HOW IT CAME TO THIS FOR GM

Angst in the '80s: Miscues send a giant reeling

In November 1986, CEO Roger Smith, left, and President Jim McDonald announced plans to close 11 plants and eliminate 29,000 jobs -- about 6 percent of the company's U.S. work force. Photo credit: JOE WILSSENS
If one was searching for the limits of technology in 1986, the year had its share of omens.

In January, the Challenger space shuttle blew up soon after launch. In April, an explosion ripped through the Chernobyl nuclear plant, spewing radiation across the Ukraine. And Roger Smith's vision of a technological colossus began to unravel.

Over the previous six years, General Motors' chairman had assembled the building blocks that he believed would allow GM to leapfrog the competition.

The acquisition of EDS Corp. would allow GM to standardize its patchwork data network with dealers, factories and suppliers. The purchase of Hughes Aircraft Co. gave the automaker access to space-age technology. And the Saturn project — still in its planning stages — would give GM the small car it needed to compete with Toyota and Honda.

There was just one problem: GM's earnings were stagnant. In 1986, Ford Motor Co. out-earned General Motors for the first time since 1924. Ford — which had nearly gone bankrupt a few years earlier — earned $3.3 billion, while GM earned only $2.9 billion. It was a time of turmoil at GM. In an effort to get costs under control, Smith in November announced plans to close six assembly plants and five body assembly or stamping plants. Altogether, 29,000 jobs were eliminated, or almost 6 percent of the company's U.S. hourly and salaried work force.

Outflanked by rivals

GM was suffering a nervous breakdown of sorts. Slowed by its massive corporate reorganization two years earlier, the company was unable to respond when Ford rolled out the Taurus sedan and Chrysler introduced its twin minivans.

"There was so much confusion at that time," said Don Runkle, who was chief engineer of Chevrolet then. "We spent 1984, 1985 and a good part of 1986 trying to decide who does what. In my view, we took our eyes off the product, big time."

GM's capital budget — money spent on plants, tooling and product development — was higher than ever, but the investment wasn't producing results. Since 1980, U.S. market share had declined from 44.5 percent to below 39 percent. Product quality was shaky and, perhaps most shocking, its state-of-the-art assembly plants couldn't match the productivity of Ford's less-automated factories.

In June, when GM's top 800 executives gathered at the company's Warren, Mich., Technical Center for their triennial conference, the mood was subdued. To save money, the company had decided not to hold the meeting at the swank Greenbrier resort in West Virginia.

In her 1989 book Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors, Maryann Keller described the events of that fateful conference.

In one presentation, Executive Vice President F. Alan Smith noted that GM's capital investment over the previous five years had totaled $45 billion. For that money, Smith reminded his audience, the company could have purchased Toyota and Honda.

Then GM President Jim McDonald lamented the automaker's lack of progress on quality. McDonald was an unpretentious man who felt most at home in the factory. Three decades earlier, he had started as a young worker in GM's foundries in Saginaw, Mich., then worked his way up the corporate ladder.

Ever since he had been named president in 1981, McDonald had preached the need for better quality. At one meeting of senior executives, he had handed out small pocket mirrors, then asked each manager to peer into the mirror to see who was responsible for the quality of GM cars.

At the triennial conference, McDonald lamented the company's heavy capital expenditures. "Improvements are important," he said. "But unless we interrupt the alarming rise in fixed costs, we could be improving ourselves right out of the ballpark."

According to Keller, McDonald added a startling coda: "We don't need more capital investments. We don't need any more mission statements."

Coming from a loyal GM lifer, that was a sobering admission of doubt.

For the record, McDonald now says he doesn't recall exactly what he said at that conference or whether Keller's account is accurate. He also told Automotive News that GM's huge capital expenditures in the 1980s were necessary.

The Perot problem

But in 1986, skeptics were starting to sound the alarm. And the most prominent among them was a diminutive Texas billionaire and major GM shareholder named Ross Perot.

When Roger Smith had negotiated the purchase of Perot's EDS, he had hoped to infuse GM with Perot's entrepreneurial temperament. But after an initial honeymoon, Perot had begun to snipe at GM. In an October cover story in BusinessWeek, Perot summed up his frustration with GM's slow progress.

"Revitalizing GM is like teaching an elephant to tap dance," he said. "You find the sensitive spots and start poking."

In a subsequent interview published in Ward's Auto World, Perot asserted that GM's top brass was too isolated from the workers.

"I'd get rid of the 14th floor," he said, referring to the floor at GM's Detroit headquarters where Roger Smith and other top executives did business. "I'd get rid of the executive dining room. I would urge the senior executives to locate their offices where real people are doing real work — live with them, listen to them, spend time with them, find out what it takes to win, and do it."

That did not sit well with GM executives, who felt that Perot was grandstanding. In an interview with Automotive News, McDonald said Perot rarely spoke up during board meetings, when he had an opportunity to speak directly with GM's brain trust.

McDonald said Perot saved his criticisms for the media. "He was really a high-ego guy," McDonald told Automotive News. "I remember him talking about the lush offices up on the 14th floor, ... but they weren't any lusher than Perot's own office" in Texas.

McDonald also thinks Perot never accepted the reality that he no longer controlled his creation, EDS. "He had the entrepreneur's mentality where he needed to be in control," McDonald said. "He thought, 'This is my company and I sold it, but I still want to run it.' "

GM began to negotiate a buyout package with Perot's lawyer and, in December, Perot sold his GM shares back to General Motors for $742.8 million. After the Perot buyout was announced, GM endured a storm of criticism. But in retrospect, GM did pretty well financially in the EDS deal. Electronic Data Systems continued to increase its non-GM business, and General Motors eventually sold the computer services operation for a nice profit.

GM eventually made money on the Hughes deal, too. After the 1985 purchase, for an estimated $5.2 billion, GM merged Hughes with Delco Electronics to form Hughes Electronics Corp. In 1997, GM sold Hughes' defense arm to Raytheon for $10.1 billion in stock. Then, in 2003, the automaker sold Hughes Electronics — owner of DirectTV satellite TV — to News Corp. for $6.6 billion.

But those future profits didn't ease the severe mid-1980s pain.

Product mistakes

While Smith had invested heavily in technology, he had allowed GM's product development to drift. And it wasn't due to a lack of funds but to poor decision-making.

In the fall of 1988, GM's long-awaited new generation of mid-sized sedans and coupes, code-named GM-10, was starting to look like a bust.

The $7 billion program was supposed to regain control of a segment dominated by the Ford Taurus, Toyota Camry and Honda Accord. In the fall of 1987, GM rolled out the Buick Regal. And over the next two years, the Pontiac Grand Prix, Oldsmobile Cutlass Supreme and Chevrolet Lumina followed.

But Lloyd Reuss, who ran GM's North American operations, made several serious blunders, according to an account of the program in the book Comeback, the Fall and Rise of the American Automobile Industry.

First, in an effort to improve quality and productivity, he decided three of the four GM-10 assembly plants would build only one nameplate. That meant GM could not easily alter its production mix if a particular model sold poorly.

Next, Reuss overestimated demand for the cars. Finally, he decided to introduce the coupes before the sedans.

Bill Hoglund, who ran the Buick-Oldsmobile-Cadillac division at the time, tried to persuade Reuss to introduce the sedans first. "I said, 'Why don't you do the sedans the first year and the coupes the second year?' Because coupes at that point had started to die," Hoglund told Automotive News.

But Roger Smith was trying to rein in costs, so GM decided to stretch out the sedans' introduction. Reuss stuck with his plan. Hoglund lost his bid to accelerate the sedans' introduction, and he soon was transferred to a job in GM's parts division.

"I watched millions of dollars get pissed down the drain on the GM-10 program," Hoglund said. "The original GM-10 program probably turned out to be the worst program that GM ever did."

Despite the GM-10 fiasco, the automaker generated record profits in 1988. But GM's earnings were largely a mirage. Much of that profit was the result of cost cutting and accounting changes. The company continued to shrink, but Smith still dreamed of a turnaround.

When Roger Smith retired in 1990, GM was unprepared for the looming recession.

In August 1990, GM announced a $2 billion write-off to cover the cost of closing seven assembly plants. It wasn't enough.

As the recession deepened, GM had to make deeper cuts. In December 1991, CEO Bob Stempel announced plans to eliminate 74,000 jobs and close 21 factories in North America. Roger Smith's dreams of empire were dead.

You can reach David Sedgwick at dsedgwick@crain.com

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