GM Squanders What Tax Payers Gave It

Let me say at the outset that the GM bailout was far, far better handled than the bankster bailouts. And as a Michigan resident whose family still has ties to the auto business, I am tremendously grateful for that bailout.

That said, this is why I have not declared mission accomplished, in spite of the successful IPO last year.

You see, no one will be able to weigh the success or failure of the GM bailout for another year or so–until such time as the cars developed entirely under the leadership team picked by a bunch of people who knew nothing about the auto industry start rolling off the lines. As I noted last year, the success of the IPO was significantly premised on a number of business decisions made by Rick Wagoner and others fired during the bailout. Wagoner deserves the credit for his emphasis on China (and places like Brazil), which is the biggest source of GM’s profit these days and was widely touted as the reason it made a good stock buy. And Bob Lutz deserves the credit for GM’s improved product line.

So we won’t know whether the bailout succeeded until we see whether the guys now in charge can make decisions that are as smart as those made by the guys fired in the bailout.

Yet, as MSNBC lays out, thus far, it looks like the finance guys Steven Rattner brought in to run a car company have, predictably, made some really stupid decisions.

[GM CEO Daniel] Akerson recently told the Wall Street Journal that a GM car was just like the can of Diet Coke he was drinking during the interview.

“It’s a consumer product,” he said. “GM has to start acting like a consumer-driven, not engineering-driven, company. We sell a consumer product — our can just costs $30,000.”

Industry insiders with a memory of the 1990s immediately blasted this view as a return to [GM]’s failed [early 1990s] strategy to commoditize a product for which a strong emotional connection is important to drive sales and to cultivate brand loyalty.

“The only difference between GM then and GM now is that this is a company that has only recently emerged from the abyss of bankruptcy, one that can ill-afford a single misstep brought upon by misguided leadership, even though it has the most competitive lineup (of vehicles) it has had in decades,” [auto writer Peter] Delorenzo said.

It’s one thing to try to sell sugar water with nothing more than emotional attachment. But so long as there are well-engineered vehicles like Hondas on the road, you can’t dismiss the importance of engineering in designing cars.

In addition, Akerson (like Ed Whitacre before him) is trying to cut the time to market for GM’s cars.

Now Akerson says speed and cost are the aspects on which he will concentrate, telling the Journal that “during World War II, GM produced tanks and equipment within four years. Why should it take four years to put a car out?”

There have, historically, been two models for cutting the time to market for cars. There’s the model Chrysler used in the late 1990s, which led to the introduction of things like the PT Cruiser that were cute but which weren’t really good cars; that’s one of the things that led to a serious decline in Chrysler’s quality. Then there’s Toyota’s quality driven approach, which has served as the standard for Ford and GM in recent years as they have accelerated their own development time frame.

But as Toyota’s recent troubles show, not even Toyota can make cars in as short a time frame as they do and ensure their quality. What makes Akerson think GM can do what Toyota can’t?

I’d say the chance GM sees real quality issues in the next several years because of Akerson’s coke-addled approach to running a car company are significant.

What MSNBC doesn’t cover–but what Zero Hedge has been tracking closely–is that GM has been dumping cars on its dealers with little apparent concern for how quickly the dealers can sell them (remember that GM makes its money when the cars enter the dealers, not when consumers drive away with one). They posted the graphic above earlier this month, but explained what was going on back in November.

It is obvious that beginning in July, GM has started an aggressive channel stuffing program whereby it offload tens of thousands of cars (over 110,000 since July) on dealer lots, hoping these will get sold somehow, at some price, all the while dealers enjoy taxpayer subsidized floorplan leases which allows them to hold nearly infinite inventory. If and when the liquidation event takes place who cares? After all the company is now public and has managed to massage it artificial sales numbers sufficiently to fool investors that there is actual end demand for its cars.

In other words, GM has been artificially keeping its sales numbers up; that’s what investors look at. But wholesale sales are way, way ahead of consumer demand.

Which is why GM started engaging in the other problem MSNBC lays out: stupid incentive programs that chip away at the already-cheapened consumer perception of the value of GM’s cars.

GM has added hefty incentives to its cars since the start of the year, offering big rebates to current owners of GM cars, no-penalty early trade-ins for currently leased GM cars and bigger rebates for users of the GM credit card. The result has been a U.S. market share of more than 21 percent, higher than the company has had in years.

Now that GM has discontinued these incentives, sales have apparently slumped, so expect Zero Hedge to show dealer inventory numbers spiking next month.

The dealer stuff may be the stupid Akerson decision that most irks me. Under cover of government-managed bankruptcy, GM put a lot of auto dealers out of business (they did so more reasonably than Chrysler, but still). GM badly needed to do this, because it had so many dealers in close proximity they necessarily had to compete on price (and couldn’t make enough to really invest back in their business).

Closing dealers was one of the things GM needed to do to eliminate a structural cause of its cheap image.

But now they’re squandering all that those closures should have given them. They’re loading dealers up with too much inventory again, which already forces them to sell on price rather than product. And then to help the dealers unload that inventory, GM is basically committing retail suicide with incentives.

So basically, Bob Lutz gave GM the products it needed to be able to compete. And now Akerson is shitting all over those products, making sure they won’t command the price in the marketplace they would be able to demand.

Ultimately, this is really going to hit GM’s profitability, so we will hear in upcoming years (again) how much more profit the Japanese and Koreans get off their cars then GM.

Far too many people have sacrificed to give GM a second shot at life: the taxpayers, the dealers, and the workers. But now some guy whom a bunch of banksters thought would be just the ticket is squandering that shot.

  1. PhilPerspective says:

    So ZeroHedge was/is right about the dealer dumping? Wow! Not that I don’t believe them, but as you know, it’s hard to separate the wheat from the chafe over there.

    • emptywheel says:

      I haven’t double checked his numbers, but assuming he’s not making them up, then yeah, he seems to be right on the money as to what GM’s doing.

      Which would make sense, bc it would explain why GM decided to commit retail suicide.

  2. alabama says:

    If you applaud the IPO, then why not applaud Daniel Ammann? I mean, didn’t he put the deal together, along with some colleagues at Morgan Stanley?

    • emptywheel says:

      I don’t applaud the IPO. I think it was a pretty egregious case of pump and dump.

      ANd I’m deeply suspicious that the guy who engaged in it is now being put in charge of the books.

      • earlofhuntingdon says:

        As far as Michigan’s concerned, there’s also the problem of the significant bits of the old GM that is still in bankruptcy, including about half a million contracts.

  3. BoxTurtle says:

    GM has nobody in power positions who remembers what happened to GM in the late 1980’s or why.

    I remember the cars designed by accountants. My car would be undrivable, if I hadn’t disabled the Godforsaken skip shift that according to the accountants saved $2K in gas guzzler tax per car. The Caddy’s that looked like Chevy’s. The CHEAP trim in the Caddy’s. Problems, problems, problems.

    Sales figures out what the customer wants to buy. Marketing makes the customers want it more. Engineering designs the cars. Assembly plants build them.

    Then somewhere, in a headquarters building far far away, accountants keep track of costs and revenues. And have nothing to do with anything else.

    Boxturtle (It would help if the CEO knew as much about wrenches as he does about CDO’s and stock prices)

    • emptywheel says:

      Right, because the banksters think the 80s were peachy, bc GM’s eating of its seed corn hadn’t get begun to hit it where banksters notice these things: in their stock price.

      • BoxTurtle says:

        Wonder how long it will be before this shows in the stock price. Are the banksters already dumping or are they going to wait for one more pump?

        Boxturtle (Don’t let accountants build cars, don’t let engineers manage revenue)

        • alabama says:

          Good question. I mean, if this were a pump and dump, would the stock be selling at $31 at this late date? And might we not suppose that the world’s largest IPO has been studied with some care by the big spenders out there?…

  4. Mauimom says:

    Yet, as MSNBC lays out, thus far, it looks like the finance guys Steven Rattner brought in to run a car company have, predictably, made some really stupid decisions.

    Oh, MSNBC is only just now catching on?

    They could have read Ratner’s book salon, and a few of your diaries before it, and been clued in so much earlier.

  5. JTMinIA says:


    There’s another reason why cars are not like cans of Coke and why Toyota is now having more problems and why GM has to be very careful: while Americans don’t mind drinking a very popular soda, they do not want to be seen driving the same car as everyone else. Toyota was, in some ways, a victim of its own success. You can’t survive on quality alone (as can BMW, Mercedes, and, of all crazy concepts, modern Mitsubishi) if you’re selling a ton of similar-looking cars. Americans want to be affiliated with their in-group at least partly by their car and, so, a car that is much more popular than the size of the owners’ in-group is a problem. The old solution of just rebranding the same car a thousand different ways is out; it led to too many dealers to be viable. But you can’t copy the old Toyota approach of quality, either; not when you need to sell so many cars to break even.

    I’m not sure what the solution to this is, but I’m quite sure that the can-of-Coke approach is doomed. Ford might deal with this issue well – since that seems a well-run company – and they’ll need to soon, but GM is effed unless it wakes up.

    • BoxTurtle says:

      If they’d just produce some of those concept cars they display at the auto shows, they’d do quite well. Something happens between concept and market that turns those headturners into little bland boxes. The latest vette had a glass panel on the hood so you could see the engine. Of course, they enlarged the “carb” on top of the engine so it filled the entire window with featureless metal.

      Boxturtle (And it wouldn’t hurt the trim dept to swap some plastic for chrome)

    • bobschacht says:

      The answer to your strategic question used to be, I think, that you created a line of cars for the masses (e.g., Toyota Corolla), and then a luxury version of the same car for the Joneses (the Camry). Then every year you take one of the Camry’s luxury features, and put it in the Corolla, and you invent a new luxury feature for the Camry. You charge enough more for the Camry to keep it just out of the reach of the masses. Isn’t that how it worked?

      Bob in AZ

  6. JTMinIA says:

    The key moment, again IMO, for the Vette was about ten years ago. They knew what they needed to do to make the Vette a real super-car. They’d even started working on it, if what I’d heard was correct: a rear trans-axle. But they didn’t do it. And that really hurt. Paying something like $75 to $100k for a car that can be beat by Japanese and German cars that cost around $35k does not help with sales. Yeah, your Vette looks cool, but my grocery-getter (an Evo) and the M3 some other guy uses to take his whole family to dinner can beat you. Kind of makes you look like the drivers of Vettes from the 70s … minus the qiana shirt and gold chain.

    • JimWilson says:

      While my BMW M3 will definitely beat a 70’s, 80’s and 90’s Vette, the new Corvettes are distinctly another matter. In fact the $60k+ BMW e90 M3 V8 has been eclipsed on the track by the new $42k+ Boss302 Mustang.

      Now if we could get GM to put some real seats in the Corvette and get Ford to stop dressing the Boss302 like a midway clown . . . the Americans would ruling the affordable sports car world.

  7. earlofhuntingdon says:

    Rick Wagoner did not initiate GM’s reinvention of its originally modest presence in China, but he did adopt Jack Smith’s work and keep it going. China is now GM’s lifeline, it’s most productive and profitable subsidiary, and its major engineering and marketing hope for the future. (Too bad for GM its phone guys gave up that 1% in GM Shanghai.)

    But WTF do a bunch of phone guys and strip mining-mentality venture capitalists know about making things, let alone cars? Their lead times are long, in design, engineering, manufacturing, parts and subsystem supplies and suppliers, and aftermarket support. What do they know or care about consumer or product safety – not ordinarily synonymous with Wall Street?

    What do they know about going local while maintaining global standards and cost savings, but not jeopardizing safety or stretching supply and distribution lines to the breaking point even without earthquakes, nukes and toppling currencies?

    What do they know or care about complying with complex laws in a myriad of jurisdictions, a task that keeps operations going smoothly and avoids incurring excruciating off-balance sheet liabilities and the corrupting influence of adopting a careless, “when in Rome” attitude?

    If GM is to remain a competitive global manufacturer, it needs to re-sink its manufacturing roots and promote a team of managers committed to the long haul. It’s a huge business that will not run on autopilot, as Wall Street’s cash cows are supposed to. That team will need to think beyond the next two quarters and have the guts and board support to do it. If the plan is to do that and not prettify the company in order to maximize the price SAIC might pay for it, it’s time to get crackin’.

  8. earlofhuntingdon says:

    That dealer stuffing – pushing inventory through the pipeline to “book” sales – is good for GM, for about 2-3 quarters and maybe a year-end financial statement. If Akerson isn’t replaced or doesn’t change tack, then he plans on selling the company to someone else.

    CEO’s often think they can run any company as well as the one where they first earned their stripes as CEO, regardless of how different its fundamentals. I’ve always considered that like a dentist thinking she can perform heart surgery or an Air Force bomber pilot thinking he can land his bird on a carrier. Hitting the fantail or running out of runway before your nosewheel hits the tarmac can ruin the whole day, and a lot of lives.

      • earlofhuntingdon says:

        The pipeline can only hold X-amount. Like the proverbial 5-lb. bag, when you overfill it, it begins to split. Dealers stop buying or stop staying current on their GM-supplied financing, or they start wanting to return cars or they dump them at a loss.

        That adds a lot of tension to manufacturer-dealer relations and other things begin to fray. I don’t have the data, but I would be surprised if new car sales are recovering faster than manufacturing jobs.

  9. earlofhuntingdon says:

    Akerson is wrong and over-simplifying in contending that GM needs to think like a “consumer driven” company, not an “engineering driven” company. Great marketing phrase, easy to stay on message with it, especially when you don’t know much about engineering or how it inter-relates in a cat’s cradle with marketing, manufacturing, and finance.

    It’s the combination of those skills that GM needs, not just sales or marketing. It’s what made the Japanese, and now the Koreans, such world beaters. Their high flyers had to rotate through each discipline; they couldn’t concentrate on one until they’d done that.

    I suspect that by “consumer driven”, Akerson also doesn’t mean putting the consumers’ interests first. That requires studying their wants and their real habits, and their actual pocketbooks in minute detail – and then manufacturing a product that fit those characteristics, which our Asian competitors did. I suspect he means selling on price alone. That’s a road not even paved with good intentions. For GM to succeed, he needs to go before he does permanent harm.

    • PJEvans says:

      He probably thinks ‘consumer-driven’ refers only to people with a minimum 6-figure income. Because the other 90 percent of us aren’t really consumers, in his world.

  10. earlofhuntingdon says:

    Akerson chose an ex-Morgan Stanley investment banker – Dan Ammann – as GM’s new CFO, and a Sprint-Nextel exec – Linda Marshall – as head of OnStar.

    OnStar is more than the Star Trek computer voice on its ads. It’s a critical subsidiary whose primary function is to maintain customer satisfaction and loyalty. Not coincidentally, it is critical to building detailed digital files on GM’s customers. It combines and utilizes data from several sources: customer profiles; car GPS movements; car telephone and satellite radio data; engine management data and car operating/performance data. It may also collate that data with customer data obtained from outsourced vendors. Telecoms and cable service providers, for example, make billions from commercializing that sort of data.

    But that’s an aside. The thing Sprint-Nextel (another phone company) and Morgan Stanley have in common is mergers and acquisitions. Wall Street I-bankers are notorious for short-term, high-profit, asset-stripping deals. Sprint-Nextel has only recently completed integrating its two constituent businesses, a task that Marshall almost certainly spent a lot of time on. Apart from doing deals and short-term thinking, both businesses make a fetish of letting go workers.

    For Michigan and GM’s sake, I hope Akerson hasn’t chosen these two for their most obvious skills.

  11. earlofhuntingdon says:

    The US taxpayers still own a big chunk of GM, don’t they? Not that Obama, any more than most board members, would dare rock management’s boat, regardless of how much taxpayer money is at stake. (Not when it comes to GM or to banksters.)

    My amazement never ends at how such intelligent people can turn off their brains when in the role of steward for the people. It’s as bad as the managers who credulously think, when on their first or second foreign assignment, that their would be foreign partners are absolutely, positively committed to them and the things they want more than they are committed to what they want and need for themselves.

    If asked to be so credulous about a Chicago real estate broker selling a lemon in a down market, those same managers would laugh their heads off. As Gandhi said about western civilization, critical thinking in such circumstances would be a good thing.

  12. cregan says:

    empty, good, insightful post. I agree the jury is out until we see more of a result.

    That Coke can statement was really an indicator.

    In a way, business is like pro football. In high school, you can be fast, or big or smart and do well on one of those qualities. In college, you’ve got to have at least two to do well. In the pros, you need all three and more.

    GM needs a stellar product, stellar marketing and deft management. They can’t get by on just one or even two. Their three legged stool seems to have a leg or two missing and the Coke can comment sums it up.

    • JamesJoyce says:

      Hey, could a 300+ lbs lineman compete if he wasted 80% of his stored potential energy during the game. How about a wide receiver or the corner back? Could they compete wasting 80% of their energy in a football game! So how the fuck can Americans compete when they spend more money on transportation than food while wasting .80 cents of every dollar ever spent on gasoline?

      Baseball, hot dogs, apple pie, and Chevrolet! Lets count the ways corporate has fucked America today?

  13. JamesJoyce says:

    Did GM do anything to advance the efficiency rating of the ICE? I doubt it? It doesn’t matter if you pay .10 cents or $5.00 per gallon of gas. If you waste 80% of the economic value of the stored potential energy, it is a waste of money. America wastes hundreds of million of dollars of economic value daily, right out the tailpipe!!! Dumber than dead fucking dirt!!!!!!!!!!!!!!!!!!!!

    • qweryous says:

      Did GM do anything to advance the efficiency rating of the ICE?

      Actually they deserve some credit for high compression engines enabled by the use of Tetraethyllead as an additive in gasoline. This was pioneered and patented by Midgley and Kettering at General Motors Research Corporation.

      Tetraethyllead was first discovered by a German chemist in 1854, but remained commercially unused for many years.[8] In 1921, TEL was found to be an effective antiknock agent by Thomas Midgley, working under Charles Kettering at General Motors Corporation Research.[9] General Motors patented the use of TEL as a knocking agent and called it “Ethyl” in its marketing materials, thereby avoiding the negative connotation of the word “lead”.[8] By 1923, leaded gasoline was being sold.[10] In 1924, Standard Oil of New Jersey (ESSO/EXXON) and General Motors created the Ethyl Gasoline Corporation to produce and market TEL.


      The ambiguity of the ‘advance’ is illustrated by the necessity to coverup the toxicity of the additive. This started almost immediately after it was introduced, as refinery workers began to die and go insane due to brain damage.

      Other ‘advances’ included the Vega- which was infinitely efficient while parked waiting for engine and rust repairs.

  14. bmull says:

    People do choose their cola largely on the basis on branding. That’s the basis for the Pepsi challenge.

    In other words, I’m agreeing with Akerson that in the near term GM is a dog and pony show whose fortunes depend on marketing and finance.