Today marked a historic day in the annals of business history. General Motors declared bankruptcy and the U.S government will invest more than $50 billion to keep the company afloat. We can debate the merits of nationalizing GM later — for now let’s focus on the reasons they appeared in bankruptcy court today. Here are the top 10 reasons in no particular order except for reason number one.
1. Incompetent management - more than any other factor, the sheer incompetence of GM’s management is stunning. When you google the phrase “management incompetence” the rogues gallery of GM CEO’s and senior managers should appear. They have steadily driven the company down, missed every major forecast and prognostication (including scoffing at the very notion of bankruptcy) and now find themselves at rock bottom. So what happens? They are rewarded with billions of dollars of taxpayer money to stay in their jobs. The lesson here? If you’re going to fail, do it on a truly grand scale.
2. Labor costs - the wages, benefits and retirement perks granted to the United Auto Workers put the company in an untenable position and saddled them with an non-competitive cost structure relative to their primary competitors, Toyota and Honda.
Both the company and the union deserve fault for this.
3. Inferior products - For years, GM produced products that were mediocre in terms of design, engineering and reliability. Consumers perceive their products to be inferior to Honda’s and Toyota’s. Despite the fact that GM’s products have improved lately, it’s customer perception that matters and that takes time to change. Despite their vast resources, GM is not a leader in any aspect of automobile production that I can think of. They don’t have the safest, most reliable, most fuel-efficient or best engineered cars compared to their competitors. Furthermore, they gave up early on electric vehicles and missed the boat on hybrids. When Toyota introduced the Prius, GM’s managers gloated that Toyota was losing money on every car they sold. Who’s laughing now?
4. Brand management - or should I say lack thereof? GM had too many brands that were not clearly differentiated from each other including Chevrolet, Pontiac, Oldsmobile, Buick and Saturn. Brands that were clearly positioned such as Cadillac have done pretty well. The rest simply cannibalized each other’s sales. Worse than the branding of its major divisions was GM”s approach to individual model brands. They simply churned them far too much. Think about Toyota and Honda’s main models such as Camry, Accord, Civic and Corolla — they’ve been around for decades. Consumers know what they stand for and what to expect. By contrast, GM’s divisions continually replaced their recognized models with new ones. They forfeited brand recognition and the opportunity to build and maintain a loyal customer base.
5. Competition - Toyota and Honda are world-class companies that build the products American consumers want. They both have significant manufacturing investments in North America and they are tough to beat. Other competitors such as Volkswagen, Nissan, Mazda and Ford are also turning out good products. The automobile business is brutally competitive and a weak sister like GM can no longer survive.
6. Excess capacity - There are simply too many manufacturers chasing too few buyers in the American market. Not all of them can survive. It would actually be healthy for some to exit the market since consumers have more choices than they can handle right now. This is just the beginning of the restructuring in the automobile industry.
7. Market maturity - the U.S. market is in a late stage of maturity with low growth prospects for the future. I also believe the dynamics of the market will continue to be depressed over the next five years. Why? The average American family has seen its net worth tumble significantly due to the stock market meltdown, business bankruptcies (like GM’s), bond and bank failures and the overall impact of the recession.
8. Consumer confidence - the typical new car purchase is now financed over 4 or 5 years. How many people have enough confidence in their jobs lasting for the next five years to commit to a car loan? Faced with job uncertainty and the need to reduce debt levels, consumers will be driving their cars longer before replacing them or looking at other alternatives such as used cars, car-sharing services and public transportation.
9. Gas prices - when gas prices spiked to over $4.00 per gallon, consumers reacted by immediately shifting their purchases to more fuel efficient vehicles. GM was sitting with a reliance on large SUV’s and trucks with low mileage ratings. The SUV was the cash cow keeping GM operating. When SUV sales died, it wasn’t long before the company followed.
10. Recession - a deep and severe recession proved to be the final nail in GM’s coffin. In this case, the financial crisis and bank bailouts tightened the credit markets. This, on top of weakened demand for autos, proved to be the one-two punch that put GM down for the count.
With all of these factors conspiring against the company, the only surprise is that it didn’t fold sooner. GM has been in a steady death spiral for several years and now it’s the American taxpayers who own this turkey.
