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How GM Lost Its Sales Crown to Toyota


It's official. Toyota (TM) has finally surpassed General Motors (GM) as the world's biggest carmaker. The global sales battle has been neck-and-neck for a couple of years. But Toyota ended GM's 77-year grip on the crown in 2008, according to numbers that came out on Jan. 21, and the Japanese juggernaut did it with authority, selling 8.9 million cars to GM's 8.35 million. The margin of victory is two auto factories' worth of production.

But the actual passing of the auto-sales crown is itself irrelevant. Like most pivotal moments in history, GM's fall from the pinnacle has been a long time coming. Even at the turn of the millennium, when GM sold 8.5 million cars to Toyota's 5.9 million, this day was all but certain. GM just made too many mistakes for too long. Management wasted too much money while Toyota was plowing billions into technology and vehicles. For decades, GM managers figured the customers would always come to them. Toyota knew it had to go to the customers.

Conventional wisdom says that the problems started with quality gaffes in the 1980s. But GM began the insidious process of creating its own demise long before then. The company's U.S. market share peaked in 1962 at 52%. It has been downhill ever since.

More and More Similar

It was in the 1960s, when GM was so dominant and wealthy, that the problems started. Under Chairman Frederic Donner, GM started to scrap legendary boss Alfred Sloan's mission of a car for every purse and purpose. The company decided to give every division except Cadillac a midsize car. Chevy had the Chevelle, while Buick sold the Special, Oldsmobile the Cutlass, and Pontiac the Tempest. The cars didn't look exactly alike, but they started getting more and more similar.

By the end of the '60s, GM centralized control of engineering and manufacturing, taking away the autonomy of its divisions, which made each one distinctive. A decade later, GM was rebadging the same car for sale in its different divisions, even at Cadillac.

Most people think of GM's demise as beginning with the infamous quality crisis of the 1980s and the spendthrift reign of Chairman Roger Smith. But the quality problems really started in the '70s. GM cranked up the line speed at its factories in 1970 to boost productivity. Reliability slipped. The Arab oil embargo and new fuel-economy regulations forced GM, Ford (F), and Chrysler to build smaller cars with thrifty engines. That wasn't exactly in the skill set for companies accustomed to making boulevard boats for Americans.

GM tried to rush efficient cars to market. But management couldn't get it done. The results were cars like the '71 Chevy Vega with its small, aluminum-block engine. The Vega was a clunker that hammered GM's image. Things got so bad that dealers moved the service counter out of sight of the new-car showroom so prospective buyers wouldn't hear the rants of irate owners. GM didn't really get a handle on quality until the late 1990s; it didn't start matching Honda or Toyota until the past few years. By then an entire generation was turned off by cars that were seen as cookie-cutter designs or unreliable jalopies.

Health and Pension Burdens

GM admits to the bad old days now. There's still a sense of victimization, though, when it comes to the cost side of the equation, especially such legacy issues as the high cost of worker and retiree health care and pensions that Toyota doesn't pay. And there, too, management blew it. During the 1980s, rather than seed its pension fund or invest in better models, GM Chairman Roger Smith spent $80 billion on automation that didn't fix the quality problem. He spent another $8 billion investing in Hughes Aircraft and software maker EDS. GM later made money on those investments, but had management spent the money on cars instead of other businesses the company might not have had to blow its savings on restructuring costs.

Certainly, GM could use that money now. If the carmaker could take back Roger Smith's $88 billion, it would equal $160 billion today. Management could pad the pension fund, seed a plan for retiree health-care benefits, and have an R&D budget bigger than Toyota's. It wouldn't need a dime from the federal government.

With more cash on hand, GM might have kept its EV1 electric car program going, thus holding on to the technology mantle that Toyota stole with the Prius hybrid. GM might have even invested in its passenger-car lines during the SUV boom, preparing for the day when cheap gasoline would no longer fuel truck profits.

Share Buybacks

But that assumes current management wouldn't have made some of the same mistakes. Chairman and CEO Rick Wagoner's predecessor Jack Smith spent about $9 billion in share buybacks in 1996 while divisions like Saturn went begging for new cars. Up until 2006, Wagoner paid $1 billion a year in dividends—not to mention about $4.4 billion to get in and then out of an investment in Fiat Auto (FIA)—while cutting the capital budget.

The point is, there is plenty of blame to pass around. With the sales crown gone, GM needs to grow its way out of trouble. That's something the automaker hasn't done since 1962.

Welch is BusinessWeek's Detroit bureau chief.


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