Politics & Policy

Whatever Happened to Gm?

The auto giant is ailing today -- but you could see it coming decades ago.

The fortunes of General Motors seemed to improve on May 4 when Kirk Kerkorian, an 87-year old entrepreneur, announced his plans to invest heavily in the company’s stock by purchasing up to 28 million shares at a price of $31. This news lifted the spirits of investors and drove the stock price higher by 18 percent. However, one day later, the fortunes of GM appeared to shrink as Standard and Poor’s reduced the company’s bond rating to junk status. Analysts have turned their back on the big auto manufacturer and fear the worst due to overhanging personnel insurance costs, shrinking market share, and an aging and unwanted product line. Whatever happened to this giant of the auto industry that once held the majority of the U.S. market?

When I was a teenager in the 1950s, I lived next to a Chevrolet dealer. When the new V8 Chevy Bel Air came out in 1955, followed by the classic Impala in 1958, GM’s babies — Pontiac, Oldsmobile, Cadillac, and Chevrolet — all dominated their particular market niches. The company became so dominant that financial prognosticators used to say that “as GM goes, so goes the [stock] market.”

By the 1970s, the big-three auto producers in the U.S. began to feel the effects of competition from Japan — the small-car nation that offered designs and reliability rates that fit nicely into the budgets of middle-income Americans. Surging oil prices in the late 1970s accelerated the pain and, reluctantly, GM bet its future on downsizing the company’s automobiles. By the late 1970s and early 1980s, I don’t think GM offered a big V8-powered automobile. The dominant cars of the 1950s and 1960s were long gone and GM was fighting a losing battle against the highly rated Japanese imports. Could GM recover?

In the early 1980s, I worked for economist Art Laffer, and spent most of my time traveling the countryside converting Keynesians and monetarists into advocates of supply-side economics. Laffer’s firm generated extensive economic analysis but also produced custom studies for corporate clients. One such client was Toyota Motor Company. Since the Japanese were concerned about a backlash to their growing penetration of the U.S. auto market, Toyota asked Laffer to analyze the U.S. auto industry and the economy to determine if they should be concerned about protectionism. The conclusion of the report — don’t worry about protectionism — was much less important than a concurrent recommendation to Toyota: They should build the biggest, most-powerful luxury car they could for the American market.

The basis for the recommendation was Laffer’s economic research on energy prices and a lengthy paper justifying his call for substantially lower energy prices. Unfortunately, the management at Toyota scoffed at the recommendation, but some years later Honda entered the market with the luxury Acura line, beating Toyota’s Lexus lineup by about four years and gaining billions of dollars in profits.

The reason I tell this story is that I visited GM’s corporate headquarters in midtown Manhattan in early 1981 with Laffer’s energy study in my briefcase. My game plan was to first get the economists at GM on board with Laffer’s way of thinking, and then get them to sign-on to our economic consulting service. In those days, the names Laffer and Reagan were often mentioned in the same breath, so I could usually get an appointment with corporate big-wigs. In this case, I had the chance to meet with the chief economist at General Motors.

My meeting was very short. As I was just getting into my introduction and about to reach for the prophetic energy paper, I was told that General Motors had no need for any additional economic research and that the company had sufficient internal economists to come up with the conclusions needed to keep GM on top of the auto industry. So, the self-sufficient GM never took the opportunity to benefit from the strategy that could have put them back on top of the U.S. auto industry in the 1980s and 1990s when big cars made a comeback.

I had a pretty good suspicion back then that General Motors was never going to regain dominance in the auto industry. In the competitive world of automobiles, new ideas are the lifeblood of a winner. But when it came to new ideas, the GM corporate mind was closed.

I think I know what happened to GM, and now you do too.

– Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc. and principal of Victoria Capital Management, Inc.


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