GM has been on the verge of bankruptcy multiple times in the past 20 years - dependent on loans and bonds of declining ratings... In addition one of their strategies was the 'core strategy' for which GM believed selling its successful businesses would help it focus on its least successful business of selling automobiles. GM sold EDS, Hughes, DirectTV, GMAC, and millions in bad debt... now all they have left to sell is Hummer & Saab.

GM was famous for their decentralized business model which Sloan developed. Divisions competed against one another. The GM strategy for the past twenty years has been to make divisions common and let brand management lead the organization. One roof and seven divisions. At the same time they attempted to differentiate model lines. The obvious result of this strategy has been a steady decline in competitiveness and management mediocrity.