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December 09, 2005

Ghosts That Haunt General Motors

Mark Thoma finds Robert Samuelson thinking about General Motors:

Economist's View: Robert Samuelson: Ghosts That Still Haunt GM : Robert Samuelson acknowledges that labor costs at GM have been high. But he believes the source of GM's troubles is poor management:

Ghosts That Still Haunt GM, by Robert J. Samuelson, Washington Post: ...General Motors ... recently announced it would close 12 facilities and cut 30,000 jobs by 2008. Granted, GM is burdened with costly labor contracts and huge numbers of retirees... But GM also inherits a self-defeating management style formed during its glory days. It presumed that superior managers could always anticipate and control change. By contrast, many top managers in younger companies accept that they will face disruptive surprises that could, unless successfully countered, destroy them. The... latest downsizing is the company's third since the early 1980s. With each, GM has struggled to catch up with changes that it badly misjudged -- the demand for smaller cars in the late 1970s; the superior quality and production techniques of Japanese manufacturers in the 1980s; and now the demand for snazzier cars and... better fuel efficiency....

GM overtook Ford because "the old master [Henry Ford] had failed to master change," [Alfred P.] Sloan wrote. Ford stuck too long with the Model T... even as the car market shifted.... Sloan had to fashion a huge industrial enterprise... this problem by decentralizing operations... among separate divisions while centralizing policy matters.... "Management" became an exercise in ensuring stability. GM's market power made it less sensitive to... labor costs, because these could usually be recovered in higher prices....

GM [today] does not have the vehicles that command good prices. To move in volume, they require steep discounts. This is a management failing that can't be blamed on unions or retirees, and it's now compounded by the impact of high gasoline prices on SUV sales.... GM's deliberate management style has produced mediocre vehicles that fare poorly in today's hyper-competitive market. Since its peak, GM's market share has fallen by half....

As I see it, GM has three big problems:

  1. It paid its workers in the 1980s and 1990s in backloaded pension and health care benefits so that now workers have cash-flow rights but no control rights over the corporation, and this is an unstable and dangerous corporate control situations.
  2. Oligopoly profits have been built into GM's wages for a long time, and these oligopoly profit components are very "sticky"--they remain even though the oligopoly profits are long gone.
  3. GM management has bet very heavily on a low price of oil and a high price of SUVs.

Samuelson thinks that these are less important than (4): a culture of management that focuses on maintaining stability rather than taking advantage of change. He may be right.

Posted by DeLong at December 9, 2005 09:46 AM