Ford likewise began a $6 billion diversification drive, buying a big savings and loan in California and a consumer finance company in Dallas called the Associates, where the name of the CEO was (no joke) Reese Overcash—which added some public relations luster to the deal. Petersen also made some small acquisitions in the aerospace and defense industries and kept hunting for his own “lulu” to make up for the last-minute loss of Hughes. In late 1989 he got a measure of revenge by outbidding GM to buy Britain’s Jaguar, a prestigious luxury car marque that had fallen on hard times. It would prove an empty victory, bringing Ford billions of losses for nearly twenty years.
For companies that had been at death’s door at the beginning of the decade, the buying binges were surreal. Author David Halberstam had spent the early 1980s researching and writing The Reckoning, using the respective stories of Ford and Nissan to describe the demise of Detroit and the rise of the Japanese. But by the time the book was published in 1986, the tables were turning: Ford was resurgent, and Nissan was sliding into one of its periodic funks. An inspirational industrial comeback, with the potential to restore American pride and Detroit’s prosperity, seemed to be taking shape.
Between 1984 and 1989 General Motors, Ford, and Chrysler spent some $20 billion on acquisitions, most of them outside the car business. The acquisitions came on top of dividend increases, stock splits, and share-buyback programs, all generated by that ultimate enabler of corporate spending—copious amounts of free cash flow. The diversification moves were intended to outflank the Japanese, who were busy with the boring business of building more automobile factories in America. The real question was, who was outflanking whom?
While Detroit was diversifying, the Honda Accord became the best-selling car in America. Unlike the Big Three, Honda and the other Japanese automakers were investing heavily in new automotive technology—engines with direct fuel injection, overhead camshafts and multiple valves per cylinder, and four-speed automatic transmissions. The Japanese were using all these advances to improve the driving performance of their cars without sacrificing fuel economy. But such basic engineering investments didn’t produce headlines. And anyway, the Big Three were producing impressive financial results, at least for the short term.
But no sooner had it peaked than Detroit’s diversification started to backfire, with GM and EDS leading the way.
Even after General Motors bought EDS, the automaker remained EDS’s biggest customer, by far. And because EDS had its own class of stock, GM Class E, General Motors let EDS set its own prices to avoid any hint that it was shortchanging holders of the Class E shares. What followed was price gouging, pure and simple.
Knowing they had a captive customer, EDS executives demanded premium prices for every GM contract they got, big and small. Any GM manager who tried to bargain down EDS’s price was risking his career. Even worse, GM wasn’t getting much for its money. At a new high-tech assembly plant in Detroit, the automated guided vehicles that were supposed to replace old-fashioned forklifts stayed frozen in their tracks for nine months, because the EDS software didn’t work.
Other automation-software malfunctions were downright comical. Spray-painting robots at the same factory went haywire, taking aim at each other instead of the cars. At another factory robots equipped with suction-cup arms to install windshields broke as many as they installed, because they pressed down on the glass too hard. Roger Smith’s factories of the future were becoming industrial houses of horror—and expensive ones at that.
Adding insult to injury, Ross Perot was becoming disenchanted with General Motors and with Smith himself, whom he derided none too discreetly as a buffoonish bureaucrat. “Roger Smith works on everything in the world but GM business,” Perot told two Wall Street Journal reporters in a six-hour off-the-record monologue in May 1986. “He is the basic problem here; you’re looking at the cancer.”
A month later Perot went on the record with BusinessWeek. “The first EDSer who sees a snake kills it,” he said. “At GM, the first thing you do is organize a committee on snakes. Then you bring in a consultant about snakes. Third thing you do is talk about it for a year.” Perot hoped his sniping would convince Smith to sell EDS, but Smith proved tougher than that. Instead, he proposed buying out Perot’s GM shares for $753 million, in return for Perot’s resignation from EDS and from GM’s board. Basically, Smith wanted Ross Perot out of his hair, and on December 1, 1986, Perot agreed to take the money and go.
The Perot buyout was a watershed for General Motors and for Smith. The Dallas billionaire was mercurial, but many Americans sensed—correctly—that his folksy criticisms of GM and Smith were spot-on. Perot’s departure produced a barrage of bad press for GM; the company’s market share dropped overnight from 45 percent to 41 percent, a low it hadn’t seen in decades.
In early 1987, shortly after the buyout, GM hired New York PR guru Gershon Kekst to assess the public relations fallout. When Kekst’s research team finished its work, he flew to Detroit for a private breakfast with Smith, whose ruddy face by then had developed a blotchy red rash that his doctors attributed to stress. Kekst suggested a variety of steps that GM could take to adjust its marketing message. Then, with all the gentleness he could muster, he suggested the only real way to fix GM’s image. After an honorable period of time, say a few months, he said, Smith should announce he was retiring early from General Motors to make way for a new generation of leadership.
Kekst held his breath waiting for Smith’s reaction, which was surprisingly calm. Without missing a beat, Smith looked up between bites and said, “What’s Plan B?” It was a classic rebuff from a man who knew that his corporate fortress was impregnable because he was, after all, the chairman of General Motors. His successors would never be so secure, but Smith couldn’t fathom that. With more than three years to go before hitting GM’s mandatory retirement age, Smith wasn’t about to turn tail and run. He would stay the course—unfortunately for the company and its shareholders.
GM’s messy divorce with Perot showed the real danger of Detroit’s diversification drive: management took its eye off the ball. While Smith was busy building the twenty-first-century corporation, GM was building lousy twentieth-century cars. The Pontiac Fiero, a sporty two-seat roadster, suffered an alarming incidence of engine fires that prompted massive recalls. The Cadillac Allante, a $60,000 two-seat coupe, featured a sleek body that was built in Italy and then shipped to Detroit on jumbo jets for assembly. Not only was the process expensive, but the long-distance assembly line resulted in leaky roofs.
As these and other missteps took their toll on GM’s earnings, Roger Smith sought salvation in his comfort zone: accounting. General Motors stretched out its factory-depreciation charges over forty-five years instead of thirty-five, increased the projected investment returns from its pension fund, and changed its accounting assumptions for inventories and auto leases. Each of these moves increased earnings under accepted accounting standards, enabling GM in 1998 to report a record income of $4.9 billion.
But one-third of that amount came from the accounting changes—meaning that the entire increase came out of the accounting department, not the car department. It was all perfectly legal, analysts noted, but it amounted to earnings trickery nonetheless. Smith was undeterred. “GM is well positioned to achieve … industry leadership into the twenty-first century,” he wrote in the company’s 1988 annual report.
By this time, over at Chrysler, the distractions of fame and diversification were pushing Iacocca into making his own blunders. Chrysler had invested $400 million in the Italian luxury car maker Maserati, but the $30,000 car that resulted was a resounding flop. Iacocca moved production of the Omni and Horizon subcompacts twice, to factories in two different states, costing another $400 million—after which Chrysler decided to kill the cars anyway.
Those fiascos were just part of the nearly $5 billion that Chrysler squandered between 1985 and 1989 on production snafus, diversification, and stock buybacks—money that could have been spent
to develop new cars, which Chrysler amazingly had neglected. Worse yet, spending discipline collapsed, Chrysler’s break-even point soared, and the company’s 1989 earnings plunged more than 60 percent.
It was a wake-up call that prompted Iacocca to shift his diversification drive into reverse, selling Gulfstream and Chrysler Technologies. The moves “reflect the company’s renewed commitment to the automotive industry,” Iacocca declared. It was a strange statement for a car company, like the Yankees announcing a newfound affection for baseball.
Chrysler also launched a stringent cost-cutting campaign from which little was exempt—except $2 million for gold-plated faucets and other amenities at the company’s suite in New York’s Waldorf Towers, which was reserved almost exclusively for Iacocca. Tone-deaf executive excess would be a constant in Detroit, right up until the Big Three CEOs boarded their corporate jets in 2008 to beg for a government bailout.
In 1990, with Chrysler’s red ink mounting, Las Vegas investor Kirk Kerkorian snapped up 10 percent of the company’s stock for an average of $12.37 a share, about one-fourth of the stock’s price just three years earlier. Before the decade was out, Kerkorian would change Chrysler’s future.
But for now Kerkorian’s arrival played right into Iacocca’s hands. The directors, lacking an obvious successor to Iacocca and worried about Kerkorian’s intentions, lavished more pay and stock awards to keep their CEO from retiring—even though the last thing Iacocca wanted to do was retire. So obsessed was he with the CEO lifestyle that his exasperated executives took to describing it as “the Four P’s: Power, Podium, Perks, and Pay.”
Being CEO or a top executive at any Detroit car company offered plenty of those. Courtiers always hovered to arrange transportation, place phone calls, fetch drinks, and pave the way for everything. Executives could drive any car they wanted, always fully gassed, freshly washed, and perfectly primped. Iacocca’s travel entourage included two cars of security guards—one in front of his limousine and the other in back—whenever he was chauffeured from place to place. His chariot of choice, like that of Detroit’s other CEOs, was a Gulfstream G5 jet or something similar, always outfitted to the chairman’s personal specifications.
At Ford some executives even complained when the corporate jets served broken cashews instead of whole nuts. (Whole nuts, indeed.) In 1988 a lavish Persian carpet ordered for the Ford executive suite was so big that it couldn’t be hauled up the elevators at headquarters. Windows had to be temporarily removed so a helicopter could lower the rug into the building. The operation occurred on the day after Thanksgiving, so ordinary employees wouldn’t notice. Predictably, the corporate grapevine spread the news anyway.
Amazingly, after swinging from repentance to recovery during the 1980s, the Big Three were going astray again, unable to learn from their failures or to be satisfied with their success. Leading characters in the morality play, their executives had started their Detroit careers right after World War II, climbed the corporate ladder during the industry’s glory years, and then struggled to cope with the invasion of the Japanese—the same enemy that some of them, or their fathers, had fought during the war. But as the 1990s neared, these men were preparing to leave the stage.
On November 10, 1989, Ford’s Don Petersen announced that he would retire early, at age sixty-three. It shocked the business world because Petersen was the most lauded CEO in the country, not just in Detroit. But he had fought with the young Fords—Edsel Ford II and William Clay Ford, Jr., the son and nephew, respectively, of Henry II—about their roles on the board of directors. He had alienated key board members, who feared Petersen’s press clippings were going to his head. Petersen explained simply that he was resigning to “repot myself” in the new soil of retirement.
Next to go was Roger Smith, who despite his many and manifest missteps did make it to GM’s mandatory retirement age. In July 1990, just before he turned sixty-five, Smith was feted at the traditional “pickle dish” party for GM’s retiring executives—so named because the retiree got a silver-plated tray engraved with the signatures of every other active officer of the company. The attendees watched a film showing highlights from Smith’s career: the acquisitions of EDS and Hughes, the Saturn announcement, and the launch of the Nummi joint venture with Toyota. But much else was omitted, including the Perot buyout and GM falling behind Ford in earnings. Most of Smith’s fellow officers were relieved to see him go, but each dutifully raised his glass in a simple toast: “To Roger Smith.”
The last 1980s CEO to depart Detroit was Iacocca, though it would take him a couple of years and plenty of melodrama to do so. Iacocca hated the thought of someone stealing his spotlight, especially his ablest underling, Bob Lutz. The last member of the Gang of Ford remaining at Chrysler, Lutz was a talented “car guy” and Iacocca’s obvious successor. But Iacocca vetoed Lutz, and it was a stalemate until Chrysler’s desperate directors made a surprise choice: Bob Eaton, an affable GM executive whose biggest qualification was his lack of any enemies at Chrysler. By the time Eaton came to Chrysler in 1992, another CEO succession drama, indeed a full-fledged crisis, was unfolding elsewhere in Detroit.
In many ways the man who succeeded Roger Smith at General Motors, Robert C. Stempel, was Smith’s polar opposite. Instead of a career-long finance man, Stempel was an engineer, the first man who actually had developed cars to run GM in nearly forty years. In contrast to the short, squeaky-voiced Smith, Bob Stempel was big and burly, with a deeply resonant baritone. Stempel didn’t mind occasional verbal jousting—he once greeted three journalists who came to interview him by saying, “I see it’s three against one this morning. That ought to make the odds about even.”
Stempel had hardly settled into the chairman’s chair when, on August 2, 1990, Saddam Hussein invaded Kuwait, and the United States plunged into a recession. Six weeks later, in the midst of contract negotiations with the UAW, Stempel agreed to expand the six-year-old Jobs Bank. No longer would the program be reserved only for workers idled because of factory automation. Now workers idled for virtually any reason—including a slowdown in sales during a recession—could collect 95 percent of their regular wages even though they weren’t working. And they could remain in the Jobs Bank for years, without any time limit, and without looking for another job.
Despite Stempel’s high-minded intentions, his timing couldn’t have been worse: GM’s earnings were evaporating in the recession. Money that might have been used to develop efficient, high-tech engines or to upgrade the tacky plastic on GM’s dashboards was used to fund elaborate “job security” provisions that were actually becoming instruments of job destruction. Instead of protecting UAW members, the Jobs Bank and the rest of the “safety net” threatened the very existence of the companies that employed them.
Nobody wanted to connect the dots, at least not publicly. But after the United States went to war in the Persian Gulf, the recession deepened, and car sales plunged. Ford’s cash drain in 1990 alone exceeded its negative cash flow in 1980 through 1982. GM lost $2 billion in 1990, and in 1991—Stempel’s first full year as chairman—the company lost a stunning $4.5 billion, partly because of expanded outlays for the Jobs Bank. By 1992 the situation was critical, and GM directors were stirred to action.
Chastened by their complicity in Smith’s missteps, GM’s directors vowed to be more rigorous in evaluating GM’s management, starting with Stempel himself. The board wanted radical change at the company, but Stempel was hardly a change agent. He kept every member of Smith’s executive team, merely shuffling each man’s assignment—like the proverbial shuffling of the deck chairs on the Titanic. His plan to address GM’s crisis called for plant closings and layoffs that would be phased in only gradually, over a period of years, through the mid-1990s. By that time, the board feared, General Motors might not be around. GM’s crisis wasn’t all Stempel’s fault, but he was the wrong man to handle a crisis.
In November 1992, with the company perilously close to bankruptcy, GM’s directors ousted Stempel a
s CEO and installed one of their own—John Smale, the retired CEO of Procter & Gamble—as nonexecutive chairman. It was the first time the GM board had dumped a CEO since the days of Billy Durant. As the new CEO, the directors turned to a quiet GM executive named Jack Smith. No relation to Roger, the fifty-four-year-old Smith was a finance man who had transformed GM’s international operations from a money-losing mess into the company’s only source of profits. The directors also bypassed several layers of management to install a new executive team of Young Turk reformers, including Rick Wagoner, who became chief financial officer at the tender age of thirty-nine. In the nick of time, GM’s board had asserted itself (in striking and ironic contrast to the unstinting support that the directors during GM’s next crisis would give the CEO, Wagoner).
So the ride was coming full circle. Between 1980 and 1992 GM, Ford, and Chrysler had tried robots, reorganization, diversification, Japanese joint ventures, and more. They had gone from record losses to record profits and back to record losses. Detroit’s quality had improved, but it still trailed the Japanese, who weren’t standing still. Toyota, Honda, and Nissan were expanding their U.S. factories and launching new luxury brands—Lexus, Acura, and Infiniti, respectively—that posed a direct threat to Detroit’s high-profit sweet spot.
There was no mistaking the challenge confronting the Big Three. “We realize the urgency of change,” Jack Smith wrote in his first letter to GM’s shareholders in early 1993, “and will not let this opportunity slip by.” Fortunately for Smith, Detroit was about to get a timely boost from a shift in the car market that the Japanese could neither foresee nor comprehend.
Crash Course Page 11