The Real Lesson from the Mess at GM and Chrysler

Last Updated Apr 6, 2009 9:00 AM EDT

The military does after-action reviews and doctors hold mortality and morbidity conferences -- all with the goal of learning what has occurred. What better way to ensure that we make better decisions next time? In this regard, most of the voluminous commentary on the problems in the auto industry is sorely lacking; it often misses the point or fails to address the root causes of the desperate problems at GM and Chrysler, and that unfortunately leaves leaders in other industries none the wiser.

Much of the focus has been on the costs of GM's and Chrysler's union contracts, including the costs of paying for health care and retirement benefits for people no longer working. There is no question that these costs are substantial, with estimates ranging from $1,500 to $2,000 per vehicle produced. But the more important dollar figure to pay attention to is $6,000, and last time I checked that was of a lot more money than those union figures thrown about as the root of the problem. Why $6,000? That's the difference in average revenue per vehicle sold between GM and Toyota in 2004, according to The Harbour Report, the Bible of the auto industry.

When I called the Harbour people to get updated numbers, a very helpful woman, Michelle Hill, told me that 2004 was the last year that Harbour compiled or published these figures because of -- get this -- opposition from the auto companies. Apparently, the U. S. car companies want to blame their problems on things beyond their control rather than focusing on the real problem: brand image, design, and technical features that have them offering their cars at big discounts just to try to move them off the dealership lots. And, by the way, to the extent that GM (and Chrysler) lose market share, something that has gone on for decades, their retiree costs get spread over fewer and fewer units, making cost issues even worse.

Next problem: too much debt and the cost of servicing that debt. How did that happen? Well, in 2007, private equity firm Cerberus bought Chrysler in an LBO. The L stands for leverage, in case you forgot. Meanwhile, according to an analysis by UCLA business school professor Sandy Jacoby, GM, to keep its shareholders happy, paid out almost $30 billion in dividends and stock buybacks between 1996 and 2005. The Japanese car companies retained and reinvested their profits, leaving them better situated with new products and technology and also financially stronger to face the current storm.

The problems in the U.S. car companies are old, well-documented, never changing, and exemplified by the enormous amount of press GM received in 2001 when it hired Bob Lutz -- a car guy. When a car company gets lots of credit for hiring a car person, the root cause of the problem is clear.

As documented in numerous books, including The Reckoning, Rude Awakening, and my favorite, the late John DeLorean's insider account of GM, On a Clear Day You Can See General Motors, the car companies have for years been run by bean counters -- finance and MBA types -- who were late in bringing new technologies to market and didn't care nearly enough about the product and customers. They cared about the numbers.

The lessons we ought to learn are simple: understand and attack the real sources of competitive difficulties, and don't overload the company with debt to make stock traders happy. The key to success in the car industry, as with most others, is to focus the product and the service.

  • Jeffrey Pfeffer

    Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at the Stanford Graduate School of Business, where he has taught since 1979. Pfeffer has authored or co-authored 13 books on topics including power, managing people, and evidence-based management. He has lectured in 34 countries and has been a visiting professor at London Business School, Harvard Business School, Singapore Management University, and IESE in Barcelona. Pfeffer has served on the board of directors of several human-capital software companies, as well as other public and nonprofit boards.