It’s said that history does not repeat itself, but it does rhyme. In the case of the automotive industry that’s simply not true; it does repeat itself, almost verbatim, typically about every 20 years or so.
The cycle is simple: American car companies come out of a period of extreme financial duress, typically recessionary in nature. Billions of dollars in profits turned into billions of dollars in losses. So upper management is canned with the appropriate logic as to why they failed; the lower level of management is elevated; unprofitable factories are shuttered; the economy comes back, and with it the corporate profits. Of course, the new management thinks they were solely responsible for the incredible turnaround.
The downside is that often these managers honestly believe they were the only thing responsible for the turnaround; and therefore, they believe, anything they touch now will turn to gold. It never works out that way, and history shows the long line of failures who believed this time it would be different. We forget now, but for decades famed American car companies fell by the wayside, shut down by demographic shifts or poor business conditions. Packard left us in the Fifties. Studebaker shut down in South Bend two weeks before the Beatles released “I Want to Hold Your Hand,” and Chrysler almost failed in 1980.
The Chrysler story is a great place to start. Lee Iacocca, famed and fired president of the Ford Motor Company, was the person most responsible for getting the government to co-sign loans worth around $1.5 billion to keep Chrysler afloat through two back-to-back recessions. But it was a recovered economy, the collapse of the price of oil in the mid-Eighties and Chrysler’s introduction of the first-ever minivan that suddenly had Chrysler minting billions in profits.
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Iacocca, who was in fact a first-rate car guy and CEO, put out a best-selling autobiography. Rumors were floated to run him for the presidency; and his public personality was so strong and respected that it allowed him to put together a coalition to repair and restore the Statue of Liberty. So far, so good. Only now Iacocca, saying that he wanted to diversify Chrysler into other high-tech industries, quickly used $637 million of the company’s new-found minivan profits to purchase Gulfstream in 1985. Shortly thereafter he also purchased Lamborghini, thinking that his magic would put those acquisitions into the stratosphere of profitability. It didn’t.
By 1990 Chrysler had already tried to sell itself to Fiat due to its latest series of financial problems, while in 1990 it would sell Gulfstream back to Allen Paulson; that’s who had sold it to Chrysler five years earlier. With that sale Mr. Iacocca commented that it was time for Chrysler to go back and focus on its core business — that of manufacturing automobiles. Chrysler dumped Lamborghini in the mid-Nineties, but not all was lost. Iacocca also saw an opening in the late Eighties and purchased American Motors, not to get his hands on a potential new Gremlin or Ambassador sedan but to acquire the Jeep line-up.
So, when Iacocca sought to extend his management capabilities outside the mainstream auto industry, things didn’t turn out so well. In good times car executives want to diversify and in bad times they want to run back to the basics of manufacturing and selling cars.
Iacocca was not alone in that period. Roger Smith at General Motors bragged repeatedly that he was going to turn GM into a technology company; he spent the better part of $80 billion trying to make that brag a fact. Just as Iacocca was spending Chrysler’s money to buy Gulfstream, GM spent $5.2 billion to purchase Hughes Aircraft. And that was folded into the acquired Hughes Electronics, which meant that under GM’s watch DirecTV was created — but, overall, the planned synergies of aircraft, high-end electronics and the auto industry just didn’t work out the way Roger planned. Remember, the year before, Smith and GM had purchased EDS from Ross Perot, which immediately made Perot the biggest critic on the General Motors board — so much so that they had to pay our wily Texan to run him off.
All these outside purchases, designed to make GM a diversified technology company with synergies for their core auto industry, were such a failure that GM finally managed to sell off EDS in 1996, Hughes Aircraft and military operations in 1997, Hughes satellite operations in 2000 and finally Hughes Electronics, including DirecTV, in 2001. The headline at the New York Times read, “With Hughes Sale, GM Buries a Discarded Strategy.” The official line was that GM from then on would focus on their core business, that of building and selling automobiles. Imagine that.
So it was rather surprising when on January 10 Vanity Fair ran an interview with current GM CEO Mary Barra, in which she discussed how she has turned GM into a tech company. For the record, and not to put too fine a point on this, the term “technology” can also refer to any application of knowledge toward a particular issue. Therefore you are already a technology company if you design and manufacture automobiles. (Most CEOs seem not to know that.) But it is interesting that Ms. Barra worked for General Motors all during the period when they could have failed twice, and did spend $80 billion trying to become the world’s most diversified tech company — which ended in complete and total failure — and now she wants to try and repeat that process. Does she not remember how this worked last time? No, she’s blinded by the massive automotive profits now flooding into GM’s bank accounts, the same way Roger Smith, Lee Iacocca and others were blinded in their time.
As recently as 2005 General Motors still controlled over 25 percent of the new car market in America and last year GM lost 0.3 percent of market share, ending 2016 controlling just 17.3 percent of the market. One would think a great CEO would find profitable ways to restore GM to 25 percent market share.
That brings us to Ford and its CEO, Mark Fields. In interviews a week ago, Fields revealed that he has great plans for this company that go far beyond designing, building and selling cars: a conglomerate that touches “all aspects of mobility.” Fields was quoted by Reuters on January 15 as saying, “Our business model over many years has been about how many vehicles did we sell. Now we are looking at the ecosystem around that and essentially it’s looking at services and revenues; it’s about looking beyond just the sale of the vehicle.”
Mark, I have to stop you right there for just a second. After all, just as Ms. Barra over at GM seems to have forgotten that company’s failed bids to do things in high tech other than design, build and sell cars —nearly failing and losing 30 percent market share in the past 36 years — I should remind you that, as recently as 1999, Ford was selling 25 percent of the vehicles sold in America. Further, it was growing so fast that the smart money claimed Ford would become larger than GM in North America within a couple of years. Today Ford sells 14.8 percent of the American market; Toyota outsold you by 6,000 vehicles in December.
As for your comments on looking beyond building and selling cars to all aspects of mobility services and revenues, I will be glad to send you a link for the October 10, 1999, BusinessWeek article headlined, “Remaking Ford.” Again, a different new head of the Ford Motor Company, flush with billions in profits, wanting to diversify the company into exactly what you just said you wanted to do. Kind of.
His name was Jacques (Jac) Nasser and, according to BusinessWeek 18 years ago, Jac’s goal was to “reinvent the 96-year-old industrial giant as a nimble, growth-oriented powerhouse for the 21st century.” Nasser bought Volvo for $6.5 billion, bought Land Rover shortly thereafter, signed deals with Microsoft for its CarPoint service to make Ford a leader on the Internet, spun off its low-margin parts company, Visteon, and described a cradle-to-grave strategy of building cars and owning the dealerships, the outside repair centers, even the salvage yards for Fords past their prime. As Noel Tichy, advisor to GE’s Jack Welch, told BusinessWeek, “Nasser is positioning Ford to make a quantum leap. He wants his legacy to be that he did for Ford what Welch did for GE.” Wow.
Guess what happened?
Ford did not become the next GE. Nor did GM or Chrysler. Nasser got canned just three years later, and Ford spent the better part of the next decade undoing everything he’d put in place. When famed automotive writer Alex Taylor wrote about the 10 Worst Auto CEOs in 2013, Jac Nasser made the list at No. 9, with the comment that “Nasser tried to remake the automaker in the image of General Electric, redefining it as a consumer products company.”
GM’s Roger Smith made that same list in position No. 6, his caption also discussing his “failed diversification plans.” When the Automotive News ran a column, “Where Jacques Nasser Went Wrong,” the top problem listed was Ford Lost Its Focus as an Automaker.
During the Eighties, the Nineties and in this century, Detroit continues its boom-bust-boom cycle, always wanting to do anything but build cars when the profits from those vehicles are flooding over them. The Japanese, meanwhile, have just kept designing and building better and more appealing cars, then launching luxury car brands, then SUVs and trucks and so on. Toyota is building a huge North American campus in Plano to better handle its future expansions, while Ford is hinting that someday it wants to own an Uber-like service with its self-driving cars. GM spent half a billion dollars claiming they wanted to learn how Lyft’s Internet taxi company works, not realizing that there’s little fundamental difference between that and how GM’s own OnStar works. Really. With Lyft you push one button and a person with a car shows up; with OnStar you push one button and an ambulance appears.
What has not changed over the past 35 years is that Detroit’s manufacturers continue to make the lion’s share of their profits off large trucks and SUVs. Even Chrysler has given up trying to build exceptional smaller vehicles; it ceased production of its Chrysler 200 and Dodge Dart, the best small cars in that company’s history. So the cycle of diversification returns with Ford and GM wanting to become the next GE or whatever and Chrysler trying to sell itself to someone else. It would be nice if anyone in the automobile industry knew anything of the history of the automobile industry — especially the recent history they could easily draw on to quit making the same mistakes.
© 2017 Ed Wallace
Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, conferred by the Anderson School of Business at UCLA. He reviews new cars every Friday morning at 7:20 on Fox Four’s Good Day and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: email@example.com