General Motors

In the early years of the 20th Century the U.S. auto business consisted of countless small producers struggling to survive in a chaotic industry. The man who set out to impose order was William Crapo Durant, an indefatigable entrepreneur who, among many other things, had taken over a small cart company, and by 1904 turned it into the country's largest manufacturer of carriages.

That year Durant decided to take the plunge into the motor car business, which he had been observing with great interest. His first step was reorganizing the Buick Motor Co., a struggling producer founded by inventor David Buick in 1901, and later taken over by James H. Whiting, a wagon maker in Flint, Michigan.

Once he assumed the position of general manager at Buick, Durant began planning the promotion of the Model-C car the company was about to introduce. He quickly built up a network of dealers and attracted a large volume of orders--more, in fact, than the company's production capacity. Durant, however, was not interested in the production side of things. He kept selling, and by 1908 Buick was the nation's leading carmaker.

That year Durant was approached by Benjamin Briscoe, owner of the country's leading auto parts producer, who had once controlled Buick, and was now backing John Maxwell. Briscoe proposed a plan to get J.P. Morgan to finance a consolidation of several leading automakers. Since this was in line with Durant's longstanding goal for the industry, he responded favorably to the initiative. After some discussions, a proposal was drawn up to combine Buick, Ford Motor, Maxwell-Briscoe, and Olds. The latter, founded by Ransom E. Olds, was one of the earliest entrants in the car business. Henry Ford's company was just beginning its climb to fame as the producer of the Model T.

The negotiations did not go smoothly; Ford, for instance, decided he wanted to remain independent. The result was that in 1908 Durant formed a holding company called General Motors that first took control of Buick and then Olds. Then Durant went on one of the most remarkable buying sprees in U.S. business history. Racing around the country, he snapped up carmakers and parts producers. Among the former were Cadillac and Oakland (later renamed Pontiac); among those that got away were Goodyear Tire and Rubber and, again, Ford Motor.

By 1910 Durant's ambitions had moved too far ahead of the reality of General Motors. The company was running out of cash, and Durant was scrambling to get new bank loans. After a number of rejections, GM finally received an infusion from a group of banks, but the terms were severe. The banks in effect took charge of the company by setting up a five-member management committee that they controlled. Durant was a member of that group, but his desire for bold expansion was overruled by the fiscal conservatives who dominated the committee. He gradually withdrew from his GM activities, focusing instead on gaining control of a company founded by auto designer Louis Chevrolet to produce an inexpensive car to compete directly with Ford's Model T.

Yet Durant began accumulating shares of General Motors stock, siphoning off profits from Chevrolet to assist in the effort. Then he gained even more of GM by announcing that he would exchange five shares of Chevrolet stock for one share of GM. Now firmly in control of General Motors once again, Durant embarked on an expensive expansion of the company. He acquired a carmaker called Sheridan, 60 percent of Fisher Body Corp. and the Canadian factories of McLaughlin Motor (later to become GM of Canada) while diversifying into farm equipment refrigerators (through the purchase of Frigidaire).

During the First World War the company converted to military production--trucks, ambulances, airplane motors, etc.--but quickly resumed civilian operations after the Armistice. Postwar sales were boosted by the creation of General Motors Acceptance Corp., which financed purchases of the company's products. By 1920, however, a weakened stock market put Durant, who was extremely overextended in his purchases of GM shares, in an impossible position. As GM's stock price sank, Durant desperately sought to meet margin calls from his brokers. Finally, in 1920 he could hold out no longer. He agreed to a bailout that once again stripped him of control, which was now in the hands of the du Pont family and J.P. Morgan & Co.

Pierre S. du Pont, who took over as president, embarked on a reorganization of the company along the lines of a plan devised by Alfred P. Sloan Jr., a GM executive who had joined the company after it acquired the Hyatt ball bearing operation from the Sloan family. Sloan, who rose to the presidency in 1923, rationalized the company's varied and sometimes overlapping product line, and set out to retake some of the ground gained by Ford's wildly popular Model T.

He accomplished that task with the introduction of the 1925 Chevrolet, which generated much more excitement than Ford's 17-year-old entry. He arranged GM's other offerings to appeal to a wide range of income groups, or as Sloan put it, "a car for every purse and purpose." He also began to modernize car design, abandoning the box-on-wheels look that had dominated the industry. Henry Ford finally saw the writing on the wall. In 1927 Ford announced the end of Model T production, and Chevrolet rose to the top spot in U.S. car sales. While Ford was reluctantly changing, Sloan was developing a strategy based on the introduction of new model each year.

Sloan also expanded the company by acquiring a majority stake in Yellow Cab Manufacturing and interests in several aviation companies. GM set up assembly operations in Europe, New Zealand, and South Africa, and it purchased Vauxhall Motors in Britain and 80 percent of Adam Opel, Germany's largest automaker.

GM was set back by the Depression, though it remained the leader in what little automobile business there was to be had. It was also during this period that GM emerged as the largest industrial corporation in the United States. When the mobilization for the Second World War began, GM plunged into military production, converting its factories to make such things as airplanes, machine guns, artillery shells, gyroscopes, and anti-aircraft guns.

Even before the war ended, GM executives were planning for the anticipated explosion of demand that would come with peace. There was some talk of a small car (along the lines of Germany's Volkswagen), but the preference for bigger (and more profitable) models won out. The postwar cars were bigger and more powerful than ever.

So was General Motors. As Ford struggled with its management crisis, GM solidified its dominance in the auto market and assumed a major position in other fields, becoming, for example, the country's largest military contractor. Not coincidentally, when Dwight Eisenhower was elected president in 1952, he asked GM president Charlie Wilson to be his secretary of defense. In what would be the decade of the automobile, GM was one of the most important institutions not only in the business world, but in American life. In 1955 GM was the first company in the world to attain an annual profit of $1 billion.

Not all was well with the company, however. Its vast size had made it a target of critics of economic concentration. The Justice Department was pursuing an attempt to get Du Pont to divest its 23 percent holding in GM (which dated back to the du Pont family's bailing out of William Durant in 1920). (The case was brought in 1949, but it was not until the mid-1960s that Du Pont finally ceased to be the controlling shareholder in GM.) During the late 1950s, after the Justice Department sued GM for monopolizing the bus business, there was even talk that the company should be broken up, in the manner of the Standard Oil trust.

GM's "big is beautiful" philosophy in car design was also being questioned. The recession of 1957-58 prompted a surge in demand for smaller, more economical cars--a fact that Ford learned the hard way in its Edsel disaster. The mood changed enough that even another automaker--American Motors president George Romney, who was promoting his company's previously obscure small car, the Rambler--lashed out at what he called the "dinosaurs" being produced by his larger counterparts.

GM responded by developing a compact it called the Corvair. The poorly designed car became an albatross for the company. When consumer advocate Ralph Nader publicized the car's problems, GM responded by spying on Nader in an attempt to come up with dirt to discredit him. In the end it was the GM and the Corvair that were discredited.

Although the Corvair was not the one, the demand for small cars continued to rise, and increasingly it was the foreign producers, including the recently arrived Japanese, that were filling that demand. The trend took a dramatic leap forward in the mid-1970s, in the wake of the oil embargo. The resulting gasoline shortages panicked U.S. drivers to reject Detroit's gas-guzzling offerings.

To its credit, GM responded quickly to the new mood. The company's engineers plunged into a down-sizing effort that resulted in a shrunken Cadillac and a U.S. version of the German-designed Chevette. The Chevette was not a great success, but GM also spent more than $2 billion to develop a line of other front-wheel-drive compacts known as X-cars. Although GM started to experience red ink, the company's market share shot ahead, as did its reputation. By 1981 Fortune wrote that "the complacent giant that used to dominate its industry by sheer size is now an aggressive, inventive product leader."

It was that year that GM brought out its J-car, a subcompact specifically meant to take on the Japanese imports flooding the U.S. market. In addition to fighting the Japanese, GM decided to join them. In 1983 the company stunned the industry by forming a joint venture with its rival Toyota to produce a subcompact in California, using the Japanese company's manufacturing techniques. Two years later GM announced that it would create a new subsidiary, Saturn Corp., to produce small cars at a Japanese-style factory in Tennessee.

The company, then run by Roger Smith, also made some bold moves outside its core business. In 1984 it agreed to pay $2.5 billion to acquire Electronic Data Systems (EDS), the computer services firm built by H. Ross Perot, and in 1985 it made a winning $4.7 billion offer for Hughes Aircraft. In addition, GM engaged in a series of smaller investments and joint ventures in fields ranging from robotics to artificial intelligence. The intention, Smith said, was to find "the key to the 21st century."

In the short term, however, these investments provided a number of headaches. Ross Perot, who became a GM director and the company's largest shareholder as a result of the EDS deal, embarked on a campaign to make GM competitive again--a process he likened to "teaching an elephant to tap dance." At the same time, the integration of EDS into GM proved difficult. In fact, Roger Smith apparently lost hope, and in 1986 he made an unsuccessful attempt to sell the operation to AT&T. Finally, GM got rid of Perot rather than EDS. The company spent more than $700 million to buy out Perot and his soapbox. (A decade later EDS was spun off. Hughes Aircraft was merged with Delco Electronics to form Hughes Electronics, which was sold to News Corp. in 2003.)

Although Perot went away, the problems he was pointing to remained. GM continued to lose ground in the U.S. auto market, not only to the Japanese, but also to a newly resurgent Ford, which in 1986 even managed to make more money than its much larger rival. GM responded by slashing production capacity, eliminating tens of thousands of jobs, and axing large numbers of salaried staff as well. At the same time, it put more emphasis on its so-called captive imports--cars made for GM by companies in other countries for sale in the U.S. market. A new line called Geo was created to market cars made by Japan's Suzuki and Isuzu (in which GM had purchased a 34 percent interest in 1970) as well as the joint venture with Toyota in California.

Although the cost cutting resulted in some improvements in profitability, the overall decline continued. By 1990 the situation had deteriorated to the point that some of the company's large institutional shareholders were pushing their own plan to restructure active interest in GM's operations.

A plan to boost the pensions of Smith and his heir apparent Robert Stempel came under attack. As the first Saturn cars were finally about to go on sale in late 1990, production problems limited the number of cars available to dealers, and five months after the launch, the company had to recall for repairs almost a third of the cars sold. To cover the cost of plant closings, GM took a huge $2.1 billion write-off that put the company's net income far into the red for 1990. In December 1991 the company announced plans to close 21 North American plants and eliminate 70,000 jobs. After posting a record loss of $4.45 billion for the year, the company put additional facilities on the chopping block.

While cutting back at home, GM continued to expand abroad. In 1989 the company purchased a 50 percent stake in Swedish automaker Saab for $500 million. The following year GM signed a $1 billion agreement to sell auto parts to the Soviet Union. The company's European operations, which began to show new vigor, moved east by taking over an assembly plant in Hungary, and entering a joint venture in Poland. GM also formed a joint venture with a Chinese company to produce pickup trucks.

Frustration at the slow pace of corporate change prompted GM’s board to force Stempel to resign as chairman and CEO in October 1992. Many other top executives were also forced out. The new management team, led by Jack Smith, accelerated the restructuring process, which included massive write-offs that forced the company to report an astounding annual loss of $23.5 billion for 1992. Throughout the 1990s Smith pursued his cost-cutting mission, including a spin-off of its parts-making operations, and brought the company back into the black. Yet its domestic market share continued to slide.

GM did not cut back on its foreign operations. In fact, in 2000 it acquired a 20 percent stake in Italy’s Fiat. (The relationship ended five years later.) That same year it acquired the Hummer brand of huge sport-utility vehicles, while announcing a phase-out of the Oldsmobile line. In 2001 it took control of South Korea’s struggling Daewoo Motor Co.

In 2005 GM’s sharp turn for the worse prompted corporate raider Kerk Kerkorian to buy a significant portion of GM’s stock, and use his position to press CEO Rick Wagoner to engage in yet more restructuring. The price of the company’s shares fell to a 23-year low, and observers began to speculate what would happen if the giant automaker had to declare bankruptcy. In February 2006 GM gave in to pressure and allowed Kerkorian’s top aide, Jerome York, to join its board. Two months later, the company announced plans to sell a large majority stake in its GMAC finance unit to a group of private equity investors. York used his position on the board to push for the creation of an alliance between GM and foreign auto producers such as Nissan and Renault.

Wagoner resisted the alliance proposal, and Kerkorian ran out of patience. In December 2006 he sold off his GM holdings. But the company was not out of the woods. In 2007 it finally lost its status as the world’s leading automaker as Toyota continued its market share gains.

Conditions for GM continued to deteriorate amid the sharp economic downturn in 2008. After the federal government came to the rescue of the big banks, GM and other automakers began to appeal to Congress for their own bailout package. In September 2008 Wagoner and Ford executive chairman William C. Ford Jr. began making the rounds on Capitol Hill seeking $25 billion in federal loan guarantees for the Big Three. GM said the assistance would, among other things, play a key role in promoting the Chevrolet Volt electric car it was planning to introduce. But assistance was also presented as the only way for GM to avoid a bankruptcy filing.

The Bush administration resisted calls by leading Congressional Democrats to use a portion of the $700 billion financial rescue program to help the automakers. The proposal also faced skepticism when Wagoner and the CEOs of Ford and Chrysler testified before a Senate Committee in November—in part because they traveled to Washington in corporate jets. The following month the three returned to Washington, this time arriving by (fuel-efficient) car, but the reception remained cool.

The Democratic leadership, nonetheless, continued to press the White House for action, though now the emerging plan was expected to involve a federal ownership stake in the automakers. In a sign of its desperation, GM published a full-page advertisement in Automotive News that amounted to an apology to American customers for its mistakes: “While we’re still the U.S. sales leader, we acknowledge we have disappointed you. At times we violated your trust by letting our quality fall below industry standards and our designs become lackluster.”

A $14 billion rescue package for GM and Chrysler (Ford decided it didn’t need federal help) came together and was put before Congress. The House approved it promptly, but on the Senate side, the plan deadlocked over demands by Republicans including Bob Corker of Tennessee who insisted that the United Auto Workers union make even more severe wage concessions than they had already offered.

In the end, the Bush administration agreed to provide a total of $17.4 billion in emergency loans to GM and Chrysler, with the money coming from the financial bailout fund. Each company was required to produce a plan for long-term profitability. Shortly thereafter, the Treasury Department came up with another $6 billion in aid for GMAC.

After President Obama took office, GM and Chrysler decided they needed more federal aid. In February 2009 GM pegged its request at $12 billion, and began to signal that it would consider going through a bankruptcy proceeding to get it. It turned out that the Obama administration wanted additional changes in the company. In late March the administration forced Wagoner to resign as CEO (at the same time that it compelled Chrysler to form an alliance with Fiat) and indicated that other radical changes would be necessary to qualify for more federal help.

Wagoner’s successor, Fritz Henderson, made it clear he would bow to the administration’s wishes, which would include further job cuts and reductions in its dealer network. The company also announced plans to sell or discontinue several of its marques, including Pontiac, Saturn, Saab, and Hummer. It also agreed to sell its European operations, including Opel of Germany and Vauxhall in Britain.

On June 1, 2009, GM finally filed for Chapter 11 bankruptcy, a step that paved the way for its transformation into a company temporarily controlled by the federal government. In exchange for an additional $30 billion infusion of taxpayer funds, the feds took a 60 percent stake, while the Canadian government, which provided another $9.5 billion, got 12.5 percent. Bondholders received 10 percent, with the remaining 17.5 percent going to the UAW healthcare trust in exchange for the $20 billion GM owed to it.

GM vowed to emerge from bankruptcy and phase out government control as quickly as possible. The first objective was accomplished with remarkable speed. The company completed its reorganization in less than two months, and launched a campaign to win back consumers. Federal ownership is expected to last at least several years.

In August 2009 GM indicated that it was reconsidering its decision to sell Opel, putting into question the planned purchase by Canadian car parts maker Magna International and Russian state-owned bank Sberbank. But under pressure from the German government, GM announced the following month that it would sell a majority stake of 55 percent to Magna and Sberbank while retaining 35 percent for itself (employees would get the other 10 percent). In November 2009 the company reversed itself again, announcing that it would hold onto Opel.

In December 2009 Henderson was forced out as CEO and replaced on an interim basis by chairman Edward Whitacre. The following month Whitacre announced that he would assume the position on a permanent basis.