“By the way, if the feds knew about this, why wasn’t it disclosed to investors when the reborn GM sold shares to the public in 2010 or when the government sold the last of its shares in 2013? This would seem to be an issue for the SEC, which never tires of sanctioning companies that fail to disclose material facts. Does GM get a pass because it was Government Motors?”, Wall Street Journal
The Culture of General Motors
Another financial-crisis lesson in the virtues of an honest bankruptcy.
General Motors CEO Mary Barra testified on Capitol Hill this week about the company’s long delay in recalling defective ignition switches from some small-car models. Members of Congress seized the opportunity to attack the “culture” of GM. Yet many of these same politicians supported a 2009 federal intervention that bent the rules of bankruptcy precisely to maintain the culture of GM. This is a handy lesson in the virtues of normal corporate bankruptcy.
For years prior to GM’s 2009 bankruptcy, our columnist Holman Jenkins and various Journal contributors warned that Detroit’s business of making small cars wasn’t sustainable given the high costs of union labor, pension and medical benefits plus fuel-economy standards mandated by the government. GM, Chrysler and Ford could make money selling trucks and SUVs because Americans wanted them (and because light trucks enjoy tariff protection). But the Big Three struggled to stay profitable making the low-emission small cars desired by politicians.
Toyota maintained a labor cost advantage (including health care) of roughly $2,000 per vehicle over Detroit. If the Big Three got creative they could find a way to offset this advantage when selling a $30,000 truck but not a small car in the $10,000-$20,000 range.
Federal regulations essentially prevented Detroit from building the small cars more cheaply offshore. That’s because the auto makers still had to meet stringent fuel-efficiency averages for all the cars they produced domestically. So in order to keep building the big vehicles they could make profitably, they had to churn out lots of fuel-efficient vehicles and somehow make them cheap enough to compete with cars produced by non-union workers.
Is this why GM didn’t make much earlier what seems like a relatively inexpensive fix? Ms. Barra suggested as much this week. “In the past,” she said, “we had more of a cost culture, and now we have a customer culture that focuses on safety and quality.”
The explanation may not be that simple, since the company did initiate other safety recalls on the vehicles. And given that GM didn’t recall the faulty switches until this year—roughly a decade after they were first introduced in cars—a dysfunctional bureaucracy with poor internal communications might also have been to blame.
That goes for the federal government too. The National Highway Traffic Safety Administration received information from GM and elsewhere in the mid-2000s about how drivers could knock the keys out of position and about accidents involving the failure of airbags to deploy while the vehicles seemed to have been turned off. The feds even convened a defects assessment panel in 2007 but took no action. This was partly because the overall rate of crashes and injuries from non-deployment of airbags in the GM cars was similar to rates in other vehicles in their class.
Mary Barra, chief executive officer of General Motors Co. (GM), speaks during a Senate Consumer Protection, Product Safety, and Insurance subcommittee hearing. Bloomberg
Within both the company and the government, which essentially began running GM in 2009, there may have been a failure to recognize the connection between the bad switches and airbag problem. Or perhaps this was known and ignored, which is why if Congressional investigators continue this inquiry they should also question federal traffic-safety employees and members of the White House automobile task force to see what they knew while running GM.
By the way, if the feds knew about this, why wasn’t it disclosed to investors when the reborn GM sold shares to the public in 2010 or when the government sold the last of its shares in 2013? This would seem to be an issue for the Securities and Exchange Commission, which never tires of sanctioning companies that fail to disclose material facts. Does GM get a pass because it was Government Motors?
Keep in mind that GM’s culture would have been turned upside down and might no longer exist if the government hadn’t preserved it. In the throes of the financial panic and recession, Chrysler and GM could no longer be sustained without help from Washington. In December 2008 they began receiving money from the Troubled Asset Relief Program. More aid came in 2009 when the feds engineered bankruptcies.
But they weren’t normal bankruptcies intended to preserve value for creditors while allowing the companies to restructure to become more competitive. The Chrysler and GM bankruptcies were engineered to maintain union jobs and benefits, as well as the political commitment to make small cars. The Obama Administration even handed 20% of Chrysler to Fiat with an option to buy more because the Italian auto maker had designs to make still more small cars.
One of the reasons it’s good to let companies fail is that consumers benefit as well-run companies replace poorly run firms. Consumers do not benefit when companies are kept alive to serve political goals. Let’s hope that the “new GM” that Ms. Barra likes to describe can develop a culture of serving drivers and passengers rather than Senators.