Generous Motors

Growing up in Detroit and working for years at Chrysler, we always referred to GM as “Generous” Motors. That was tongue-in-cheek sarcasm, because in those years GM was anything but generous. In the ‘50s, ‘60s, ‘70s and beyond, they were always the guys to beat. They built a car for less than $500 in variable costs, while Chrysler struggled to get down to $1,000; Ford wasn’t much better, and AMC was the accident waiting to happen. GM management was so tough that they became known around town as the “heart attack machine”. Senior managers beat so hard on middle managers that the heart attack rate among these people, became alarmingly high. I know from personal experience: My wife’s father was chief mechanical engineer of GM’s realty and construction division and he had two heart attacks as a young man, which ultimately cut short his promising career. He was literally one of hundreds affected by the ruthless, cut-throat management environment that was GM in those years. I formed an opinion during my years in Detroit that the managers who shouted the loudest were people who had indeed risen to the level of their own incompetence.

Paradoxically, what happened to GM (as well as the others of the “big three”), primarily in the ‘70s, ‘80s and ‘90s, is that they actually did become “generous”, for all the wrong reasons. The UAW found managements’ weak spot: they just couldn’t bear to take a strike and possibly give up market share to one of their competitors. So, if the union bargained hard enough they virtually always got what they wanted and everybody laughed all the way to the bank. Management didn’t have to bite the bullet of labor strife, thereby risking their own status and inflated compensation packages, UAW officials always got re-elected, and hourly workers got ever-increasing pay checks and benefits, as did all the salaried workers who automatically received the same benefits and pay raises. So everyone was fat, dumb and happy. I can remember shaking my head at the idea that I would have a whole week off (with pay of course) at Christmas, as well as my birthday every year. I was always too busy.

So, all of this compounded over the years to the point that the American auto industry became so financially cumbersome, poorly managed, and virtually controlled by the UAW, that they literally could not compete with foreign manufacturers building cars with non-union U.S. labor. Can you imagine a labor provision requiring a company to keep thousands of laid-off workers in a “jobs bank”, doing community service for years while collecting full pay and benefits? I can’t, and neither can the Japanese manufacturers down the road.

I am often asked if I believe GM can avoid bankruptcy. My answer is always: “They shouldn’t”. In my view, Chapter 11 is the only way to save GM from themselves and the union. Like the airlines, management in bankruptcy can eliminate ponderous salary and benefit provisions (and the jobs bank!) once and for all. Also, it presents a once in a lifetime opportunity to bring fresh management thinking to an industry that has always been run by people who grew up in the business; usually in the same company. Nepotism has also run rampant, from the shop floor to top management. Note the Fords, who always seem to rise to the top job at Ford in times of strife, whether or not they are competent (usually not). In my view, this inbred management tradition is the primary reason they haven’t made good product decisions. People in Detroit really don’t get it about product, and that isn’t something new. So, if the bankruptcy court is wise, they will cede management of a bankrupt GM to outside professionals, who could care less about “how we have always done it around here”. Also, that ultimate old boys club, the dealer network, needs to be changed drastically, but no one in Detroit has ever been strong enough to tackle it. Jacques Nasser, who was CEO of Ford several years ago, began making noises in that direction, just before he was sacked and succeeded by the ultimate PR man, Bill Ford. In the world of the internet, cars should not be sold from vast inventories held by dealers and floor-planned by captive auto finance companies. This is a huge misuse of capital, but very convenient for keeping assembly lines cranking when cars aren’t selling. Cars should be ordered on-line and delivered “just-in-time”, and dealers should be delivery and servicing agents; obviously very different from today and probably only achievable “in extremis” of bankruptcy. By the way, I’m waiting for the Japanese to figure this one out.

Frankly, I have very little hope that much of this is going to happen. I’m pessimistic about Detroit and I do not believe the U.S. auto industry is too big to fail. However, we have no way of knowing when the band-aids will fall off. In the meantime, we will continue to insulate ourselves as much as possible from financial shocks by owning value-creating companies vs. value-destroyers like Ford and “Generous Motors”. And, yes, there are others out there, but none quite so bad.

Let me know what you think.

Jack Falker

Note: At the time of publication, neither the clients of FalkerInvestments Inc. nor Jack and Peter Falker held long or short positions in GM or F.