GM's Downfall

Dr. Hans Veldman, expert on the USA and associate professor of strategy at Nyenrode, analyses the economic and political significance of the downfall of General Motors.

Sloan’s Strategy versus Hi-tech
The partial collapse of General Motors (GM) is an important benchmark in American history. The bankruptcy of the major car manufacturer marks the end of the auto-industrial 20th Century in the USA and the start of a 21st-century, hi-tech society. For decades, General Motors was an exemplary model of how to run a modern corporation. Alfred Sloan, one of its first CEOs, was the founding father of an enterprise strategy that was followed by most American and European companies. Among other things, this involved the head of the car manufacturer dividing the company into business units, each of which operated in different branches of industry. The profitability of an industry and competitiveness within it were the most important criteria for investing in that industry.

Since the forties, most big American and European companies have been organized in accordance with Sloan’s doctrine of management. They usually derive their revenues from other activities than those for which they were originally begun: Philips with medical equipment, Nokia (originally a wood producer) with mobile telephones and Toyota – in the future – with the generation of (nuclear) energy. GM remained active in the car industry but also earned a lot of money from activities in the banking and insurance industry. This immediately explains why the car manufacturer was able to drag out its loss-making existence for so long. 

Major Employer
However much it may have been expected, it remains shocking that GM – a classic example of business management – has come to an end. When Fortune magazine named its top 500 businesses for the first time in 1955, GM was the biggest company in the USA. In terms of turnover, it was even one of the three biggest industrial corporations in the world. In the mid-1950’s, it was generally accepted that GM’s expansion prevented a recession in the USA, and until the latter half of the eighties it was one of America’s most important employers. It paid its poorly educated employees generous, middle-class wages, provided them with sick pay and gave them pension rights. GM virtually had a European stakeholder model, in which the trade unions had a major role. In this respect, the company’s decline also symbolizes the decline of the American middle class in an industrially-oriented society. It is not without reason that Wal-Mart is now America’s biggest employer and that this supermarket chain (where the trade union barely has a foot inside the door) is eligible for the position of ‘most successful business’ this year.

Second Car Industry
Aside from the economic repercussions, the downfall of GM also symbolizes a turn-around in political history. Although the financial difficulties of General Motors get the most attention, the American car industry is not restricted to the ‘Big Three of the North’ (GM, Ford and Chrysler). Over the past two decades, assisted by investment subsidies and tax advantages, a second car industry has developed in the southern states with cheap labor and minimal union influence.

In the conservative southern states of Kentucky, Oklahoma, Tennessee, Alabama, Mississippi, South Carolina, Georgia and Texas, foreign car manufacturers have radically changed the economic landscape and powerfully affected the political debate about the fate of the car industry. Take Toyota in Kentucky, for example. Encouraged by investment subsidies from the state, the Japanese car manufacturer built its first factory in Georgetown in 1986. Since then, the population of Georgetown has doubled and there has been major urbanization of the area where farmers used to grow tobacco. The financial incentives offered by Kentucky have been repaid many times over. The same applies to the other states of the south.

The Driving Motor behind Employment in the South
While the car industry may be encountering hard times, the foreign manufacturers in the eight southern states are doing much better than the Big Three in Detroit. For example, in 2007 Toyota still invested over 17 billion dollars in 10 American factories and provides employment for almost 40,000 American workers. Alabama, which had never produced a car until 1995, manufactured 800,000 cars last year, making it the fifth-biggest car producing state. Toyota, Nissan, BMW and Honda: they are more American than most Americans like to believe. In the conservative, inward-looking south, they are welcomed with open arms, if only for the fact that one job here in car manufacturing supports five more jobs in the regional economy of the south. This means that half a million Americans directly or indirectly depend on them for work. By way of illustration, the Big Three in the north provide direct and indirect employment for ‘only’ 250,000 workers.

Illustration of a Changing Economic and Political Landscape
The south now has a bigger share of the US Gross National Product than the north. Apart from the modern car industry, the region is characterized by concentrations of high-quality, technologically innovative companies. These are rather like ‘Silicon Valleys’, manned by well educated employees with different ways of (tele-)working. They are the new middle class, forming the core of the post-auto-industrial society. The downfall of GM is more than a bankruptcy that strikes deep into the being of many Americans. It illustrates the decline of the car-oriented industrial north and the rise of the hi-tech, southern society. The economic landscape in America is changing fast and the politics are lagging, by definition, far behind.  



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