Someone with knowledge of how the auto industry works once told me something about General Motors that has been rattling around in my thoughts ever since. “GM doesn’t make money selling cars, they make money selling options,” he said.1 Business school textbooks describe other companies with similar sleight of hand business models. Take McDonalds for example. You may think they make money selling hamburgers. They actually make money by renting real estate to franchisees. Or, how about Apple? Did you know they actually lose money on each iPod they sell? Apple makes up for it with iTunes.
My local Walmart gives away free cell phones. The catch is you either have to sign a contract, or agree to a pay as you go scheme. They even have a machine set up next to the display counter where customers who don’t have bank accounts can insert cash and purchase “talk-time” on their new phone. The phones and the machine are all provided by AT&T. I see teenagers inserting their hard earned chore money into the slot so that they can buy a few precious minutes for their phone. I see people who have obviously been living rough, feeding what spare change they can scrounge to buy up minutes for their phones. I remember thinking to myself last time I was at Walmart that AT&T might as well stock the machine with crack cocaine, because the company would still have the same type of repeat business. People are addicted to mobile phones.
Most kids today don’t know this, but at one time AT&T customers actually had to lease their phones from AT&T. Prior to 1984 you were not allowed to own your phone. This was a very profitable business model for the company, customers paid for the same hardware many times over. United States vs. AT&T changed all that. In the Government’s antitrust lawsuit against AT&T, citizens won the right to buy and use telephones of their choosing. The settlement also broke up AT&T (aka “Ma Bell”) and spun off seven regional “Baby Bells.”
It opened up the industry to competition from non-union companies. This caused a wave of downsizings and radical restructurings within the industry. While the CWA (Communications Workers of America), tried to maintain pattern bargaining, they gradually lost Cost of Living Allowances and many of the benefits they enjoyed when AT&T held a monopoly. What they ended up with were “profit sharing” contracts. The Union retreated to a position of trying to protect “job security” by giving concessions, while at the same time losing leverage. It was eerily similar to the situation the United Auto Workers faced in 2011. A book by Harry C. Kayz called, Telecommunications: Restructuring Work and Employment Relations Worldwide, explains how it happened in graphic detail.
In 1984 another insulated U.S. company was suddenly exposed to outside competition, General Motors. That year GM entered into a joint manufacturing venture with Toyota at GM’s Freemont California manufacturing center. It was Toyota’s first manufacturing experience on U.S. soil. This was a radical departure from GM’s traditional way of doing things. The Japanese wanted to move into U.S. manufacturing because of U.S. import tariffs on light duty trucks and cargo vans, and GM wanted to learn about Toyota’s scientific manufacturing techniques
The Japanese did not share with Americans an idealistic view of automobiles as elegantly sculptured, “turbo-charged,” “dream-machines.” They introduced cheap plastic transportation appliances. “Rice burners,” as some called them, came to dominate the compact car market in the U.S., where small cars were expected to be cheap. This led GM CEO Roger Smith to start pondering restructurings and new business models to make GM more competitive.
Smith said he wanted to build “the car of the future.” He envisioned a new GM brand with high tech cars that communicate with one another and have computers that can determine the best route for travel. He purchased both EDS and Hughes Aircraft. Smith then merged Hughes Aircraft into GM’s existing Delco Electronics division and made it an independent subsidiary, Hughes Electronics. So instead of simply buying Toyota and Honda when they were cheap, he bet the farm on satellites, software data systems, and a new brand with an appropriately futuristic sounding name, Saturn.
While all this was going on at GM, a guy named Ed Whitacre was clawing his way to the top at a Baby Bell that would become SBC Communications in 1995. One year later President Bill Clinton signed into law the Telecommunications Act which deregulated the Telecom industry. Instead of creating more competition, the bill led to massive reconsolidation through mergers and acquisitions, and the re-emergence of half the AT&T Empire under the leadership of Mr. Whitacre.
The same year the Telecommunications Act was passed, GM introduced OnStar. It was the brain child of collaboration between EDS and Hughes Electronics. According to one report General Motors published in the Academic Journal Interfaces in 2002, OnStar controlled eighty percent of the telematics market and had over two million subscribers by that time. The same report estimated the emerging value of the telematics market to be between $4 and $10 billion.
Roger Smith’s purchase of Hughes Aircraft had positioned the company at the head of the automobile telematics industry long before 2009. The term “telematics” describes a combination of telecommunication and data flow technologies. OnStar is the quintessential example of this. Toyota’s Lexus brand didn’t even get its own standalone service until 2009. Prior to that they relied on GM’s OnStar, and only as a requested add on. OnStar was by default installed in every new GM vehicle along with FM radio.
Meanwhile, a telecom war had been raging since the 1996 deregulation. The long distance business was dead. AT&T and Verizon were superpowers battling it out for control of every niche market they could find. By the time of the financial collapse of 2008, Verizon had gobbled up two former Baby Bells; Bell Atlantic and NYNEX, plus GTE and MCI which were major competitors to the pre-divestiture AT&T. Whitacre’s AT&T on the other hand had devoured four former Baby Bells; Ameritech, Bell South, Pacific Telesis, and Southern Bell. Only Century Link, formerly US West, remains as the only independent Baby Bell. As of 2010 AT&T had slightly higher revenues of $124 Billion while Verizon reported $106 Billion.
AT&T’s interest in GM today may lie in how the telematics are implemented. For example OnStar is “embedded,” meaning it has its own cellular device that connects it to the outside world. Service for that system is dominated by AT&T’s chief competitor, Verizon. Ford’s SYNC, on the other hand, uses “enabled” technology, meaning you have to hook up your smart phone to make it work. AT&T likes enabling because it gets them into the game. The downside to SYNC is that you have to have your phone with you in order for it to work. The downside with OnStar is that it’s not sync’d with all your other electronic gadgetry. A hybrid model may be where the telematics industry is driving toward. This would mean OnStar would maintain its own embedded technology for say 911 emergencies, updating dealerships of your cars’ health, and telling law enforcement authorities of your cars’ whereabouts. While, at the same time you could connect your phone and update your car on your travel plans, digital music selections, and do voice texting through OnStar’s hidden mic system.
Remember those AT&T ads from the 90’s? They would play some thumping motivational music in the background while showing futuristic scenarios where a college student downloads a book from another part of the world, or the guy on the beach sends a fax from an iPad like device. In one ad they show a couple driving down the road with a small screen on their dashboard. The narrator says, “have you ever crossed the country, without stopping for directions?” In another ad he says, “have you ever paid a toll, without slowing down?” The ad always ended with the line, “you will, and the company that will bring it to you, AT&T!”
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In 2008 the CEOs of the Detroit 3 were on Capitol Hill begging for bridge loans. GM and Chrysler were going broke because people stopped buying cars. The Bush administration agreed to provide financial support to keep General Motors afloat during the economic downturn. In exchange for this assistance both GM and the United Auto Workers had to agree to gut wrenching restructurings in order to make the company financially viable and competitive.
Major investment banks had been negligent of their responsibility to adequately assess risky mortgages and home loans. They bundled subprime loans and sold them to investors as if they were prime grade-A investments. When the housing bubble burst, the subprime mortgage bundles turned sour. The market responded by tightening the availability of credit. This credit correction in turn hurt the auto industry because it relies heavily on people being able to finance new vehicles. It was a crisis waiting to happen.
The incoming U.S. President Barack Obama chose Larry Summers as his senior economic advisor. Summers, is a highly controversial yet deeply intellectual economist. I think it would be safe to say he would have scrutinized the auto industry’s predicament though a critical academic lens, rather than a political periscope.
The idea of saving GM to protect middle class jobs or to prevent foreclosures and bankruptcies would not have been Summers’ prime concern. Although a total liquidation of both GM and Chrysler, some estimate, would have cost the U.S. economy three to four million jobs through what is known as the multiplier effect. That certainly may have been on his mind, but as an economist he would have also looked at bankruptcy and liquidation as an opportunity for a more efficient company to fill the market demand gap left by GM’s liquidation. That would have led to new capital investment and eventual restoration of credit and cash flow. The millions of jobs that were predicted to be effected by the possible GM liquidation would have eventually been replaced, albeit not by the same people or perhaps even in the same country. The line that they did it to “save jobs,” is great political theater, and it certainly helps get the boss re-elected, but nationalism and social altruism are not the objectives of economics. This explains why the government had no qualms about giving Chrysler away to the Italian car company Fiat.
What I think Summers would have looked for when he peeked under the hood at GM were the sales options. That is a sure indicator of future viability in an auto company. It is what differentiates one brand from another in the eyes of the consumer. As it faced the possibility of liquidation, GM had one very valuable asset, it had OnStar. This made GM cars like smartphones on wheels. It gave GM a high tech edge, as well as lucrative subscription based revenue that would continue to roll in long after the car was paid for by the customer.
In February 2009 the Obama administration formed the Auto Task Force to oversee the restructuring of the auto industry ordered by President Bush as a condition of providing bridge loans. Interestingly, the Task Force was not initially intended as a team to usher GM and Chrysler through bankruptcy, nor was its objective to see that the taxpayers got their money back. The key word was “restructure.” In the lexicon of Washington D.C., that means “regime change.”
Summers, with the consent of Secretary of Treasury Tim Geithner, chose Steven Rattner to lead the new task force. Rattner started his career in the 70’s as a journalist for the New York Times. In the 80’s he decided to become an investment guru because it paid significantly more than the roughly $50,000 per year he was earning writing for the newspaper. One report estimates his current wealth at somewhere between $200 and $600 million.
What exactly was Rattner’s area of expertise in the investment world? He oversaw mergers, acquisitions, and restructurings of media and telecommunications companies. His investment firm Quadrangle has a portfolio that includes technology called “triple play.” It is basically the same thing as telematics, the combination of telephone, internet, and mobile. Summers had found his man!
Rattner’s wife, Marueen White, just happened to chair the finance committee for the DNC at the time. That certainly did not hurt his chances of getting Senate confirmation to be the first Car Czar. He needed some kind of leverage, because he sure as hell did not have any experience with the auto industry.
Rattner did several things of note in his Czar job. He hired a guy named Ron Bloom to talk the UAW into taking mid-contract concessions. He forced General Motors to completely eliminate the Pontiac brand. Rattner was apparently unhappy with their original viability plan that left in place some of the profitable Pontiac cars like the G6 and the Solstice, while getting rid of the unpopular minivans. He secured a commitment from General Motors to build the sub-compact Chevy Aveo in the United States. The Aveo is in a segment that is; one, unpopular with Americans; and two, it has never been manufactured profitably in the United States. He ushered the company though a pre-arranged bankruptcy and asset spin-off process. He fired GM’s longtime CEO Rick Wagoner. Then he gave Chrysler away to the Italian company Fiat for free.
The last act of note by the Car Czar was to install a dark horse chairman at GM. He was to begin his work at the conclusion of the bankruptcy process. His hardcore “give ‘em hell” approach to corporate governance quickly earned him the nickname “The Reaper,” from the Detroit press.
Edward Earl Whitacre, Jr. assumed the chairmanship of the post-bankruptcy General Motors on June 10, 2009. On December 1st of that same year, Whitacre forced CEO Fritz Henderson out and assumed his position. By May 2nd 2010 he completed the trifecta started by Rattner’s firing of Rick Wagoner by forcing Vice Chairman Bob Lutz out of the company as well. Lutz left with these parting words quoted from Bloomberg Businessweek, “In the past, GM was accused of not enough change. You have to find the balance between the pace of change and trauma to the organization.” Whitacre by his own admission said in many interviews he had no experience in – nor did he know anything about – the auto industry.
Bloomberg Businessweek later wrote this,
“Three days after taking over, he reorganized sales and marketing, and then, after just three months, let his deputy reorganize the departments again—a restructuring of the restructuring that caused middle managers to fear for their jobs and even question whether Whitacre had the right disposition for his.” ~David Welch
So who was this Ed Whitacre guy and where the hell did he come from? He was the former CEO of AT&T. He had so much influence at his old job that AT&T actually named their Dallas world headquarters building “Whitacre Tower.” In what almost seemed to be a statement of their unwritten mission to take over other telecoms, Whitacre resurrected the infamous Death Star logo from the early 80’s. His retirement package from AT&T included a golden parachute worth $158 million. He continued to maintain office space at AT&T headquarters, and received one million dollars annually in “consulting fees” from the company, even after joining GM. He didn’t even bother moving to Detroit for his new job. Whitacre clearly still belonged to the world of big telecom.
Whitacre shook up the corporate atmosphere. He killed off many products that were in the pipelines. He finalized the dissolution of brands such as Hummer, Saab, and Pontiac. He also prepared the company for its IPO at the end of 2010. Assisting him in his work were three other telecom executives. On the board were, Patricia Russo former CEO of Alcatel-Lucent, Carol Stephenson former CEO of Lucent Technologies Canada, and Dan Akerson former CEO of Nextel. It is worth pointing out that Lucent was created as a spinoff from AT&T in 1995. When executives from other industries were shying away from joining bankrupt GM, why were so many telecom people eager to jump aboard?
Whitacre stepped down as CEO on September 1, 2010 and handed the job to Dan Akerson. He stayed on as Chairman until the end of the year. Twenty three days after Akerson took the reins, GM finalized a deal at the Lake Orion assembly plant that spelled out Whitacre’s future vision for GM assembly plants and its labor force. Forty percent of the current “traditional” workers were to be forced out immediately, while they would be replaced by lower paid “entry level” employees. All future employees were to be considered “entry level.”
It epitomized the fears that caused autoworkers reservations about voting for the tiered wage structure in 2007, that the company would find some way to make it permanent and use it against them. The Orion deal had echoes of AT&T’s own system of ladders and grades, where the bottom rungs of the company are called “entry level.” Apparently the long term plan is for everyone working in assembly operations everywhere to be considered “entry level.”
The Plant manager for the Lake Orion Assembly was Alecia Boler-Davis. Trade journal interviews described her as being in charge of everything, from design to production. She was ambitious, someone the workers would refer to as a “climber.” Those are the ones to watch out for, because they often plow others over in order to further their own careers. Alecia is even quoted in several interviews as stating that her career goal is to become a senior GM officer with a lot of influence someday.
In an odd twist of coincidence Alecia’s husband, Fitzgerald Davis, happens to be a senior AT&T executive. Two plants prior to her Orion assignment, Alecia was the plant manager for Arlington Texas. Her husband was there with her, so he most certainly would have been known to Ed Whitacre. So whatever “The Reaper” wanted, he got! Luckily it was the only plant deal negotiated while he was in power at GM.
To add insult to injury, Alecia told TheStreet.com that “We’ve got a great team effort working with the UAW that allows this to happen!” …
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A Detroit Freepress article titled GM Adds Expertise to OnStar Team had this to say about Whitacre and Akerson’s interest in OnStar. “GM Chairman Ed Whitacre and Akerson, both telecommunications veterans, have pushed for more development and marketing for OnStar since joining GM last summer.” The story itself was about Akerson hiring Linda Marshall, one of his former telecom employees from Nextel into the head position at GM’s telematics unit. To further underscore the new telecom influence at GM, both Akerson’s global policy chief Bob Ferguson, and his communications head Selim Bingol, worked for AT&T before joining GM. On July 1, 2011 Cindy Brinkley, AT&T’s former chief diversity officer and VP for talent development was brought in to lead GM Human Resources. None of these people had any experience whatsoever in running an auto company.
In January 2011 the Wall Street Journal reported that Akerson had told his executive team that he envisioned that cars should be designed like cans of Diet Coke. He said he wanted GM to be a consumer driven rather than an engineering driven company. That same report states that, “Mr. Akerson wants GM to go all-out to exploit products that give it a chance for marketing firepower—to ‘bet the company,’ as he puts it.” In the very next paragraph it says that Akerson envisions OnStar as, “an interactive network by which drivers could update their Facebook status to make requests from family members to run an errand.” Later that month the Journal reported, “creating a more high-tech aura around GM has been a key goal for Mr. Akerson, a former telecom executive who sees…in-car entertainment systems—as a key battleground in the global auto industry.” Akerson has also criticized GM’s telematics unit for not capitalizing on the demand for more technology and entertainment options by drivers.
On August 25, 2011 Bloomberg Businessweek had this to say about Akerson,
“When the U.S. Treasury appointed him to GM’s board in 2009, Akerson, 62, had no auto industry experience. He does have a résumé, though: nearly 20 years as a telecom industry executive, successfully leading MCI and Nextel, then a run as a private equity investor with Carlyle Group. Depending on who’s talking, these qualifications make him either a refreshing force for change or a clueless newbie doing more harm than good. ‘It’s not that he isn’t smart or a good executive, he just lacks the background’.”
~ Maryann N. Keller, a longtime car industry consultant.
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So just how did the telecom industry, and AT&T in particular, manage to gain control of General Motors? They bought their way in. According to OpenSecrets.org, a website run by the Center for Responsive Politics, AT&T is the single largest corporate donor to U.S. political campaigns. They are the second largest overall contributor behind the liberal ActBlu mega PAC, and from 1998 to 2010 AT&T spent over $130 million on federal lobbying. AT&T is in fact the largest corporate lobbyist of all time. President Obama even had an AT&T Director on his Economic Recovery Advisory Board from 2009 to 2011, Laura D’ Andrea Tyson. At that time the Recovery Board would have acted with great influence upon the U.S. National Economic Council, which Larry Summers was in charge of.
I believe the Fords knew something about this and avoided it at all costs by mortgaging their business to the hilt to avoid bankruptcy. Ford is still a somewhat family run business. They had the advantage of being able to watch all of this unfold from the beginning. It is interesting to a student of the automotive industry that Ford chose to go outside the industry and hire Allan Mulally as its CEO in 2006. Mulally was chairman and CEO of Boeing’s commercial aircraft wing. By training he is an aeronautical and astronautical engineer, he’s basically a rocket scientist. In 2000, under the leadership of Mr. Mulally, Boeing purchased most of the Hughes Electronics assets from General Motors. It should also be mentioned that, according to the Washington Post, both Ford Motor Company and Boeing were original bidders for Hughes Aircraft in 1984.
In an October 2009 Fortune Magazine interview, Rattner said that Wagoner had cautioned him against bringing in an outsider after he left. Apparently that warning fell on deaf ears. OnStar had brought GM to the attention of the telecom industry. Thirteen years after its public debut, the Car Czar put Ed Whitacre in charge of GM, and droves of AT&T people followed him over. Nobody really questioned that at the time. Neither the employees nor the public fully understood these people or what their motivations were.
Look at people like Chris Liddell who left Microsoft to become CFO of the new GM. News reports say he had tensions with Akerson and openly said he wanted the COO job. Shortly after not getting it he left. I don’t think he left Microsoft for greener pastures, I think he was dispatched to see what he could accomplish. As cars have become more and more computerized over the last two decades, software companies have been angling for access to the auto companies in order to get a piece of the lucrative systems control business. Workers, investors, and management alike need to be aware of this.
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Looking forward into the future, Chinese and Indian car companies will grow just as the Japanese and Korean companies did. Hyper-competition from these Asian car companies will force international mergers and acquisitions in the auto industry. Much as the telecom industry went through a “telecom war” in the first part of this century, we are today witnessing an “auto war” beginning to bloom. The havoc this will wreak on the job stability prospects of future autoworkers cannot be overstated.
Cars will become more like Mr. Akerson’s Diet Coke concept. They will become cheap disposable tin cans. The parts will all be made in the areas of the world where the technology for today’s inexpensive smartphones are manufactured. The only involvement American workers will have in building cars will be monitoring the robots that Roger Smith envisioned. Eventually they will simplify the assembly line enough that robots will perform up to 95% of the work, just as they do at high tech companies around the world.
With the telecom people in charge, the day will come when you can no longer buy new cars at a dealership. Instead you will have to go to your local Walmart parking lot. If you lack a bank account or credit, they will have machines installed in their parking lots where customers can feed dollar bills in so they can purchase “drive-time.”