This all happened back in 1948. I was a young (26 year old) Chevrolet (GM) dealer in a small town (population 650) in Michigan. At that time General Motors was a vibrant, successful company in a very enviable position.
1. Their market share was almost exactly 50%.
2. Their return on equity was over 20%
3. They had unlimited power over their dealers. Having a GM franchise, including my own, was a guarantee of being profitable. GM canceled dealers at will and automatically whenever the owner died. They appointed whomever they wanted as the new dealer. In the best locations this was often a retiring GM management executive.
GM had two major problems.
1. The government had made it clear that if GM exceeded 50% of the market it would be broken up as a monopoly. The government did not trust GM and GM had many enemies among the liberal members of congress.
2. The UAW and the auto manufacturers hated each other. The UAW had a lot of power and the government favored them over the manufacturers.
Back to my situation; The Chevrolet marketing department, under a sales manager, oversaw the dealers. The department was organized into five large regions, each with a regional manager. The regions, in turn, were divided into a number of zones, each with a zone manager. Each of the zones had a number of "factory reps." Each of the reps was responsible for a number of dealers.
My small dealership was in the Detroit Zone which was in the Chicago Region. Occasionally all the dealers in our Zone, small and large, went to a sales meeting in Detroit. Among other things, at my early age, I remember being reminded about how fortunate we were to be Chevrolet Dealers. We had the 2nd most valuable franchise in the United States. We were told that the only franchise more valuable than a Chevrolet Dealership was one to bottle Coca Cola. I believe that was true.
Normally my only contact with GM was with my factory rep who visited me on a regular basis. He was a nice young man, not much older than me. And we got along quite well. One of his jobs was to make sure that I was fulfilling my responsibilities to GM as decided by GM.
On one visit my rep told me that I needed to buy a film projector to show films of the new models when they were announced. I explained that for a dealership in a village as small as mine it was not practical to operate the projector. He said he understood, but his job was to make certain that 100% of the dealers in his area bought a projector.
We both knew I could never use it. I asked him what would happen if I did not buy a projector. I vividly remember his words and the way that he said them. They were "I can't make you buy one, but I can sure make you wish that you had." I knew that he was right and I became the proud owner of a new film projector. This was indicative of the attitude throughout GM so I knew that I did not want to spend my entire life in that situation. I sold the dealership shortly afterward.
Given their situation it is not hard to understand GM's behavior. They could meet their 50% of market share without even trying. In fact the opposite was true. They were not allowed to try. They no longer could compete as most other businesses need to compete.
Think of a dominant sports team that was not allowed to win more that half of its games or they would be broken up. Whom would the owner and manager put on the team and how hard would they push the team to perform? How could that team remain ready for new, first class competitors?
Meanwhile, every few years the UAW union would decide which one of the three large auto companies to negotiate with to get more salary and benefits for the workers. Quite often they would go on strike against that company for as long as necessary. Whatever new benefits the union won from that company would almost automatically be granted by the other two companies. They knew the union would strike against them until they met the same or more demands.
The companies had no reason to stand up to the union and suffer a long strike. GM, the market leader was also the price leader. They could set prices as high as necessary. There was no effective competition and the government appreciated any new benefits the workers were able to attain. In fact GM had to set prices high enough to allow the other two companies to stay in business. Otherwise GM would exceed their allowable 50% market share.
Everyone, including the union, understood the situation and they were all happy with it. Everyone was doing fine and no one foresaw the competition from foreign auto manufacturers. Initially the few pitiful attempts of the foreign companies were meaningless. American buyers were not interested in the small, underpowered cars that were exported. They might be OK for Europe or Asia but they didn't sell many in the U.S.
The market for small cars in the U.S. was not worth pursuing for U.S. auto companies. This was not just their opinion, it was the truth. Who among us, at that time, foresaw that foreign companies could design and manufacture large cars too? And who expected that the market for small cars would grow as it did? And who realized that the auto companies had painted themselves in a corner with the UAW so that they could never economically compete against the foreign companies. I certainly did not and I don't think any of you reading this did either.
So, added to this are a few other new problems for U.S. auto companies:
1. Costs to ship automobiles by boat dropped dramatically. It is cheaper to ship a car to Los Angeles from Japan than from Detroit.
2. Tariffs on importing cars from Europe and Asia have dropped. From Mexico and Canada they have disappeared.
3. Foreign companies have learned how to cheaply assemble their cars in America out of foreign parts, income tax free. They shift their profits abroad by making sure the U.S. assembly plants just break even. They also get all kinds of freebies from our local governments for locating their assembly plants in their localities. They are not burdened with pensions and health benefits for retirees.
4. Unlike the U.S., the foreign governments, their auto companies and their auto workers have cooperated to make sure their products are efficiently produced and can undersell equivalent U.S. products.
5. China looms with its automobiles and possibly India, getting ready to undersell Korea, Japan and Europe, as well as us.
Where are we? What can we do? What is going to happen? Who is to blame?
1. The three U.S. companies are almost broke and are hemorrhaging what little capital they still have. Under the present circumstances giving them more capital will only slightly delay their demise. With their current union contracts and obligations to their retirees, they have no future for themselves or any potential buyers. Chrysler found that out the hard way.
2. Rationally the government, the companies and the unions should sit down together (as they do in Germany and Japan) and determine what they each need to do to keep the companies alive at the least cost to our country and then do it. Unfortunately there is no chance of that happening here. Other than that we can give them more taxpayer money as is proposed.
3. The money the government gives them will be welcomed by the union workers and retirees, the management employees, the suppliers and their employees and the localities where the workers are employed.
4. When that money is gone, we will be right back where we are now.
Who is to blame depends on many things and many preconceived notions:
1. It could be the poor decisions made by company managements who painted themselves into this corner. I think they reacted as you and I would have under the circumstances.
2. It could be the unions who found a way to earn more than foreign workers or other U.S. trades doing equivalent work. They painted the companies into the corner. Who can blame them?
3. It could be the foreigners who cooperated and worked together to produce better products at lower costs. You can't criticize that.
4. It could be that workers in other countries were needier or hungrier and willing to work harder for less pay. That could be expected.
5. It could be karma. Who could know that shipping costs and tariffs would go so low? Such things happen.
6. Perhaps it was our government and the law of unintended consequences. Who could know that keeping a vibrant company from competing so they would not become a monopoly could lead to the destruction of our most important industry? I certainly didn't know how bad it would end. I did not understand it at the time. I now believe our government was the snowball that started the avalanche that happened. Certainly it was not intentional.
7. Blaming the current GM management is certainly not productive and probably not fair. They weren't even born back then. Expecting them to solve the problem without going bankrupt is wishful thinking. It's too late.
8. Unless we radically change, the Chinese will make sure that even worse things are ahead for our automobile industries, if that is possible.
In way of background, I have an Engineering degree (MIT and USNA) a Master's degree in International Economics and a Ph.D. in Management from UCLA. I have taught these subjects as an associate Professor for over 30 years at UCLA and other Universities. I was a Naval Officer in the Pacific during WWII. I am also an inventor with several patents and an entrepreneur, having started several successful companies operating worldwide. I have sold the companies to exchange listed firms and am now retired.
1. Their market share was almost exactly 50%.
2. Their return on equity was over 20%
3. They had unlimited power over their dealers. Having a GM franchise, including my own, was a guarantee of being profitable. GM canceled dealers at will and automatically whenever the owner died. They appointed whomever they wanted as the new dealer. In the best locations this was often a retiring GM management executive.
GM had two major problems.
1. The government had made it clear that if GM exceeded 50% of the market it would be broken up as a monopoly. The government did not trust GM and GM had many enemies among the liberal members of congress.
2. The UAW and the auto manufacturers hated each other. The UAW had a lot of power and the government favored them over the manufacturers.
Back to my situation; The Chevrolet marketing department, under a sales manager, oversaw the dealers. The department was organized into five large regions, each with a regional manager. The regions, in turn, were divided into a number of zones, each with a zone manager. Each of the zones had a number of "factory reps." Each of the reps was responsible for a number of dealers.
My small dealership was in the Detroit Zone which was in the Chicago Region. Occasionally all the dealers in our Zone, small and large, went to a sales meeting in Detroit. Among other things, at my early age, I remember being reminded about how fortunate we were to be Chevrolet Dealers. We had the 2nd most valuable franchise in the United States. We were told that the only franchise more valuable than a Chevrolet Dealership was one to bottle Coca Cola. I believe that was true.
Normally my only contact with GM was with my factory rep who visited me on a regular basis. He was a nice young man, not much older than me. And we got along quite well. One of his jobs was to make sure that I was fulfilling my responsibilities to GM as decided by GM.
On one visit my rep told me that I needed to buy a film projector to show films of the new models when they were announced. I explained that for a dealership in a village as small as mine it was not practical to operate the projector. He said he understood, but his job was to make certain that 100% of the dealers in his area bought a projector.
We both knew I could never use it. I asked him what would happen if I did not buy a projector. I vividly remember his words and the way that he said them. They were "I can't make you buy one, but I can sure make you wish that you had." I knew that he was right and I became the proud owner of a new film projector. This was indicative of the attitude throughout GM so I knew that I did not want to spend my entire life in that situation. I sold the dealership shortly afterward.
Given their situation it is not hard to understand GM's behavior. They could meet their 50% of market share without even trying. In fact the opposite was true. They were not allowed to try. They no longer could compete as most other businesses need to compete.
Think of a dominant sports team that was not allowed to win more that half of its games or they would be broken up. Whom would the owner and manager put on the team and how hard would they push the team to perform? How could that team remain ready for new, first class competitors?
Meanwhile, every few years the UAW union would decide which one of the three large auto companies to negotiate with to get more salary and benefits for the workers. Quite often they would go on strike against that company for as long as necessary. Whatever new benefits the union won from that company would almost automatically be granted by the other two companies. They knew the union would strike against them until they met the same or more demands.
The companies had no reason to stand up to the union and suffer a long strike. GM, the market leader was also the price leader. They could set prices as high as necessary. There was no effective competition and the government appreciated any new benefits the workers were able to attain. In fact GM had to set prices high enough to allow the other two companies to stay in business. Otherwise GM would exceed their allowable 50% market share.
Everyone, including the union, understood the situation and they were all happy with it. Everyone was doing fine and no one foresaw the competition from foreign auto manufacturers. Initially the few pitiful attempts of the foreign companies were meaningless. American buyers were not interested in the small, underpowered cars that were exported. They might be OK for Europe or Asia but they didn't sell many in the U.S.
The market for small cars in the U.S. was not worth pursuing for U.S. auto companies. This was not just their opinion, it was the truth. Who among us, at that time, foresaw that foreign companies could design and manufacture large cars too? And who expected that the market for small cars would grow as it did? And who realized that the auto companies had painted themselves in a corner with the UAW so that they could never economically compete against the foreign companies. I certainly did not and I don't think any of you reading this did either.
So, added to this are a few other new problems for U.S. auto companies:
1. Costs to ship automobiles by boat dropped dramatically. It is cheaper to ship a car to Los Angeles from Japan than from Detroit.
2. Tariffs on importing cars from Europe and Asia have dropped. From Mexico and Canada they have disappeared.
3. Foreign companies have learned how to cheaply assemble their cars in America out of foreign parts, income tax free. They shift their profits abroad by making sure the U.S. assembly plants just break even. They also get all kinds of freebies from our local governments for locating their assembly plants in their localities. They are not burdened with pensions and health benefits for retirees.
4. Unlike the U.S., the foreign governments, their auto companies and their auto workers have cooperated to make sure their products are efficiently produced and can undersell equivalent U.S. products.
5. China looms with its automobiles and possibly India, getting ready to undersell Korea, Japan and Europe, as well as us.
Where are we? What can we do? What is going to happen? Who is to blame?
1. The three U.S. companies are almost broke and are hemorrhaging what little capital they still have. Under the present circumstances giving them more capital will only slightly delay their demise. With their current union contracts and obligations to their retirees, they have no future for themselves or any potential buyers. Chrysler found that out the hard way.
2. Rationally the government, the companies and the unions should sit down together (as they do in Germany and Japan) and determine what they each need to do to keep the companies alive at the least cost to our country and then do it. Unfortunately there is no chance of that happening here. Other than that we can give them more taxpayer money as is proposed.
3. The money the government gives them will be welcomed by the union workers and retirees, the management employees, the suppliers and their employees and the localities where the workers are employed.
4. When that money is gone, we will be right back where we are now.
Who is to blame depends on many things and many preconceived notions:
1. It could be the poor decisions made by company managements who painted themselves into this corner. I think they reacted as you and I would have under the circumstances.
2. It could be the unions who found a way to earn more than foreign workers or other U.S. trades doing equivalent work. They painted the companies into the corner. Who can blame them?
3. It could be the foreigners who cooperated and worked together to produce better products at lower costs. You can't criticize that.
4. It could be that workers in other countries were needier or hungrier and willing to work harder for less pay. That could be expected.
5. It could be karma. Who could know that shipping costs and tariffs would go so low? Such things happen.
6. Perhaps it was our government and the law of unintended consequences. Who could know that keeping a vibrant company from competing so they would not become a monopoly could lead to the destruction of our most important industry? I certainly didn't know how bad it would end. I did not understand it at the time. I now believe our government was the snowball that started the avalanche that happened. Certainly it was not intentional.
7. Blaming the current GM management is certainly not productive and probably not fair. They weren't even born back then. Expecting them to solve the problem without going bankrupt is wishful thinking. It's too late.
8. Unless we radically change, the Chinese will make sure that even worse things are ahead for our automobile industries, if that is possible.
In way of background, I have an Engineering degree (MIT and USNA) a Master's degree in International Economics and a Ph.D. in Management from UCLA. I have taught these subjects as an associate Professor for over 30 years at UCLA and other Universities. I was a Naval Officer in the Pacific during WWII. I am also an inventor with several patents and an entrepreneur, having started several successful companies operating worldwide. I have sold the companies to exchange listed firms and am now retired.
Leave a comment