The rise and demise of GM’s Saturn

Not very long ago, on a cold, wintry day of January 1985 the top man at GM, Roger B. Smith, unveiled ‘Saturn’, the first new brand to come out of GM in almost seven decades. A stand-alone subsidiary of GM, Saturn had a promising birth and was touted as a ‘different’ type of a car. Having its own assembly plant, unique models and separate retailer network, Saturn operated independently from its parent company. It was a cut above the rest in using innovative technology and involving its employees in the decision making process. Conceived as a fighter brand to take on the Japanese brands, the small car of superior quality was the product of strong principles with a mission of being America’s panacea to Japan’s challenge. It reaffirmed the strength of American technology, ingenuity and productivity with the combination of advanced technology and latest approaches to management.

Though a revolutionary idea, Saturn wasn’t able to live up to the hype or the hopes of Roger Smith. The case of Saturn is definitely one for the books. Its marketing campaign fired up the public’s imagination and interest perfectly while the product was a miserable failure. Everything the company did was just another leaf out of the handbook of perfect PR. When the first lot of cars had a bad engine antifreeze, the company replaced the entire car instead of just the coolant much to the customer’s delight.

Besides clever marketing, Saturn’s biggest assets were its passionate employees and customer-centric approach which rewarded it with a quick victory. The victory was however short-lived as GM was reluctant to expand Saturn’s offerings for fear of cannibalization on the sales of its other divisions. For the existing models, Saturn’s engine had inferior motor mounts with the plastic dashboard panels giving it a cheap look and even the plastic-polymer doors, the so-called unique feature, failed to fit properly. Overall, the car neither had an identity nor a USP. To make things worse, Roger Smith was on a spending spree from throwing recall parties when vehicle problems were solved to hosting “homecoming” celebrations at plants. This saddled GM with high costs leading to increased doubts of Saturn’s survival among the leaders of GM.

Disaster struck further when Saturn’s sub-compact prices failed to cover the huge costs gobbled up by a dedicated plant with massive operating costs. The fact that the plant churned out cars that barely share any common parts with other GM brands did not seem to help at all. To top it all, at a time when buyers were snapping up minivans and SUVs, Saturn’s offerings were just limited to 3 small models for over a decade, thereby losing out on locking customers in. Just when GM was pondering over the decision of scrapping the car, the UAW visited one of Saturn’s production facility with its international contract, only to be rejected by the workers. As obvious as it seemed, the unique labor contract of the company was dissolved and GM had no choice but to part with the brand by dividing the production among other GM plants.

Automotive history has witnessed myriad failure stories of brands that were supposed to be world-class products but ended up biting the dust. One such underachiever brand was Vector which sprouted out of the aim of producing an American supercar but doomed due to cash flow issues, mismanagement and failing to keep up their insane promises. Sterling, Rover’s disguise into the American market, was another lost car of the 80s which most people haven’t even heard of. Their promise of delivering “Japanese reliability and refinement with traditional British luxury and class” couldn’t save them from continuous sales drop and combating competition from new Japan rivals. Few other epic automotive experimental failures which can be recalled in this scenario would include Chrysler’s TC by Maserati , Subaru SVX, Jaguar X-type, Lincoln blackwood, GMC Envoy XUV, Chevrolet SSR, Chrysler Crossfire and Dodge Durango Hybrid/Chrysler Aspen Hybrid. While some were design disasters, the others just couldn’t perform.

The automobile industry is governed by various factors which include the technology advancements of the time, economic conditions and fluctuations of consumer needs. The latest automotive chip on the block are the electric cars which are set to revolutionize the entire industry. LeEco, a Chinese electronics company is taking serious steps to target Tesla, what with it investing $1.08 billion on developing its debut electric car. Tesla was the name which paved the way for an electronic vehicle era. Whether LeSEE, LeEco’s concept sedan, can surpass Tesla’s performance and give them a run for their money is only something that time will tell. If successful, these electric cars could be the game changers of this century to usher in an electric future. If not, it will fade away and claim its place as a bittersweet memory on the list of flops that the industry has had.

Detroit’s 6 Mistakes and How Not to Make Them

First Wall Street and now it seems GM and Chrysler came begging at the governments doors for additional $20+ billion dollars. What do they offer in exchange for this money? They want to give buyouts and early retirements packagesin their effort of cost cutting and layoffs. This means essentially that the two companies aim at reviving themselves the old, traditional way adding perhaps an edge of efficiency, leanness and flair of cautiousness in these new realities or do they offer a radical shift, a ideological quantum leap enabling reconstruction of an automotive industry that befits well the expectations, technological progress and strategic vision inherent in the 21st century?

GM and Chrysler so far seem to have chosen what is best characterised by Albert Einstein’s saying, “You can never solve a problem on the level on which it was created.”

Below is an illuminating piece on what (six) mistakes were made by Detroit industries during the 20th century from Umair Haque, one of visionary thinkers on this aspect. These errors, while allegedly bringing automobile industry to their knees in the 21st century, were largely paralleled, ideologically, by other mainstream industries of the 20th century.

1. Old rule: Choose evil. Industrial era business is unrepentantly and almost sociopathically evil: shifting costs onto others, while striving to internalize benefits. Detroit chose lobbying, marketing wars, and low-cost hardball – to always and everywhere try to socialize costs and privatize benefits. Never was this truer than Detroit’s lobbying against public transport throughout the 20^th century. Why does public transport in the States suck? Because Detroit’s lobbying machine doesn’t.

New rule? Choose good. In the 21^st century, every moral imperative is also a strategic imperative:doing good – for customers, employees, suppliers, or society – is a radical strategic choice that unlocks new pathways to innovation and growth. The opportunity cost of defending evil for Detroit was never learning how to choose good – and that’s a crucial mistake other auto players didn’t make. Tata chose to make a car that was accessible to the world’s poor. Porsche and BMW chose to invest in talent, people, and imagination. Honda and Toyota chose to invest in renewables and partnerships with the public sector. All opened new avenues to growth for an industry at the brink of extinction.

2. Old rule: Selfishness is self-interest.What’s strategic is supposed to be what’s in the firm’s self-interest. But how do we define self-interest? Consider for a second the fact that as recently as this year, Detroit’s lobbyists were hard at work, opposing stricter fuel efficiency standards. That’s 20^thcentury self-interest at its finest – not authentic interest for one’s own long-run outcomes, but simply a childlike selfishness, both myopic and narrow, where cutting off the nose to spite the face is as rational as mutual nuclear annihilation.

New rule? Purpose is self-interest. The 21^stcentury demands a more enlightened self-interest: one factoring in a longer timescale, fuller contingencies, and an honest and broad consideration of hidden and unintended consequences to people, society and the environment. When we understand all that, have begun to develop a purpose – a way in which we will change the world radically for the better. By confusing selfishness with self-interest, Detroit vaporized it’s own purpose – and will stay trapped in a wilderness of economic meaninglessess until it rediscovers it.

3. Old rule: Maximize destructiveness. The goal of orthodox strategy is to destroy the ability of others’ to imitate or commoditize you. And Detroit was a master of the art of destructive strategy: patenting, trademarking, and litigating; playing hardball to control distribution channels, defending brands with disproportionately steep marketing investment, and building entire new marques to gain share in key markets and segments. The point of all these tired, stale 20^th century strategic moves was the same: strategy as an exercise in exclusion, isolation, and barrier-building.

New rule? Get constructive. True 21^st century businesses can be judged in the blink of an eye: how intensely do they put the “co” in constructive? Can they let demand spark and fuel co-creation, can they co-produce from a pool of shared resources, are they capable of letting value activities be co-managed, are they tuned to cooperate? Detroit can’t get constructive because it’s spent the better part of a century playing the games of destructive strategy.

4. Old rule: Seek differentiation. When is a Jaguar really just a Ford? When it’s an S-Type. Under Alfred Sloan, GM famously organized itself divisionally – Pontiac, Buick, Cadillac… – for the sole purpose of differentiation. But industrial era differentiation is too often just skin-deep: the same lemons with slightly different marketing, distribution, and branding. So why pay a steep premium for a Buick if it’s just a Chevy with slightly nicer trim? Detroit discovered the hard way that in the 21^st century, the concept of differentiation is increasingly stale.

New rule? Seek difference. Ultimately, the problem is simple: differentiation is about perception. Difference is about reality. People in the 21^stcentury aren’t the zombified, braindead consumers of the 20^th century. And so the 21^st century demands not mere differentiation – a bean counters’ eye view of the world if ever there was one – but true difference. True difference is built by making different choices from the ground up – different in the very essence of the value activities that make the wheels of production and consumption spin. Porsche and BMW strove for difference – not mere differentiation – and it is that choice that is at the heart of their global leadership of the automotive sector.

5. Old rule: Seek agility. Strategy is in many ways simply the avoidance of crisis – the evasion of threat, weakness, and vulnerability. The goal of strategy as the avoidance of crisis is simple: agility. Industrial-era corporations seek agility, in other words, by insulating themselves from real-world economic pressures – that’s what Detroit did bar none, by always seeking to game the system: lobbying, marketing, and wheeling-and-dealing it’s way straight into oblivion.

New rule? Seek crisis. By insulating themselves from real-world economic pressures, boardrooms also dilute and sap incentives for innovation and renewal. Detroit wasn’t innovating because the opportunity cost of strategy as gamesmanship was, ultimately, foregoing innovation itself. In the 21^stcentury, gamesmanship – and its attendant dilution of incentives – is a sure path to near terminal strategy decay. Forget Detroit – just ask big music, big pharma, or big food.

6. Old rule: Advantage happens against. Orthodox econ holds that it is through the pursuit of competitive advantage that corporations create the most value most quickly and reliably. And that’s a mistake Detroit made to the hilt. It sought a nakedly competitive advantage – against suppliers, dealers, consumers, and society alike. The result is an industry crippled by structurally antagonistic relationships with labour, buyers, suppliers, consumers, and society alike.

New rule? Advantage happens for. Competitive advantage against bears a striking resemblance to simply bullying. Bullying is easy: just as in the sandbox, any boardroom with market power can jack up margins by forcing others – buyers, suppliers, consumers, society – to bear costs. But if every corporation across the economy is playing that game, the economy’s just a game of musical chairs.

Paulson mistakes and chapter 11

A brief but illuminating summary of recent blunders of Henry Paulson, an expert on the Great Depression.

Treasury Secretary Henry Paulson made some disastrous decisions that had major unintended consequences.

One of those was the decision to nationalize Fannie Mae and Freddie Mac. Once the government took over Fannie Mae and Freddie Mac, supposedly preemptively, shareholders of every other financial company that perhaps needed capital were left with no choice but to sell aggressively, fearing the government might decide to preemptively wipe them out also. This made it impossible for any company to raise the capital it needed or wanted.

About a week later Lehman Brothers filed for bankruptcy, Merrill Lynch was forced to sell to Bank of America, and AIG was extended a huge government loan, all completely or nearly wiping out shareholders.

Then Paulson forced nine major banks to receive capital infusions from treasury, effectively partly nationalizing them, and creating a huge American Sovereign Wealth fund.

The above referenced nationalizations created a bizarre situation where the government contended that financial institutions needed more capital, and that it should be private capital that will solve the problem. But the government also indicated that it stands ready to provide additional assistance in the future, thus destroying the equity stakes of those prospective capital providers. Why would private capital invest, if it believes it is the policy of the government to later intervene and dilute it?

Enter the pernicious crash of October-November 2008.

The smartest CEO, John Thain of Merrill, understood the new landscape before anyone else and quickly sold at the then still available price, albeit a fraction of his company’s value at its peak. In doing that he saved Merrill from the ignominious fate it was inevitably headed towards, the same fate that awaited Lehman Brothers.

And by letting Lehman Fail, the counterparty risk was unleashed on the economy of the world, as Lehman was involved in thousands of trades all over the globe and was much bigger than Bear Stearns. That brought to the forefront the systemic risk that is now looming above us like a dark cloud. All of a sudden even money market funds were losing principal. Secured bond holders are losing money (unlike the creditors of Bear Stearns, Fannie and Freddie, who emerged whole). Nobody knew who could be trusted, and short term credit markets ceased to function, severely impairing the economy further.I believe Secretary Paulson’s policies aggravated the crisis. At the moment, Citigroup and JP Morgan are struggling; locked out of the market for private capital and their shares are in free fall. Despite major capital infusions, most financial stocks are down sharply. The nine institutions that received the first cash infusion from Washington have seen their shares fall more than 40% since then. Goldman Sachs last week was trading at a value less than just the amount of money it raised recently. So many financial institutions are failing, making the federal government their built-in savior and enervating the Fed’s resources with their insatiable demand for fresh cash.All this is making it palpably clear that the Treasury’s policy did nothing to build confidence or stabilize the markets. The sickening, precipitous drop of the equity markets in October and November are the market’s judgment on the merit of Treasury’s policies.

Here is the original article from the Huffington Post.

He accepted his errors by saying, “We’re not proud of all the mistakes that were made by many different people, different parties, failures of our regulatory system, failures of market discipline that got us here.” His solution was then and now to “buy bad assets and the administration has allocated $US100 billion for that portion of the program,” referring to the $700 billion bailout program.

His approach however looks more like a band-aid, which will postpone but by no means prevent a near certainly future problems in the financial markets. As one shrewd expert admits, “The government cannot repeal the law of gravity and stop markets from falling. Nor can it turn back the clock to reverse our financial blunders.”

The currently prevalent and rather dogmatic approach of avoiding filing for the Chapter 11 is mostly due to a misconception. It is commonly thought that a company or an organization filing for the bankruptcy (immediately) ceases its activities and (virtually) its existence. This is wrong. Usually the causes (especially in high-tech cases) to file for Chapter 11 include overwhelming debt, defensive maneuver against temporary legal liabilities and need for reducing labor problems. For the duration of being under the Chapter 11 protection, the company/organization continuous its operations. The difference mainly comes in guise of added supervision and control. The debtor usually remains in possession of the company’s assets, and operates the businesses under the supervision and control of the court and for the benefit of creditors. The debtor in possession is a fiduciary for the creditors. The objective and desired result of the Chapter 11 protection is make the company cut costs, re-orient itself and streamline in resources in efficient manner in order to return to profitability. Although admittedly the rate of successful Chapter 11 reorganizations is low (estimated at 10% or less), it is still a better solution, and is not only considered by small and medium but by large multinational corporations such as GM (which follows the same path of peering into the public money instead of doing an internal restructuring, refocusing and cost cutting as was done to save IBM in a similar case in 1993). In addition to other benefits, for the GM case, Marketing expert Seth Godin goes to the extreme of proposing, “Use the bankruptcy to wipe out the hated, legacy marketing portion of the industry: the dealers.” And then adding, “We’d end up with a rational number of “car stores” in every city that sold lots of brands. We’d have super cheap cars and super efficient cars and super weird cars. There’d be an orgy of innovation, and from that, a whole new energy and approach would evolve.” I agree.

Companies coming out of the Chapter 11 (usually few years after the initial filing) are leaner, healthier and better positioned. The most famous case in point is WorldCom.

One way or another, financial policies so far espoused by the US Treasury and Fed not only come short of calming markets and inducing confidence in money-needing banks, but also continue wasting tons of taxpayer dollars, imposing a heavy financial burden on younger generations.