Why GM failed: 1. Bad financial policies
Filed under: Company News
Why did General Motors (GM) fail? The first reason is bad financial policies. As I posted, for too many years GM used cheap cars as razors to sell consumers a monthly package of razor blades -- in the form of highly profitable car loans. GM has been a finance company that happened to sell cars.
In 2005, GM limited its $6 billion in vehicle operating losses due to the $2.2 billion it made financing those vehicles. Naturally, the two Harvard MBAs who drove GM to bankruptcy -- Rick Wagoner and Fritz Henderson -- both rose up from GM's finance division -- rather than its vehicle design operation.
But financial engineering ended up driving GM into bankruptcy years ago -- a look at its balance sheet over the last decade reveals that GM has been bankrupt -- in that its liabilities have exceeded its assets -- since 2006. And this condition has gotten worse every year from a negative net worth of $5.4 billion in 2006 to a negative $91 billion net worth in the first quarter of 2009.
For all five reasons why I think GM failed, click here.
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)
6-01-2009 @ 10:22AM
OINKJOHNSON2 said...
I have not seen a financial statement from GM lately, but doubt that what the author says is true--that its liabilities exceeded its assets as early as 2006. If that were true, how did they continue to pay dividends as late as 2007? And, you know, Kodak did pretty well virtually giving away cameras so they could sell you the film and Gillette did likewise with the razor and razor blades, for a lengthy period of time. That is, until the competition caught on and beat them at their own game. The secret to such a strategy is to be nimble and quick, but GM (and Ford and Chrysler) bought time by over-paying its workers, promising fat pensions, health care to its burgeoning roles of retirees, etc. Thus, when Toyota, Honda, Nissan, Hyundai et al began to eat their lunch, they could not adapt to the changed conditions. Imagine going to your best workers, say 20-year veterans, and offering them $100,000 plus to take early retiement.
Sadly, in this "global economy," there is an excess of supply (probably 25 or more companies), making hundreds of different models. When many of the manufacturers are located in low cost countries, how can GM (or any U.S. company) be competitive?
Woe is me. Woe is the U.S.A.
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6-01-2009 @ 2:32PM
detroiter said...
Big, big difference between the price of manufacturing an automobile compared to that of a camera or razor blades...
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6-01-2009 @ 7:27PM
DirectionDd said...
Well I'll be, according to Mr. Cohan the unions didn't have a thing to do with it. It's hard to find the word union in the article. Huh
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6-02-2009 @ 11:30AM
David said...
This brief article simply doesn't provide any evidence to support the hypothesis that poor financial management led to the collapse of GM. Indeed if financial operations were adding $4b a year to the bottom line they were helping GM live on until sales (and finance) collapsed.
Pointing out that the two officers were Harvard MBAs is a interesting touch. Is the author trying to suggest that an MBA makes a person unable to manage a company? Does it support the main hypothesis of the article in any way? Is he trying to suggest that Harvard teaches concentration on finance (it doesn't - there are other, better schools for that).
If the author does think MBA school makes people incapable of management I'd like to see honest statistical support for the claim. I suspect that companies headed by educated people do better than those headed by uneducated people and contrary to what some believe an MBA is part of an education.
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6-01-2009 @ 10:31PM
Bullvixen said...
Ok, so the article is named "Why GM failed" Not why I think GM failed as you mentioned toward the bottom of the article.......... This is what is wrong with the same media which helped GMs demise along. The media praises the Japanese vehicles and when there is a recall on theose vehicles it is in the middle of the newspaper. When there is a recall for an American name vehicle is is usually on the front page. Go figure.
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6-01-2009 @ 10:25PM
Donald Bousquet said...
Gm's failure is due to the fact that their cars had lousy engines and lousy transmissions.. They were selling garbage and everyone in America knew it. No one at Gm wants to admit it,, so they will repeat the same mistake. it is impossible for them to recover,, they dont know what the problem was.
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