A titan stumbles

May 29, 2009 Editorial

It is a sign of the changing times. For most of the last century, the US company General Motors (GM) – with brands like Cadillac, Pontiac, Oldsmobile, Chevrolet and Buick – was not only the largest carmaker in the world – it was the largest industrial corporation the world had ever seen.
In testimony before a Congressional Committee, one of its former head – without any intended irony – claimed that, “What is good for GM is good for America”. On June 1st, GM is expected to file for bankruptcy. What gives?
The rise and fall of GM to a great extent reflects the predicament that confronts the entire US economy at this juncture.
Pieced together in 1908 by financiers that wanted to outdo the Ford Motor Company that had taken the lead with its no-frills Model T, General Motors was a conglomerate of failing but disparate carmakers brought under a single tent. After some ups and downs, GM overtook Ford by the thirties and never looked back.
Its marketing ploy was to offer variety and style in contrast to Ford’s focus on value and craftsmanship. Tailfins, designer colours, luxury interiors and other such “bells and whistles” were introduced in models that were announced as “new and improved” annually.
To enable the customers to literally buy-into the new concept, GM made its most important innovation (and to American business) – offering credit directly to its customers. The other carmakers like Ford and Chrysler decided that “if you can’t beat GM, you might as well join them”.
Another secret of its success was its founding membership in the “US military-industrial complex”. First dragooned into the support-system for WWI, GM cemented its place during the even bigger WWII when its entire production line went towards the war effort. The President of GM became director of the US War Production Board and told the US Army Ordnance Board that in order to prevent a return to the Great Depression, the US needed “a permanent war economy”.
He was made Secretary of Defence in 1953 – when he made the comment quoted above.
Earlier this year, with GM’s position become increasingly dire, in an op-ed in the NY Times, former Supreme Allied Commander, NATO, retired 4-Star General Wesley Clark said bluntly, “Aiding the American automobile industry is not only an economic imperative, but also a national security imperative.”
Maybe it was the security-blanket provided by its nexus with the government but GM pursued with its “bells-and-whistles” approach to car-making long after it was evident that the world was demanding better value in cars.
The first oil-crisis of 1973 was a wake-up call that the gas-guzzlers that GM specialised in producing might not be viable in the long run but after a brief flirtation, GM returned to its old profligate ways.
The Japanese carmakers, led by Toyota, found a toehold that allowed their superior engineered products to be compared to the offerings of GM (and the other US carmakers). The Japanese share of the market grew every year – and last year, in the 100th anniversary of the formation of GM, Toyota became the largest carmaker in the world.
Another factor that probably distracted GM was the increasing proportion of profits that their credit arm was contributing to the corporation.
With deregulation of the financial sector increasing exponentially during the 1990s, GM became as big a player in many of the new “financial innovations” as many banks.
Car-making was just the catch to extend loans to any buyer that could be enticed off the streets (a la subprime mortgages) which could be sold off as collaterised debt obligations (CDOs). Make the money now; let others worry about tomorrow.
The US government has already extended $19.5 billion of taxpayers’ money to GM and Chrysler. With the imminent bankruptcy of GM we can be sure that many billions more will be extended to ensure that GM (in whatever form) survives. What is good for GM is good for the US; but to what end?

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