December 6, 2008
At G.M., Innovation Sacrificed to Profits
By MICHELINE MAYNARD
General Motors did not apologize for anything in its first trip to Congress more than two weeks ago to plead for a federal rescue. The company’s only problem, it insisted, was the current financial crisis.
“What exposes us to failure now is not our product lineup, or our business plan, or our long-term strategy,” Rick Wagoner, G.M.’s chief executive, said in his testimony.
On its return visit to a skeptical Congress this week, however, General Motors bowed its head. “G.M. has made mistakes in the past,” Mr. Wagoner told Congress, and named three: agreeing to expensive union contracts, not investing enough in smaller cars and failing to convert its plants so they could build more than one type of vehicle.
It was an unusual concession from a company that has rarely felt the need to apologize for anything, given its bragging rights as the world’s largest automaker with operations in 35 countries, and as a company that has built 445 million vehicles and sat atop corporate America for much of its 100-year history.
But the mistakes Mr. Wagoner acknowledged do not begin to explain why General Motors finds itself on the brink of insolvency, begging Congress for financial help.
G.M.’s biggest failing, reflected in a clear pattern over recent decades, has been its inability to strike a balance between those inside the company who pushed for innovation ahead of the curve, and the finance executives who worried more about returns on investment.
The two views were rarely in sync — in effect, fighting over the steering wheel that controlled G.M.’s direction — and the internal battles distracted G.M. from spotting shifts in the marketplace.
Time and again over the last 30 years, G.M. has spent billions of dollars on innovative ideas like its Saturn small-car company in the 1980s and the EV1 electric vehicle in the 1990s, only to then deprive those projects of further financing because money was needed elsewhere or because they were not delivering enough profit.
The failure is frustrating to those who remember the high value placed on innovation by legendary company leaders like Alfred P. Sloan Jr. and Charles E. Wilson, who felt G.M. could sell cars to the masses by demonstrating it was out in front.
“Until the 1960s, innovation was part of G.M.’s DNA,” said John Casesa, a veteran industry analyst with the Casesa Shapiro Group. “Now, it’s a matter of trying to play catch-up.”
One such area is hybrid technology, an area where G.M. might be leading if it had encouraged the engineers who led its hybrid development as long ago as the 1970s, and continued building on expertise it gained with the EV1.
While Toyota has sold more than 600,000 Prius hybrids in the United States since 2000, General Motors will not start selling its Volt plug-in hybrid until 2010, when it hopes to sell 10,000 of them in the first year.
“We were late on hybrids,” George M. C. Fisher, the lead outside director on G.M.’s board, said in an interview this week. “Why were we late? We made a business decision as opposed to a marketing decision. That’s probably a mistake, in retrospect.”
Another, as Mr. Wagoner said last week, was its slow reaction to greater demand for smaller, more fuel-efficient vehicles. Although more are on the way, the only small car in its vast lineup of models to compete with the likes of the Honda Fit and the Toyota Yaris is the Chevrolet Aveo, a car made in Korea by G.M.’s Daewoo subsidiary.
General Motors has tried to answer the call for greater fuel efficiency in the short run by outfitting some of its pickups, big S.U.V.’s and larger cars with hybrid-electric engines, but they have not caught on with consumers.
In the early 1990s, the company lagged Chrysler’s Jeep and Ford by five years in bringing an S.U.V. to market with mass appeal. Once it had ramped up its offerings, G.M. was reluctant to shift from big profitable vehicles to building small, less profitable cars, even when gas prices spiked.
By contrast, Ford, which also minted profits on a lineup heavy with S.U.V.’s, shifted its lineup faster to cars, although it still does not have one that can compete directly with the Fit and Yaris.
“We would have been chastised the other way if we had missed that opportunity,” said Mr. Fisher, referring to its decision to focus so many resources on producing S.U.V.’s. “Giving consumers what they want is not a bad business decision.”
Indeed, that approach worked well for G.M. for decades.
Its strategy of offering consumers an array of brands and choices, like the 70 different models across eight separate brands that it sells now, was meant to fulfill the goal set by its legendary chairman, Alfred P. Sloan, to offer a “a car for every purse and purpose.”
(The idea was meant to contrast with Henry Ford’s quip that a consumer could have any color he wanted, “as long as it’s black.”)
G.M. executives have long defended the myriad choices as necessary to defend the company’s turf in a market crowded with competition both from across town as well as overseas. Likewise, its bet was always that G.M., with its enormous marketing and research and development budget, could afford to offer such options.
Only now, in its second plea to Congress, did it acknowledge what just about every industry analyst has said for years: that G.M. has too many brands, now that its market share has fallen by nearly two-thirds from its peak in 1960 to just 22 percent today.
G.M. said last week that it would focus on just four core brands — Chevrolet, Buick, GMC and Cadillac — and sell or play down Saturn, Pontiac, Saab and Hummer.
The goal, it said in its new plan, is “to focus available resources and growth strategies on the company’s profitable operations.”
That may sound like an obvious strategy for any car company, but the automobile industry, like the aviation business, involves bets of billions of dollars that may not pay off for years, if at all.
For those willing to gamble and to follow through on their bets — like Chrysler did with minivans, like Toyota did with Prius and as Honda has done with its focus on fuel efficiency even when gas was cheap — the payoff in sales and reputation can be enormous.
But G.M., despite its tradition of fostering innovation, has often been impatient for profits to emerge.
Mr. Casesa said that pattern stemmed from the fact that so many of the company’s top executives had a background in finance, not in engineering and designing cars and trucks.
For the last half-century, virtually all of G.M.’s chief executives, including Mr. Wagoner, have come from its financial side, which has judged most initiatives based on whether they will be profitable.
That “earn it” philosophy has led to the demise of some of G.M.’s most publicized efforts to try something new, like the EV1 electric car, which G.M. leased to owners from 1996 to 1999, before killing the program as too expensive.
It also led G.M. not to introduce any new Saturn models for five years during the 1990s, effectively starving the division of new products that might have lured in new customers.
By contrast, Toyota lost money for years on Prius, which never caught on in Japan until Toyota halved its price. Likewise, Prius might have remained a cult car in the United States had gas prices remained low. But Prius sold out once prices topped $3 a gallon, and gave Toyota political cover when it introduced the big Tundra pickup truck in 2007.
Worries over profits has also stifled innovation at G.M. Engineers actually started work on minivans a decade before Chrysler popularized them in the 1980s, said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., and the son of a former G.M. president, who has advised G.M. for years. But G.M.’s finance staff refused to give the go-ahead.
“They looked at it and thought, ‘Why would people need minivans if they had station wagons?’ “ Mr. Cole said. After Chrysler’s vans were a big hit, G.M. tried to capture attention in the early 1990s with a series of slope-nosed vans derided as “Dustbusters” that failed to sell well. After other attempts, General Motors stopped selling minivans this year.
G.M.’s failure to press forward with its own hybrids was a deep disappointment to Robert C. Stempel, the former chief executive who gave the go-ahead to the EV1 program during his brief tenure in the early 1990s.
“I’m furious,” Mr. Stempel said in a 2003 interview. “G.M. had the technology. The lead was there. I know it.”
This week, Mr. Wagoner told Congress that G.M. would innovate once more, this time in the hope of securing some sort of aid. The company’s restructuring plan, he said, is “a blueprint for creating a new General Motors, one that is lean, profitable, self-sustaining and fully committed to product excellence and technology leadership.”
This new blueprint undoubtedly was not what Mr. Wagoner had in mind less than three months ago, when he stood before hundreds of employees and executives to mark G.M.’s centennial.
“What’s our assignment for today and tomorrow?” Mr. Wagoner asked, and then provided the answer. “Above all, it’s to demonstrate to the world that we are more than a 100-year-old company. We’re a company that’s ready to lead for 100 years to come.”
Now the question is whether G.M. will make it to its 101st birthday as a solvent company.
Nick Bunkley and Bill Vlasic contributed reporting.
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