Martian's Daughter: A Memoir

by Whitman, Marina von Neumann

  This unnerving episode typified an unwillingness to take individual responsibility that ran throughout the company. I soon discovered that GM headquarters operated through decision making by committees at meetings, which diffused the pinpointing of responsibility, leading me to murmur in exasperation, “Nobody here but us committees.” These committee meetings consumed an inordinate share of the workday, particularly because every attendee demanded that his staff brief him beforehand on the issues on the agenda, to avoid any chance of being blind-sided. And, in the end, after all the presentations and the discussions, the chairman's view was the one that counted.

  Two of the most important committees were the ones on pricing and production scheduling. Although the same top executives belonged to both, the two functioned independently. No one seemed to be concerned with the relationship between the expected demand for particular models, which drove production scheduling, and how they were priced. I had managed to pound the concept of a demand curve into the heads of undergraduates, who knew it would be on the exam, but I had no such success with GM executives. My objection, that the company wouldn't have to lean so heavily on customer incentives to move the merchandise if it made decisions about prices and volumes jointly from the start, fell on deaf ears.

  Despite setbacks like this, I was becoming expert in the corporate hand-to-hand combat involved in bringing into my fold several activities key to the goals I had set for myself as chief economist; I hadn't been labeled a pushy broad at Japan's Keidanren for nothing. One was the Corporate Strategic Planning Group; another was GM's European Advisory Council (EAC), another string in my bow aimed at moving GM toward a more global perspective.

  The twice-yearly meetings of the EAC were among the highlights of my job. This council, consisting of some of Europe's most prominent citizens from more than half a dozen countries, had been created by Roger Smith to advise on economic and political conditions affecting GM's operations in Europe. My task as chairman was to acquaint them with how things were going there for us, and to lay out the questions on which we especially wanted their wisdom and guidance. Drawing out the views of these leaders on issues affecting GM's business success was stimulating enough. But what I learned from these men—yes, they were all men—at the dinners preceding our meetings ranged far beyond issues germane to GM's European business to encompass almost every aspect of political, economic, and security developments in Europe. It was like once again sitting in on the conversations around the dinner table in Princeton when I was a teenager, except that now I was an engaged and respected participant rather than a sulky and impatient listener.

  One of the ways in which I tried to focus GM senior management's attention on the new realities was by sponsoring, in 1982, an intensive analysis by the Economics and Financial staffs of the reasons why the Big Three's production costs averaged fifteen hundred to two thousand dollars more per car than those of the Japanese imports, even after including the costs of transportation across the Pacific. The key message of the study was that the US auto industry was in big trouble and that its problems were long-term structural ones that would not be cured by economic recovery from the ongoing recession of 1981–82.14 Now that there was a single worldwide auto market, rather than national ones separated by different consumer demands in different countries, we simply had to dramatically reduce the large cost differential. Part of this cost gap was due to external factors like tax systems and exchange rates. But, the study revealed, the vast majority of this disadvantage was attributable to US management and US labor; primarily to the higher per-hour cost of labor and lower labor productivity in the American auto industry.15

  This analysis of the relative cost disparity got its authors in trouble with almost everyone. Ford and Chrysler had been insisting loudly that the most important causes of the cost differential were differences in the overall tax systems of the two countries and the “artificially” low value of the yen. Since these were disadvantages created by government policies and beyond the control of the automobile producers, they argued, it was up to our government to eliminate them or, if that proved impossible, protect the domestic industry by placing restrictions on imports.

  The United Auto Workers (UAW) had a different but equally vehement objection. As part of GM's labor negotiations, I was sitting across a table from the head of the UAW's GM Department, Don Ephlin, discussing with him one-on-one the GM analysis of the US-Japanese cost differential. Ephlin was normally an even-tempered man, known for promoting a cooperative problem-solving relationship with management. But he blew up at my explanation that about half the cost difference was due to our higher labor costs per hour and the other half to differences in labor productivity. “That makes it sound,” he spluttered, “as if everything was the workers' fault, that management's failings in the design of both the products and the production process, and its long-standing lousy relationship with our union, had nothing to do with it.” Startled and embarrassed, I replied, “But that's not what the study said; it stated clearly that both management and labor bore some responsibility for the cost gap.” It had never occurred to me that what I had regarded as a value-neutral piece of accounting would be seen from his perspective as putting the blame exclusively on his members.

  Quite a few analysts, journalists, and legislators reacted by insisting that the Japanese advantage was due almost entirely to better management. I responded whenever I was asked that it was “all of the above— better motivation and productivity, lower wages, new plants, lower materials costs and, well maybe, better management on the Japanese side.”16 An independent study produced jointly by the University of Michigan and the consulting firm Arthur Anderson came to basically the same conclusion.17

  The differing explanations of the Japanese cost advantage became a huge bone of contention because they provided ammunition to various sides in the ongoing wrangle over US trade policies. In 1980, as the Japanese share of car and truck sales in the United States was moving inexorably upward, and the size of their competitive advantage was becoming clear, Ford and the UAW jointly petitioned the US International Trade Commission (ITC) for a so-called escape clause action, which would impose restrictions on imports of Japanese cars for a minimum of five years. Those of us at GM who opposed import protection managed to hold off strong pressure to join the petitioners by persuading Roger Smith to support our position. The company refused to join the Ford-UAW action, with the result that they lost the case.

  Ford and the UAW persisted, though, despite a testy comment from Henry Ford II to Ford CEO Philip Caldwell: “I'm sick and tired of GM sitting back and letting us carry the ball on the Japanese…You know, Phil, we're in business to sell cars. I don't feel that this government lobbying has gotten us much so far except for some bad publicity in the mass media and the financial community.”18 The difference of opinion between the two companies surfaced publicly at the 1981 plenary meeting of the Trilateral Commission, to which both Caldwell and I belonged. Caldwell made a vigorous case for protectionism, while I minced no words in voicing my strong doubts about going that route. Our disagreement was highlighted in an article in the Washington Post.19

  At the beginning of his first term, in 1981, Ronald Reagan negotiated with the Japanese government a so-called Voluntary Restraint Agreement, limiting imports of Japanese cars to 1.68 million annually for a three-year period. Just before the president took this action, I sent a strong memo to my superiors, urging them to resist the siren song of protectionism. Although import protection would undoubtedly reduce competitive pressures and increase our profitability in the short run, I argued, it would work to our disadvantage in the long run, by reducing our leverage with the UAW in bargaining for wage concessions and modification of some of its restrictive work rules. It would also subject the United States to retaliation from our trading partners and could easily lead to a breakdown of the trend toward a liberalized trading system, a system that was essential if multinational corporations were to be free to operate on an increasingl
y global basis, including investing in facilities overseas. “The only reason to sacrifice one's long-run position to short-run advantage,” I concluded, “is if you don't think you can survive to enjoy the long-run otherwise. Chrysler is obviously in that position. I hope, and believe, that we are not.”20

  Once the restraints were imposed, I defended this action in public statements and interviews, saying, in effect, “They will give American producers a breathing space in which to adjust to intense foreign competition, and, besides, there is less danger that they will become permanent than some of the protectionist legislation being proposed in Congress, which they have been designed to fend off.” Inside GM, though, I warned that this move carried several dangers to our ability to compete. One was that it would encourage Japanese firms to evade the quotas by building auto plants in North America, adding to global car-building capacity, which already greatly exceeded worldwide demand. Another was that, since the Voluntary Export Restraints (VERs) would limit the number of cars sold in the United States rather than their total value, the Japanese would logically move up-market and begin to produce the larger, more expensive, and more profitable vehicles that were the heart of the Big Three's business. And finally, the increase in profits generated by quota-induced artificial scarcity would accrue primarily to the Japanese manufacturers, allowing them to invest more resources in newer, better products and processes.

  When the VERs' original three years were up, their extension for a fourth was a foregone conclusion. Ronald Reagan may have been philosophically on the side of liberalized trade, but he knew better than to terminate them in an election year. When it came time to discuss a fifth year, Roger Smith, alone among the CEOs of American car companies, called for them to end. In an op-ed piece in the Washington Post headlined “It's Time to End the Auto Quotas,” he outlined all the investments GM had made and was making to become more competitive with the Japanese. “So let's drop the restraints,” he urged, “and get on with slugging it out in the world marketplace. The discipline of worldwide competition not only can assure that customers have access to the best products at the best prices, it also speeds up the pace of technological innovation and industrialization and industrial modernization, which means more growth and better jobs.”21

  I felt a glow of triumph that my oft-repeated arguments had received the imprimatur of the chairman's byline. I found out the downside when the host of Automotive Report on WJR, Detroit's most listened to AM radio station, cast Roger and me as allies opposing most of the other executives at GM on trade policy, saying, “A very important philosophical question on whether General Motors should continue to support total free trade with the Japanese is now going on inside the number one auto company…The debate…has had chairman Roger Smith and New York based economist Marina Whitman on one side, with GM President F. James McDonald, Vice Chairman Howard Kehrl and numerous vice presidents on the other side.”22

  The allegation of a Smith-Whitman alliance on trade issues did me no good in the eyes of many other GM executives. The heads of GM's divisions, the very operating executives I wanted to persuade that the Economics staff earned its keep, were determined to oppose my antiprotection arguments every chance they got. As one of them put it, “The time has come to rise above abstract principles and do what's best for General Motors.” Their hostility to my views on trade, I began to sense, was undermining the credibility of my staffs forecasts and analyses in their eyes.

  President Reagan did refuse to extend the VERs for another year, to the consternation of Ford and the UAW. Japan continued to impose such quotas unilaterally, though with a substantial increase in the number of cars allowed, until 1994. By that time, the Japanese producers had made full use of all three of the strategic opportunities created by the VERs that I had warned about. They were setting up manufacturing plants in the United States, building larger and more expensive cars for the US market, and investing their quota profits in new products and processes; these moves became critical factors in the decline of the American auto industry. I had the satisfaction of having been right, but that only heightened the backlash against my well-known opposition to import restrictions, which led UAW president Owen Bieber to refer to me privately as “that free-trade bitch at GM.” My colleague who overheard the remark wasted no time in passing it on to me.

  Roger Smith did believe, as a general proposition, that an open world trading system would give GM maximum flexibility to plan its sourcing and operations on a global basis. But his first concern was with the company's bottom line, and he had more practical, immediate reasons for favoring an end to the VER program. He had never shared his colleagues' blindness to fast-moving developments in the worldwide auto industry, and he knew that GM would have to compete in the increasingly popular small-car segment of the market. But when he saw the original cost estimates for producing such a vehicle, Smith killed the proposal, saying that there was no way the company was going to ramp up to produce cars it would have to sell at a loss.

  Smith had in mind his own radical plans for establishing GM as a player in the market for small cars, but it would take several years to bring them to fruition. To bridge the gap, he admitted on station WJR's Automotive Report, “[We] do have programs to bring in from Japan some small, very fuel-efficient, low-priced cars—in limited numbers.”23 A continuation of the VERs at their current levels would have allowed no room for these additional imports; only the substantial expansion of the quotas by the Japanese government when it extended the program unilaterally made his bridge strategy viable.

  On the other end of the bridge, Smith had a two-pronged approach to building such vehicles in the United States on a cost-competitive basis. One he described on the same radio program: “Our Saturn Corporation, eventually with assets of $5 billion, will build and operate—in the United States—its own new, highly integrated manufacturing and assembly complex. It will use new technologies in product and processing and will have separate franchises and a separate labor agreement, using concepts worked out by a joint GM-UAW task force.”24 This announcement set off a hot bidding war among several states, eventually won by Tennessee, for what would be advertised, when it was up and running, as “A different kind of company, a different kind of car.”

  The other prong to Smith's strategy emerged from the secret discussions he had been having with Eiji Toyoda, the chairman of Toyota, about a joint venture to manufacture small cars in a shuttered GM plant in Fremont, California, using the Toyota production system and a teamwork-based working environment. The two executives regarded this pioneering idea as a win-win proposition. General Motors would get an inside look at the vaunted Toyota system, and Toyota, which was planning to build its own plants in the United States, would test the waters in working with unionized UAW workers.

  The proposal, which had to be approved by US regulators, was challenged by Chrysler on antitrust grounds, and I found myself in front of first a judge and then a congressional committee defending the plan for a New United Motor Manufacturing, Incorporated (immediately and ever after known as NUMMI). The proposal had been structured, I emphasized, to be pro- rather than anticompetitive and imposed no restrictions on either firm's ability to continue its fierce rivalry in the United States and throughout the world. Furthermore, I insisted, the knowledge GM would derive from the proposed joint venture with Toyota was essential to Saturn's success.25

  Chrysler's general counsel argued that the joint venture would in fact restrict competition. Fortunately for me, the committee's chairman, Congressman John Dingell, a strong supporter of the US auto industry and a fearful opponent in the halls of Congress, shared GM's view. He lobbed such softballs to me and such hard-hitting questions to Chrysler's representative that I caught myself feeling sorry for the guy.

  As it turned out, my promise that NUMMI would provide a learning experience for Saturn and GM in general was thwarted by the internal bureaucracy charged with implementing it. Smith had intended that GM midlevel executives would go to NUMMI in
teams of four, spend several years learning the secrets of the Toyota production system, and return as a team to incorporate them into company operations. But the GM divisions resisted bringing these bearers of foreign ways of doing things into their fiefdoms, and the returnees were reluctantly reabsorbed into the company one by one, a process guaranteed to thwart the changes that were to have been GM's gain from the joint venture. In yet another example of the company's tendency to stick with or revert to its traditional habits, many of the innovations that had made Saturn a new kind of company were gradually abandoned by Smith's successors. The Saturn line of vehicles was phased out as part of GM's government-mandated restructuring in 2009, and the NUMMI plant closed when neither GM nor Toyota showed any interest in continuing to keep it open.

  Roger Smith's strategy for producing small cars competitively in the United States typified the visionary side of his nature, in which he saw highly automated factories and paperless offices as the main instruments for restoring and maintaining GM's competitive position in a global struggle for automotive dominance. During his time as CEO, GM invested heavily in the latest and most automated production processes. Why, then, did his long-range planning ultimately fail to achieve its creator's goal but rather took the company to the edge of bankruptcy?

  Like the heroes of Greek tragedy, Smith was a great man with some ultimately fatal flaws. His greatness lay in his intelligence, creative thinking, and ability to make big decisions rapidly. But he misunderstood the sources of the Japanese advantage and couldn't make midcourse corrections when his plans blew up in his face. He failed to see that the heart of Japanese product and process innovation lay not in high-tech automation, which they used sparingly, but in a finely honed integration of product design, process simplification, and human behavior. When the expensive machinery Roger was so proud of became the butt of bad jokes about robots dropping windshields and painting each other, he was unable to get the problem effectively diagnosed and fixed. Instead, all the spending on automation took GM from being a low-cost to a high-cost producer, absolutely the wrong direction at a time of intensifying competition.