Nearly 100 years ago Pierre DuPont, his financial sidekick, John J. Raskob, and Alfred Sloan decided to logically reorganize and simplify General Motors’ vast automotive divisions. Sloan would come up with the concept that the corporation should offer “a car for every purse and purpose.”
Henry Ford, on the other hand, was still caught up in his dream of motorizing everyone in America; to him that meant one thing and one thing only: getting the famed Model T’s price as low as possible. While it’s true that Ford did put America on wheels, he failed to notice or simply ignored America’s emerging new middle class. Ironically, his was the spark that had created it; but he didn’t pick up on the fact that those newly flush families no longer wanted to own a bare-bones Ford.
Sloan had a different idea. He split the corporation into divisions that would offer products tailored to follow the lifespan of a family, from younger adults pinching pennies to lower middle management, upper management, educated professionals, and CEOs. And with that GM’s five brands —Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac — were given their marching orders. It was a system that worked almost flawlessly until it was intentionally dismantled by the short-sighted. By the end of the 1920s GM relegated Ford to permanent second place; Walter Chrysler, formerly head of Buick and Sloan’s lifelong friend, would copy Sloan’s automotive stair steps to success in his own Chrysler Corporation.
By 1960, almost half of all cars sold in America were built by General Motors. By then Alfred Sloan was retired and writing his autobiography, which GM did everything it could to keep out of publication. But in 1964 Sloan’s My Years with General Motors was finally published, and it’s been available for sale ever since. It’s a book that Bill Gates admits he’s read more than once, but apparently few if any heavyweights at GM today have opened it. Or if they have, they forgot everything in it.
It’s Not Broke; Don’t “Fix” It
The big secret that Sloan related in his book was that at no time in GM’s history did all five of its car divisions make money at the same time. But that was fine with Sloan; after all, GM was a profit powerhouse. If one or two divisions lost money in any given year, that was OK; people were still buying GM products. Today’s vehicle might lose GM money, but their next purchase could well make GM flush again. The point? The array of choices, profitable or not, kept car buyers in the GM family. So the automotive stair step model to fiscal prosperity held for GM.
When Roger Smith took over GM nearly 40 years ago, however, he combined the manufacturing divisions to save money, and divisional general managers lost the power to define what their future product might be. It was the GM era of cookie cutter products for all divisions. For his part Smith was sure all he had to do was have GM build a better Honda Accord and GM would be back on top again.
The problem was that Smith didn’t have the patience to accommodate the engineering types who understood how to fine-tune GM’s product line. Alex Mair, GM’s head of advanced engineering, knew that Honda’s secret to a flawless four-cylinder engine was simple: perfectly controlling production specs on the individual parts. But he was ignored.
When Smith made the decision to produce cars jointly with Toyota in California — where Toyota taught GM how to build vehicles like it did, as a pro-active defense against American cries of protectionism — GM managers said the corporation turned a deaf ear when they tried to move Toyota’s superior production system into other plants. GM floundered, as it took decades for Toyota lessons to filter out to other production facilities. Ironically, as it was forced to shutter Oldsmobile, Pontiac, Saturn, Hummer, Opel, Holden, Saab, and other divisions, GM was finally building the finest cars in its history.
Sadly, one trajectory that Smith put in place that’s still flying is the mindset that anything that loses money needs to be jettisoned now; by maximizing profits today, Smith believed, those extra dollars would prepare the company for the future. For the record, Roger Smith spent $80 billion on trying to create high tech, but penny-pinched on things the public wanted in a current vehicle.
Recently GM Authority, a news blog about everything General Motors, ran a short story on current CEO Mary Barra, along with two quotes. “There was a point in time where we were everywhere for everyone with everything,” which sounds a lot like the original “car for every purse and purpose” concept. But thenshe added, “We had to say, OK, where are we deploying capital that’s not generating appropriate returns? Once you start to believe in the science of global warming and look at the regulatory environment around the world, it becomes pretty clear that to win in the future, you’ve got to win with EVs and autonomous technology.” And with those sentences Ms. Barra has proven that she has no idea how Sloan’s GM went from almost going out of business twice to become the world’s largest corporation within two decades.
Moreover, she’s cast her lot with Roger Smith’s business illogic. Then again, she came up in General Motors during the Smith reign of error; maybe it’s all she knows.
Waste Not, Want Not
In 1998, about every other day on my automotive news report on KLIF, there was one story or another about the imminent future of hydrogen fuel-celled vehicles. At the turn of the century those proposed units had gained a predicted deadline for mass introduction: by 2010 we’d all be buying them. But little problems, admitted publicly, suggested that this wasn’t going to happen at all. Even Honda said in that period that its costs to build a hydrogen fuel-celled vehicle were in the hundreds of thousands per car, but once it got the cost under $100,000 Honda would offer them to the public. Really? That would give buyers a choice between spending $18,000 for the top-of-the-line Civic, which got great mileage and could be filled up anywhere or paying over five times that amount for a Civic-sized car that ran only on hydrogen — for which America offered fewer than 10 locations nationwide to refuel.
In early 2005 Gary Cowger, then president of GM North America, asked me to write the outside review for General Motors on the prospects for hydrogen fuel-celled vehicles. I simply channeled my inner Alfred Sloan. Knowing Sloan’s history with GM, I suggested that one day the world actually would be in hydrogen fuel-celled vehicles, because it’s the most abundant element in the universe, although it takes energy to split it off from whatever atom it’s attached to. But, added the cost of creating that automotive future might end up far greater than what we spent sending men to the moon.
Alfred Sloan didn’t believe in doing such moon shots at GM to create the future; he understood that creating new technology was extremely costly. True, Charles Kettering, GM’s in-house inventor, gave us leaded gas, Freon, and the modern refrigerator and air conditioning, but much of his work was in building a better engine. (Kettering’s group created Freon in the early Thirties, but it wasn’t until 1971 that half of all new cars sold in America had factory air conditioning.) But when it came to things like safety glass or unibody construction for cars, Sloan saw no sense in wasting money on that because everyone else was working on it, too. Sloan knew it was cheaper to let someone else spend their big bucks creating technology. Then, when others perfected those devices, GM could simply pay minimal patent rights to produce whatever it was. Sloan knew it was best to spend the money on motors and styling, because at the end of the day that’s what the car-buying public cared about.
This was exactly my point in that outside review for GM on fuel-celled vehicles: Let someone else waste all that money perfecting that system. If they’re successful — and once the market for those products exists in profitable volumes — then either buy the gear from a parts supplier or simply pay the license rights and build it yourself. Thereby GM would save untold billions in development for a product that might not be financially viable, or sell in large numbers, for decades in the future.
I don’t want to take credit I was never given by GM, but within a few weeks Rick Wagoner and Bob Lutz said the hydrogen fuel cell program and cars at GM were dead. Instead, the company would create a series hybrid electric, which became the Chevy Volt. You will notice all of the other car companies in the world virtually stopped the heavy expense of developing those vehicles. Honda delivered a few of its Clarity models; Toyota and Hyundai did the same. But the smart money says that particular future for mobility is still decades away from being reality.
Ironically, far too many automotive executives are in fact decades out from reality, too.
Next week: Mary Barra says she knows what wins in the future. Sure.
Ed Wallace is a recipient of the Gerald R. LoebAward for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: firstname.lastname@example.org