Originally Published July 26, 2016
By Mike Smitka
Businesses fail all the time. Indeed a new business is lucky to last 5 years. Few notice such passings. It's more puzzling why big corporations on occasion self-destruct. They command substantial resources and have professional staff to follow market developments, and to handle operational aspects of the business with a level of sophistication and specialization that the handful of individuals in a small firm cannot hope to match. In the case at hand, General Motors (NYSE:GM) helped define not just the auto industry, from market segmentation and the annual model change to consumer finance and the management of styling. They also helped develop modern management, as the exemplar of the multidivisional company with the separation of staff and line and the use of return-on-investment accounting to allocate capital. It's appropriate that the business school at MIT bears the name of Alfred Sloan, the single most important individual in the transformation of the company from a flailing conglomerate to displace Ford (NYSE:F) after 1921 as the dominant force in transforming the industry. Market research, corporate-wide applied engineering that helped lower costs year after year, a strong dealer system - the company seemed to be all strengths. During the 1960s, it was not only the largest manufacturing enterprise in the world, but it systematically earned a double-digit return on sales, returns on investment of over 20% and returns on equity of 40%.
Yet fail GM did, maintaining high levels of investment and an overall lack of panic as it lost 2/3rds of its 1960s market share. Unlike with smaller firms, that's horribly costly not just to investors: many retirees and pension funds were GM-heavy. It was also costly to hundreds of suppliers and customers (for a car company, that means dealerships), to a quarter million or more individuals with family members who worked there, which combined to traumatize whole communities. Unlike a small business, where the owner as manager bears both responsibility and loss, most of those hurt in GM's failure were innocent participants who had no input into the decisions that led to failure, and often little ability to insure themselves against the consequences.
So why did GM decline, year after year, with little apparent concern in the C-suite? Unions weren't responsible for cars not selling and plants sitting idle. Nor were they behind poor financial decisions, from the depletion of cash reserves (the proximate cause of any bankruptcy) to investment projects that failed.
Nick Kachman's book, ably edited by family friend Ethel Burwell Dowling, provides insights into this on two levels. First, it portrays the power plays within the company at the senior management level where accumulating personal power while undermining rivals became central to the fight for promotion. While he is not particularly analytic on this, the essence seems to be that those good at this sort of infighting were highly sensitive to anything that might leave them open to attack. In particular, several key individuals took reasoned criticism of proposals via memos and discussions at committee meetings as personal attacks and not normal professionalism.
The second, and more carefully argued part of the book looks at specific strategic decisions and how (and by whom) they were made. That GM was dysfunctional is not in itself a novel insight. Covering some of the same time period there is for instance Maryann Keller's 1989 book, Rude Awakening: The Rise Fall and Struggle for Recovery of General Motors. This, however, is a top-down analysis, highlighting costly strategic mistakes, but not providing much insight into why and how they were made. Others, such as Steve Rattner in Overhaul: An Insider's Account of the Obama Administration's Emergency Rescue of the Auto Industry or Bill Vlasic's Once Upon a Car: The Fall and Resurrection of America's Big Three Automakers - GM, Ford, and Chrysler, provide insightful accounts of top executives and decisions more proximate to the Detroit Three's 2008-2009 crisis. Both - particularly Vlasic - point to toxic corporate cultures. They do not, however, provide insight into how those developed and how they molded decision making. By focusing on detailed examples, Kachman makes a major contribution. At the same time, that focus on detail makes it a challenging read.
Paint matters, and that is his story. As it happens, I've been in paint shops at Toyota (NYSE:TM), Ford, GM and BMW (OTCPK:BMWYY). Paint was the big barrier to mass production in the 1920s; Henry Ford could assemble vehicles with great efficiency, but he was unable to shorten the weeks it took to get the paint on car bodies to dry. The development of the all-steel body by Budd and Chrysler in the 1920s changed that, as the entire body could be put in an oven to dry in hours. DuPont's new paints helped.[note] Almost a century later paint shops remain the most expensive single section of an assembly plant, are the most energy-intensive section of a plant, are toxic, are the bottleneck in the flow of production, and are critical to visible quality. Kachman does a good job explaining that context.
So... paint remained a headache, and it was also a target of environmental regulations, a mindset reflected in Richard Nixon's creation of the Environmental Protection Agency, which began operating in 1970. Paint goes on best when it is in a solvent, and at GM those solvents were volatile organic compounds (VOCs). They could be mitigated through better paint formulations, paint processes that got more paint onto vehicles and less on the floor, through sealing paint shops to keep fumes contained (which of course in a dust-filled factory is a good idea anyway), and through burning off the VOCs in a smokestack (and collecting waste paint and neutralizing it). But that was not the route GM took. Instead they wanted to move to water-borne paints that would eliminate the VOCs entirely.
The senior executives in charge fixated on using such paints. Those technologies now exist, but they did not in Kachman's day. With EPA deadlines looming, executives pushed ahead, without waiting for the development work that would "prove out" the processes. They weren't chemical engineers, and brushed off the concerns of Kachman, who by that point had almost 2 decades of experience and was justifiably worried that the commitments GM made would be impossible to keep. They were in addition expensive commitments, because shifting to water-based paints would entail closing assembly plants while paint shops were rebuilt. But by this time, two key senior managers had bought in, one little-known outside narrow industry circles, and one of whom was the future CEO, Roger Smith. To cancel the project would jeopardize their careers. Neither chemistry nor expense mattered. Soon GM was committed to spend roughly $45 billion on new and renovated factories, with scant attention to the details of which plant would be built, when and how that would affect the production of key products. Again, Maryann Keller and others had pointed out the huge investments made under Roger Smith in plants that never operated to potential. But her focus was on untried automation and failed product plans, and not on paint. As Kachman details, the addition of robots was an afterthought, something that could be done at the same time as the new paint shops to give GM a second "leapfrog" technology, while the product plans went awry in part because of the lack of planning on which plant would be redone when, leading to premature product terminations, premature introductions, or models kept in production too long. Keller and other contemporary critics focused on the robots and the cars that sold poorly, and thereby vastly underestimated the magnitude of paint decision that had more wide-ranging ramifications. They thereby also underestimated the poisoned nature of politics at the top of GM.
I won't provide more detail; I want you to read Kachman, not me. So far I have passed the book on to retired executives from a major global automotive paint firm and to a very senior person from one of GM's rivals, who worked directly with 4 CEOs. I'm a paint dilettante, and while to me Kachman comes across as someone who knows his stuff, my chemical engineering friend could attest that Kachman really does get the technical story straight. Then there's the more general management story. As my auto exec friend put it, someone who preferred overseas assignments to the politics at corporate headquarters (to which he was repeatedly promoted), "and I thought we were f...d up."
I may not use Kachman's book in my teaching, because my class is only 4 weeks long and I need to prep students in the first week for a series of visiting speakers and visits to auto companies, ranging up and down the value chain from suppliers to salvage yards. But I'm glad I stumbled across his book, thanks to meeting his editor/co-author Ethel Burwell Dowling, who ended up in the same rural Virginia community as myself. I will re-read it at some point, and keep recommending it to others in the industry. I hope to meet Kachman, too, and will ask Ethel for an introduction prior to my next trip to Michigan.