It Doesn’t Take a Nostradamus to See what’s Next for GM!

In an article published in the March 2006 issue of the Chartered Financial Analyst, I stood alone among a group of six automotive experts and declared that GM would go bankrupt by the end of 2007. As a resident of Michigan, the home of GM and the US auto industry, I am glad I was off by a year and five months. Clearly, our leaders needed the extra time to prepare for the one state depression that is unfolding now.

In 1978, GM employed more than 482,000 Michigan residents. Today, it’s less than 50,000. Yes, in the good old days, GM stood atop the Fortune 500. Today, the US and Canadian governments own 70% of its stock, and American taxpayers will invest almost $50 billion in its rescue plan. President Obama has declared, “I am absolutely confident, if well managed, the new GM will emerge. However, nothing wounded goes uphill and neither will GM, even though it has purportedly “freed” itself by declaring bankruptcy. Unfortunately, the company can’t free itself from its history or the oncoming tragedy of its future.

The key to understanding GM’s fate rests in the notion of psychological resistance. The term first arose in Sigmund Freud’s work in the 19th century. He saw resistance as the process that his patients used to defend themselves from remembering unpleasant memories or recognizing uncomfortable truths about themselves or their world. GM has been a serial resister for the past fifty years.

In the 60′s, GM resisted Ralph Nader’s accusation that its rear engine Corvair was unsafe. In Nader’s book, Unsafe at Any Speed, he asserted that the Corvair was prone to “tuck under” in certain circumstances. GM not only refused to acknowledge the veracity of Nader’s claim but also conducted a harassment campaign against him. It hired private detectives to shadow him, tapped his phone, and conducted a long investigation into his personal life (including his sexual habits). Nader eventually won an invasion of privacy suit against GM and used the money to launch his lobbying work.

GM has resisted several oil crises, refusing to dedicate itself to building a small fuel efficient car that could compete with Japanese automakers. When the first oil crunch came in the 1970′s, it responded by fielding a fleet of ugly front-wheel-drive shoeboxes. Who can forget the Oldsmobile Omega and the Pontiac Phoenix or that brand destroyer, the Cadillac Cimarron, a clone of the far less expensive Chevy Cavalier? In 1999 GM bought the Hummer line from AM General, while Toyota prepared for a 2000 launch of the Prius. Even in 2006, after Hurricane Katrina had turned Peak Oil into a household term, GM re-launched gas guzzling SUVs like the Chevy Suburban and the Cadillac Escalade. Decisions like this make one wonder if they had economists who could understand an oil price trend line.

In the 80′s, GM launched its Saturn line (a recent bankruptcy victim) and a joint venture with Toyota in California. Unfortunately, its corporate culture resisted the very expensive and hard earned knowledge gained from these bold innovations: female friendly dealers build brand loyalty (Saturn) and lean manufacturing reduces cost and improves quality (Toyota). Also in the 80′s, GM Chairman Roger Smith acquired EDS, and EDS founder Ross Perot joined the Board of Directors. Smith and Perot had a deep falling out about the company’s change-proof culture. Said Perot about GM, “When they’re in a crisis, the first thing they do is hire a consultant. Then, they have meetings to define the crisis. Afterward, they appoint a committee to talk about the crisis.”

One could go on and on about GM’s resistance, but no article about GM’s current and future demise is complete without a mention of its relationship with the United Auto Workers (UAW), the second biggest shareholder in the new GM. The UAW was born out of fire in 1937 when the UAW bested GM in a sit down strike in Flint. Over the decades the two organizations have danced together like in-laws at a shotgun wedding. The 1999 contract could have been called a mutual suicide pact. Despite warnings from analysts about escalating health care and retirement benefit costs, GM gave away the house with increased wages, health care benefits, and lush perks like tuition reimbursement for UAW dependents (up to $1500/year). But the corporation couldn’t escape the math of its largesse and the UAW’s greed. By 2005 GM had lost its investment grade credit rating and its ability to make a profit.

The fault for GM’s downfall lies within its leaders. A psychologist might look at GM’s post World War II history and wonder if its leaders were sabotaging themselves, driven by some insidious unconscious force. From Chairman James P. Roche’s 1966 apology to Nader in front of the Senate to Rick Waggoner’s woeful beggary in his appearance before Congress at the end of 2008, GM’s leaders have failed to solve problems. Sometimes they failed to anticipate problems before it arrived (Japanese competition). At other times they failed to solve problems that stared them in the face, like the 2001 decision to roll out the Pontiac Aztec, a vehicle which became a symbol of GM’s inept product development.

The big question is: will the past be prologue for GM’s future? A big clue has already surfaced. In June, shortly after declaring bankruptcy, its financial advisor (Evercore Partners) predicted a rosy future in court filings. According to Evercore, a lean, debt free GM will make a $3 billion profit before taxes in 2011. This figure will rise to $7.8 billion in 2014. These profit forecasts are based on U.S. total vehicle sales increasing from 10 million this year to 16 million by 2012. This rising tide will allow GM to expand its sales from 3.8 million to 6 million by 2014! One hates to keep returning to the psychology, but these forecasts seem delusional at best.

Over the long term, you can’t resist demographics. The US population is aging. The number of people over 65 will probably double in the next 30 years. It’s an industry maxim that older people buy fewer cars. The US economic collapse is also shifting the demographic math against GM. The destruction of $10 trillion in household wealth in the U.S. and the transformation of 401Ks into 201Ks will make it difficult to GM to retain its aging customer base – let alone increase it. In 2007 the average new vehicle purchaser was 43. In 2008, this figure rose to 48. Obviously, people are choosing a mortgage payment over a car payment. Worse yet, two of the GM’s four brands, Buick and Cadillac are locked into a dying generation. In 2008, the average Buick buyer was 68 years old, while the average Cadillac buyer was 56 years old.

Much has been written about how bankruptcy will damage GM’s brand image, not to mention the loss of GM customers through shedding the Pontiac and Saturn brands. But little has been written about the decline of one of GM’s most important customer cohorts: GM employees, families, retirees, and suppliers. In prior years, this “internal” customer base has provided nearly 50% of GM’s US sales. As GM slashes employees, suppliers, and retiree benefits, this cohort will be less and less able to purchase GM products. To date, despite billions spent on marketing and vehicle discounts, GM has not been successful in attracting enough foreign car buyers to replace its dying internal base. Again, there is the resistance problem. People don’t want to give up their Hondas and Toyotas for a GM product, and that won’t change soon.

Now that the US Treasury Department is calling the shots at GM, one wonders about the real game plan. Ostensibly, they plan to make GM profitable and make a return on their $50 billion investment. But, government officials can read the demographic charts, too. If the US auto industry continues to flounder, a likely outcome given the continuing decline in housing values and rising unemployment, Ford will go bankrupt too. Unless Ford can best the Toyota/Honda machine, Ford will be at a competitive disadvantage against a government owned, debt free GM. It’s likely that the government has already spoken to Ford about easing the company into bankruptcy. As the Obama regime has put its prestige on the line for a GM recovery, an uncontrolled Ford bankruptcy is a distraction it can’t afford.

There is a promising model for a long term recovery. In the 1960′s, the US railroad sector collapsed. Much like the US auto industry, the railroads were burdened with high labor costs, union conflicts, a declining customer base, deteriorating infrastructure, stifling regulations and excessive debt. In 1970 Penn Central Railroad went bankrupt, an event which threatened to destroy the entire railroad sector. It was the largest bankruptcy in US history, shocking the nation much as GM’s bankruptcy did.

In 1973, Congress created Conrail to save the railroads. Through the 70′s and 80′s, it poured billions of dollars into the company to keep it alive, while management right sized it. In 1983, Conrail turned a profit and in 1987, the government sold Conrail to the public in a stock offering. In 1997, the Northern Suffolk and CSX railroads agreed to purchase Conrail’s stock, and today the company lives on as switching and terminal railroad for its owners. Given the prospect of Peak Oil and escalating oil prices, Conrail might have been one of the best investments the US government made in the last thirty years. Hopefully, we will be able to say about General Motors someday.