03 December 2018 13:22:01 IST

A management and technology professional with 17 years of experience at Big-4 business consulting firms, and seven years of experience in high-technology manufacturing, Rajkamal Rao is a results-driven strategy expert. A US citizen with OCI (Overseas Citizen of India) privileges that allow him to live and work in India, he divides his time between the two countries. Rao heads Rao Advisors, a firm that counsels students aspiring to study in the United States on ways to maximise their return on investment.   He lives with his wife and son in Texas.  Rao has been a columnist for BL on Campus from the year the website was launched, in 2015, and writes regularly for BusinessLine as well.
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The abject failure that is General Motors

The world’s best companies can fail simply because a few leaders make bets that won’t pay off

The name General Motors (GM) conjures a picture of something great. For many years, it was the world’s largest private employer, until that title went to Walmart. GM was also the world’s largest auto-maker (by market share) until it ceded that privilege to Volkswagen, Toyota and Renault Nissan.

The only constant in GM’s legacy is that it has been in decline for nearly 50 years. Nothing it decides ever works. If GM were a college student, it would be expelled from campus for poor performance. If it were an employee at a company, it would have been fired a long time ago.

The latest news is that GM is shuttering five major auto plants in North America, laying off nearly 14,000 employees. This at a time of unprecedented prosperity and economic growth in the United States. GM has invited the wrath of President Trump, who lobbied heavily for the auto industry to keep plants in the US, even renegotiating the US-Mexico-Canada trade agreement to protect domestic manufacturing.

Textbook mistakes

GM’s problems are textbook examples of what happens when a company has a record of consistently being helmed by poor management. In the 1980s, GM invested over $5 billion in industrial robots through a tie-up with Japan’s Fanuc. But rather than reap rewards from automation, GM entered into bad contracts with the United Auto Workers union. The contracts were so stringent and the work rules so inflexible that the slightest job change on the plant floor required union approval. When workers were laid off due to plant inactivity, they were entitled to collect up to 90 per cent of their pay. Engineers continued to design boxy cars that didn’t excite customers. Production quality fell because of a hostile UAW workforce that didn’t particularly take pride in building the world’s best cars.

And there were so many competing models and brands, with little product differentiation, causing confusion among customers. GM’s market share fall steadily. To avoid another fall, GM began to offer heavy incentives. This strategy worked for a while but when it withdrew the incentives, foot traffic at its showrooms decreased. GM had done the worst thing a company can do — train its customer base to always expect discounts.

There were other messy management decisions as well. GM bought Opel in Germany and Vauxhall in the UK, and then sold both of them for a loss. It bought a stake in Suzuki, and sold that too. The company bought a 49 per cent stake in Isuzu and then divested itself of most of it. Along the way, GM bought and sold EDS, Hughes Electronics, AC Delco, Delphi, Allison Transmission and GMAC. It entered the Indian market with a bang (remember the Tavera?) and then made a silent exit. While corporate acquisitions, spin-offs and market exits are nothing new, the number of times GM has reversed its decisions shows how poor its management is.

Bankruptcy the only option

The company began to rack up losses. In just four years, from 2005 to 2009, the company netted $51 billion in losses. Any company other than GM would have entered the history of defunct companies in 2009. The situation was so bad then that it was bleeding hundreds of millions of dollars in cash every single day. Because of the financial crisis, no bank had the money or the willingness to extend billions of dollars of credit to it. Executives descended on Washington, begging Congress to lend it money from the US Treasury. How could a company be so badly mismanaged?

In June 2009, GM filed for bankruptcy with the assurance that the US government would bail it out with a cash injection of $50 billion, in return for about two-thirds ownership of the company. The government’s priorities were to save the automotive sector and the millions of jobs that were at stake. Meanwhile, bankruptcy was the only way GM could be saved from its onerous contracts with labour unions and car dealerships, because all those contracts can be shredded in bankruptcy court. The restructuring package came with lots of conditions. GM had to forever close its Oldsmobile, Pontiac and Saturn brands, focussing on only four brands — Chevy, Buick, GMC Truck and Cadillac. The government also bailed out the ancillary auto parts industry to a tune of $35 billion.

Despite such unprecedented support, GM now says that it badly misjudged the American market for automobiles. Again. Americans no longer buy cars, GM says, and prefer SUVs. This is true, but cars of outstanding quality from other manufacturers continue to sell. In 2006, the Honda Accord sold 355,00 cars in the US. In 2016, it sold 345,000 cars, an extremely small change over a decade of consistent high sales. The case of the Hyundai Sonata is even better. In 2006, the Sonata model racked up about 150,000 cars in sales; in 2016, sales improved to nearly 200,000.

Is EV the future?

GM stopped making cars that customers want buy — in terms of price and quality. Although the quality of GM cars has improved significantly from those lemons that it sold in the 1980s, the depreciation of GM cars is a lot steeper than Honda or Toyota models, reflective of poor reliability after the initial 90 days of ownership.

So, who is to blame? Not the workers who assemble cars but the white-collared employees who make strategic decisions, and the engineers and marketers who design the cars.

GM contends that electric vehicles and autonomous vehicles are the future, and has decided to invest billions in these projects. Good luck with that.

The electric vehicle market is heavily subsidised, to a tune of $7,500 in rebates, by the government. If not for the rebates, EVs would never survive. GM admitted as much when it announced this week that it is ending production of the Chevy Volt, an electric-gas hybrid launched with much fanfare in 2010 and touted by former President Obama as the car he would buy as soon as he left the White House. (For the record, Obama never bought the car.)

That the EV market is on life support is without question. Look at Tesla. Everything about Tesla was subsidised by the government. Its battery factory received taxpayer funding. Each car out of the lot received customer rebates paid for by the government. Yet, in the 15 years since its birth, Tesla has not made a single dollar of profit.

There’s a lesson here for B-school students. Bad corporate decisions always have bad consequences. The world’s best companies can fail simply because a few leaders make bets that won’t pay off. GM is but one story. GE is another. But that’s for another day!