Why GM's bankruptcy matters
Filed under: Company News, Economy
Our formerly weak peers are picking up the pieces of a once world leading auto giant. That's the latest chapter in a story which ends on Monday with the nearly guaranteed bankruptcy of General Motors (GM). In a loss to Italy's Fiat, a Russian bank and a Canadian auto parts makers are poised to buy GM's European operations. Does it matter?
GM's pending bankruptcy is an example of how success leads to failure. And failure is fine in an economy that thrives on creative destruction -- the doctrine that growth springs from industrial churn. That's because for every business that fails, creative destruction dictates that there ought to be 10 new ones scrambling to snag its customers and make better use of its people.
But the U.S. has strayed from that vision of creative destruction. Now we can't even fail right -- we have companies that are simply too big to fail without massive government intervention. Our biggest banks have gotten trillions to keep them from failing and two of our three auto giants are failing with the aid of billions in taxpayer money.
More importantly, the great engine of U.S. economic growth -- our system of venture-backed innovation -- has been nearly snuffed out for a decade by too little technological innovation and a dormant market for venture-backed initial public offerings (IPOs).
Meanwhile, GM's deal to sell its European operations should help speed up its pending bankruptcy. GM's two million vehicles a year European business -- including Germany's Opel and Britain's Vauxhall -- will merge with Magna, a Canadian auto parts maker, giving GM a 35 percent stake in the new company, with Sberbank, a bank controlled by the Russian government, taking 35 percent, Magna holding 20 percent and Opel's employees controlling the remaining 10 percent. The deal will save 25,000 German jobs and let Magna sell 500,000 cars in Russia.
Why did GM fail? It was too successful for too long and its managers did not pay attention to changes in consumer tastes, in the competitive environment, and in technology because all these changes would have required GM managers to change.
And it stopped making better cars than the competition -- instead using cheap ones as a delivery system for loans. As I posted back in January 2006 when the economy was in relatively good shape, one of the most dramatic examples was Ford (F) which specialized in using cars -- on which it lost $4 billion in 2005 -- as a delivery system for car loans on which it earned a $6 billion profit. GM's results were similar.
GM's failure to make cars that people wanted to buy -- more than those of Toyota Motor Co. (TM) and its peers -- was the ultimate management mistake. So when finance -- which had became the tail that wagged the U.S. auto industry dog -- collapsed, so did the industry.
If America has any hope of growing again, it needs to spur more startup companies -- electric car maker Tesla is one that, despite its financial troubles -- comes to mind. When GM got started in 1908, it was buying up such startups to create a full-line of cars spanning the economic life of a family -- from Chevrolet to Cadillac (interestingly, these economic bookends will be all that remains of the new GM).
GM's bankruptcy, almost 101 years after its founding, marks the pinnacle of the destruction part of the creative destruction formula. Now we need lots more of the creative part.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
5-30-2009 @ 11:44AM
Donovan said...
If a car manufacture produces a vehicle of exceptional quality, reliability, style, fuel efficient, at a reasonable price. The vehicles will sell. Its simple. You don't use a bunch of plastic parts and thin metal. Put the name Cadillac on it. And expect consumers to pay $62.000 for it.
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5-30-2009 @ 4:31PM
James Raider said...
UNIONS RUNNING GM. Perfectly wonderful.
Obama’s ideology is blinding him. His dearth of understanding on economic matters is harmful to the nation, and the manipulation is pathetic to watch.
http://pacificgatepost.blogspot.com/2009/05/obamas-not-so-private-economic.html
Wall Street is quietly cheering and encouraging the moves of a neophyte CEO. You would too, if you controlled the game.
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5-30-2009 @ 6:08PM
frank said...
Don't bet on the Creative part since most small companies are starving for capital resources.................there seems to be a
scarcity of $$$ for promising companies mostly because the
Venture Firms who can support them really just want to take
them over and force out the innovators who create them. Some of these small companies will move to other geography if they can find captial to grow...................politicians and investment
bankers talk a good game but actually provide very little in the
way of leadership or balanced financing.
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5-31-2009 @ 12:57AM
grr said...
Partially agree with this. We DO need innovative companies. Tesla and other start-ups are EXACTLY what we need. Our problem is not Unions, but few large companies that are ran by poor managers. Worse, we are about to ask the same management that got us here to decide what lines to keep. BAD CHOICES ALL AROUND. Heck, GM is now backing a Korean battery that is KNOWN to have issues with fire and even explosions.
Our best bet would be to finance new electric cars AND battery companies, all of which produced in AMERICA. Secondly, we need to rethink Chrysler and GM. It is far better to break these companies up, rather than simply allow them to be sold off to other large foreign companies. If we break up GM/Chrysler into say 5-6 car companies, then we will see one or more of these survive. In fact, with new management in these, and perhaps moving some out of detroit, we are likely to see LOTS of GROWTH.
Two that I would like to see survive is Hummer and Saturn. Saturn is PERFECT for PURE electric cars. For small cars, skip the concept of serial hybrids. BUT, Hummer is PERFECT for Serial Hybrids. In particular, a H4 would be a small jeep size vehicle with a single small motor/generator combo that charges batteries that would last say 20 miles. The motor/Generator should IDEALLY be a single unit that is dropped in and pulled out for servicing. Then the H1-H2 should have 2 of these units in them. That would allow a LOT of electricity to be made. The military will be VERY INTERESTED IN THAT. So will construction companies, or anybody who wants a generator on site. By having 2 units in there, you have redunancy in the generation side. Lose one and not a big deal. Worse that happens is that you have to move slowly. If the batteries can go 10-40 miles, then a patrol can run quietly in dangerous areas, while charging in others.
The fact that GM does not do these, SHOWS lack of leadership.
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5-31-2009 @ 8:44AM
Robert VanderLaan said...
Peter Cohan could not be more wrong. I was in the Michigan Legislature from 63-82 and saw the government attempt to run the auto industry with unreasonable requirements. Also the UAW was more concerned with wages, pensions, and health care than the future of the company.
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5-31-2009 @ 9:32AM
rob said...
What is going to happen to my mothers pention $ that my dad worked for 43 yrs.?
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5-31-2009 @ 8:54PM
Mary said...
My husband and I worked and saved over $300,000.00 for our retirement and invested in the "SUPPOSED" no 1 Car Maker in America. If the Number One heart beat of America can fail, they can make any company go bankrupt and it might be your Hard-earned money next. GM and Obama are just a bunch of thieves and I wouldn't take a car from GM if it came totally free and insured. YOU are RATS to take our life savings and leave us broke. We are 70 now and who will hire us. We will be losing our home we worked years for and have to go on public assistance for the first time in our lives. THANKS OBAMA and GM. Yes I will buy another GM, YEAH RIGHT! I have purchased my last GM ever I hope the public does the same. If they are stealing our money they need to go away, and not come out smelling like a rose. I say NEVER NEVER buy anything owned by GM or its affiliates.
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5-31-2009 @ 9:04PM
Mary said...
America LETS SHow GM the REAL HEARTBEAT of AMERICA and Let US NOT LET THEM GET AWAY WITH THIS CRIME. STICK together and NEVER BUY GM ANYTHING.
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6-01-2009 @ 3:32AM
Tom said...
It is amazing that we can put men in space to fix an orbiting telesope but we can't develop a new gasoline engine that gets 75 mpg highway and 50 in town right here on earth......
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6-15-2009 @ 7:31PM
Julius Camelio said...
Why didn't Obama let G.M. go bankrupt a couple of months ago? He could have saved a few Billion dollars of our money.
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