What if GM was a startup?
Over the past few weeks, a lot has been written about the auto industry and what they should do. As I read everyone’s advice, I keep asking,
“What would GM do if it was a startup?”
To start with, how would I explain the problem to the Board of Directors? The issue seems, well, pretty simple:
1. They are making cars that fewer people want to buy.
2. They are not making money on the ones people do buy.
Call me a simpleton, but that’s it. It is true the problems are exacerbated by a tough economy but has anyone heard that Toyota is teetering on failure? Honda? BMW? Mercedes? Even Hyundai? And another American car company, Ford, is opting out of any government assistance program. Toyota is as big (if not bigger) and they figured out how to profitably make cars people want. And even though all their sales have slumped and they are struggling, they were healthy to start and GM was not. This is not world wide auto industry problem but a company problem here in the US.
So what would GM do if it were a startup?
First, a startup would try to sell itself. GM has a market cap of $2.5 billion. For comparison, Toyota is at $106 billion. GM has approximately 25% market share and Toyota is approximately the same. If Toyota would not acquire them to increase their market share 100% at a cost of 3% of Toyota’s value, it highlights that there is a real problem here. But an acquisition is not going to happen because it is such a mess.
So as a startup, you have to make it work as a standalone company. And as a startup, GM would need to make more of the cars people want to buy and stop making the cars they don’t want. And also stop making cars that don’t make any money.
I know, I know, you are saying “very insightful”. Yet the fact is that GM has not made the tough or right calls – for years. Yes, parts of GM have improved. Cadillac is actually a good luxury car group. But they have effectively ignored the realities of the market and their situation. They don’t sell enough good cars at a profit.
Why? Well, for two big reasons that I can see. The first is a failure of leadership and the second is too much “friction” in the system created by the government and unions that get in the way of needed cost cutting and fixing the problems.
The leadership problem was exemplified in the CEO’s flying to Washington DC asking for a bailout in their corporate jets. Last time I checked, most startup CEOs fly coach. On Expedia and there is a roundtrip flight from Detroit to DC (non stop by the way) for $209 including taxes and fees. Private jet? $20,000. Let’s see, a savings of $19,791. One flight and that’s the profit on 10 or maybe 20 cars?
While no longer flying private jets does not on its own make them profitable but its a start and its an example of bad judgment. If such an obvious cost saver is blatantly ignored until one is embarrassed in the media, then it seems pretty obvious that the leadership team is not going to find nor make the more difficult decisions on how to cut costs and make quality cars. By the way, if a startup CEO flew a private jet other than during an IPO road show, they would be fired in a heartbeat. In summary, first step, let’s get some new leadership. As the saying goes, “It starts at the top.”
What about the government and unions? (I am an equal opportunity layer of blame on this one.)
Most startups would not likely have to deal with the government or unions. If GM were a startup, they would have demanded that the government and unions both need to get out of the way and stop causing “friction” against what is needed to make GM a profitable company.
Let’s start with one example of government friction. Both the federal and state governments have enacted a set of laws that make it prohibitively expensive to terminate a car dealership/franchise. The fact is that GM does not need thousand of dealers anymore. Could you imagine if a startup could not close an underperforming website or let go of an underperforming sales person because state laws protected the advertisers or that employee? That’s pretty much what’s happening in its simplest form with the car dealers. It cost about $1 Billion (yes, billion) for GM to close the Oldsmobile dealerships a few years ago. That’s friction.
I did a quick Google search and found eBay sells a car a minute and has sold about $20 billion in cars in its first few years since offering its auto site. That’s frictionless.
It’s about time we let GM sell cars the best way they can and get government out of the business of being an impediment to its success.
Last but not least, the unions too are part of the problem. No matter what we do, clearly this process will be very painful both for the overall economy and the many people employed in the auto industry. My heart goes out to people that have been working hard at the car companies and the companies in their supply chains. But we cannot inhibit the companies from making the necessary decisions about the compensation for its workforce – which is what unions are doing.
It is truly amazing that today the union presidents want to risk all its employees futures by not making wage concessions right now. It seems like the choice is accept lower wages or not have any wages left for anyone. Isn’t GM about to go bankrupt in 2008 or early 2009? A lot of good it will do to wait to make wage concessions until 2011 when their current contracts expire when GM itself could completely expire in 2009. I wonder if we let the union members vote for either lower wages or bankruptcy which they would choose?
A startup would immediately start over and offer to re-hire employees with new compensation that allow for profitable car sales. A startup would even pay less than market rates and also offer some stock options and equity in the company to participate in any long-term stock appreciation.
By the way, there is a place the government does need to help. It needs to invest in a massive job-training program to help the workers of all skills that lose their jobs find other jobs and careers. And the biggie is to also help deal with the pension and retirement obligations for the retirees. No small feat but this will truly help GM get out of this mess.
The auto industry is important in that lots of people work there but we need a profitable auto industry to survive. Subsidizing the auto industry (or worse nationalizing it) will cost more in the long run than taking the painful but necessary steps today by leadership, the government and unions.
This is a time for GM to stop and re-architect themselves for the 21st century. They should start from the bottom up and figure out how to do less in order to start making money. The government should allow the companies to close unprofitable parts of its business without additional expenses and the union needs to get out of the way in order to help protect the workers that will remain or risk having no one at all.
People have said that the car companies are too big to fail. Maybe they are too big to succeed?
UPDATE: April 27, 2009: NY Times today “Faster Cuts and More Loans Are Key to G.M. Survival Plan” http://bitly.com/pOdT5. It seems that is a all a bit obvious. Though what is really scary is that The US Government will become the majority shareholder of General Motors. Welcome to the new GM – Government Motors. Does anyone else think its a bad idea for the government to own a failing car company? Also, here’s another post on GM titled “What would Steve Jobs do as GM?“ Please feel free to share this with others if you think its interesting using the buttons below. And if you don’t like it, share it with people you don’t like just to bug ‘em… 
I think another question is how can management be allowed to have such poor relations with the unions and labor. To piggy back on some of your earlier post, a big part of start up success is rooted in culture. How can you let a culture stand where fellow workers have such a deep mistrust of one another? Shame on both sides.
BTW.. Chrysler announced today that workers would not be welcomed back to the factories until mid-January (normally they would come back at the beginning of January). While there will be some assistance, workers will not get their full salaries during this time.
Agree almost across the board, and sounds like Bush and crew may be drifting in the direction of a government managed and backed bankruptcy that would help fix many of the issues you outline in terms of friction, uaw, etc. Won’t fix the product disconnects … though many have said there are decent products in the pipeline. And what also gets lost is the fact that over the last 10 years, they have done a tremendous amount to improve their quality. Don’t get me wrong — I’m from the midwest and haven’t owned an american car in my adult lifetime (though I do remember when my parents bought a gigantic chrysler when I was a kid — and then there was the plymouth station wagon with wood paneling … sorry, drifting off track!
Also amazing to me that the boards of these companies haven’t made changes to the management teams or how these companies run. Can you imagine any start-up board leaving a ceo/mgmt team in place with that kind of clear mis-management/lack of strategy or direction?
Two last comments. First is a pet peeve on the corporate jet thing. They are CEOs of very large, if not tremendously unhealthy companies. Very bad on the optics, but in terms of the time, the number of people they travel with, and the amount of work that happens on those planes, I do understand how it happens. For anyone who has flown on a private jet w/ the senior staff of a large company, it’s comfortable, but not really relaxing — and I’m sure for anyone who was on those flights with their ceos, they were tumbling numbers, working talking points, practicing the pitch, thinking through the questions. Can’t really do that on a commercial plane, and even harder in a compact car with one guy driving and two guys in the back seat (and probably 10 other guys flying coach … just below the optics radar).
Second and final comment – can’t let these companies go down right now. In any other economy, let them sink. Only question now, for me, is what’s the right way to help and for how long.
Oh, one last comment — yes, shutting down for four weeks, but they typically shut down for two. There’s a massive glut of unsold cars (both domestic and foreign). Would only extend the disaster to not stop/slow production. And while I’m as liberal as they come, you can’t give workers their full salaries if they’re not working and you’re on the verge of going broke!! (though I suspect the UAW could argue that point).
DocktorJ – as always appreciate the comments. my first two cars I remember my parents having were two Buicks – a 69 skylark and 72 lesabre. I of course crashed the lesabre but that is a another story…
Agree that at the end of the day they don’t make cars people want to buy though there actually have been some bright spots. Cadillac is an example. Their sedans are actually quite nice and good quality. And their trucks are clearly good too though they relied on them too much for profits…
I do think there is often times too much CEO bashing out there. Why do we get all worked up about executive pay but no one bats an eye when a (insert your favorite sport and position here) gets paid $100+M over a few years? The point on the jet is that there are times when flying privately can make sense because it can extend productivity both in terms of having a private space to continue working in private with a large team of people or traveling to out of the way places such as a factory. The issue though is that there are times when flying on United is perfectly acceptable and I am sure it has been binary that they always fly on a private jet even when the cost benefit equation does not work.
On your comment that we can not let these companies go down now, not sure why many people think that? Ben Bernake has done lots of research on the Depression and one of the things that he thinks prolonged the depression was the fact that wages did not decline commensurate with the economy and they probably extending the downturn because companies were not able to get their costs in line with market realities. The book is here on Amazon.com. Essays on the Great Depression
And of course totally, agree, when you shut a factory, you can’t keep paying people… That’s another example of friction that exists in the business. I would rather have 80% of the people employed in a profitable company that a short term for 100% which ulitmately goes to a bankrupt company. Eventually, the companies will need to simply shrug their shoulders and give up otherwise…
Cl80n – yes, clearly relationships with the unions are management’s fault too. Unions were created as a way to help protect employees from management taking advantage of them. Today, however, as you say, they are both to blame. I do wonder though if the unions have too much power today to make it impossible to make the car companies profitable and successful. Can you imagine if the car companies all colluded to fire all its workers? That would be an outrage, but its not an outrage when unions do the same thing to the car companies?? Just a thought. Thanks for the comments. @cl8on
The GM saga continues to get interesting with bondholders suggesting they get majority stake vs US Govt. Why not? http://bitly.com/14nJPh