Stockholder Revolt

In 1986, the centennial year of the world automobile industry, there was a stockholder revolt at General Motors. It was only one stockholder who challenged management, but it was the biggest stockholder of all. L. Ross Perot, founder and chairman of Electronic Data Systems Inc., became GM's largest single shareholder when GM acquired the computer firm in an effort to step immediately to the head of the high-tech line.

Unlike earlier stockholder rebels (and there have been plenty of them in the auto industry), Perot was not charging corruption, or stupidity, or insensitivity to vital issues. He was not even charging mismanagement. He was not really charging anything.

But what he had to say GM did not want to hear. He seemed to be saying that GM had lost its "can-do" vigor.

GM's Roger B. Smith said Perot meant nothing of the sort, that he didn't really know how to run a modern multinational giant like GM. So GM bought out Perot at a very good price and Perot agreed to shut up.

Many financial analysts agreed with Smith. Perot was a throwback, a character from an earlier, more romantic and more individualistic age, a man who masterminded a dramatic rescue of hostages in Iran, built a giant computer firm from nothing, aided Vietnam veterans and did other good works. In 1992, he emerged as a player on the national presidential election scene and again in 1996. In short, he was a man who would probably have felt right at home with the founders of the auto industry. Smith might well have been right and may have been acting prudently to protect the corporation from a man who has achieved mythic status, but in fact had never built an automobile. But the confrontation, so out of character for GM, nonetheless raised issues and questions. And not only about GM. About the American auto industry. About Detroit.

Is GM no longer the "can-do" company that optimistically grew like Topsy in the early days of this century, that took on Ford's beloved Model T and beat it, that helped make Detroit the Arsenal of Democracy during World War II?

Was this the innovative organization that gave the world the electric self-starter (with a whole new battery-based ignition system to boot), that was the first and for a long time the only auto maker with an automatic transmission that worked well, that developed an engine of such efficiency that it would not run on ordinary gasoline and so developed a new premium gasoline for it?

How can General Motors, which built the Chevrolet that finally conquered Ford in the lower-price arena, say it can't build small cars in America, that it cannot build an entry-level car as good as the Japanese?

After so many decades of building one of the world's great luxury cars, after making Cadillac "the standard of the world" and suffering "the penalty of leadership", how did GM lose much of that market to Mercedes-Benz, BMW, Lexus, Infiniti, Volvo, Audi and Jaguar?

The Smith-Perot confrontation seems in retrospect to be about bureaucracy and complacency. Perot was not attacking Smith, he was attacking a mindset, an attitude. He struck a blow at complacency, but that complacency had probably been wiped out some time ago. There was already evidence that Detroit was coming out of its dark age.

When Roger B. Smith was elected chairman of General Motors in September, 1980, he said he doubted that he would make any dramatic changes on his watch. Few looks into the future have been more off target. Born into a conservative middle-class family in Columbus, Ohio, in 1925, Smith did not seem like a man who would become the agent of change for the world's largest auto maker and the storm center of all the turmoil battering the auto industry in the '80s. His father, a banker, saw his business collapse under the pressure of the Great Depression and moved his family to Detroit to take a job as controller of Bundy Tubing.

After World War II service in the Navy, Roger Smith returned to get his MBA at the University of Michigan and joined GM in Detroit as an accounting clerk. Given to putting in long hours, he worked his way up the GM financial ladder to become corporate treasurer in 1970, vice president of finance in 1971, executive vice president for finance and public relations and a member of the board of directors in 1974. His rise to chairman seemed by then preordained. He appeared to be in the pattern of GM chairmen -- a conservative, anonymous bureaucrat, resisting change. He was not.

He was, in fact, a highly unconventional thinker, especially for a product of the GM financial organization. Fascinated by technology, he bought a home computer long before it became the trendy thing to do. Smith ascended to the chairmanship at 55, younger than usual. He planned to use his anticpated long reign to move GM into the 21st Century.

When Smith took over GM, it was reeling from its first annual loss since the early 1920s. It reputation had been tarnished badly by lawsuits and public protests over installation of Chevrolet engines in Oldsmobiles and by singlehandedly ruining the burgeoning diesel car market in the U.S. with a disasterous, poorly designed diesel engine.

In 1982, Smith suffered another public relations black eye when he pressured the UAW into accepting making contract concessions, cut planned raises for white-collar workers, then unveiled a more generous bonus program for top executives. Angry union reaction forced Smith to back-pedal, but the damage was done. The UAW workers were angry, management personnel were angry and stockholders were angry.

But profits improved in 1983 and Smith began unveiling his vision for reorganization, diversification and "reindustrialization." A massive reorganization in 1984 panicked middle management. Later that year, Smith announced GM would buy L. Ross Perot's Electronic Data Systems for $2.55 billion, GM's first diversification outside the auto business, setting up Smith's historic confrontation with Perot. GM followed in 1985 with purchase of Hughes Aircraft for more than $5 billion. But even these enormous acquisitions, exciting to Wall Street, were dwarfed by Smith's spending program to modernize and automate GM's manufacturing facilities.

Smith wanted to beat the Japanese with high tech. But high tech seemed on the verge of beating General Motors. Manufacturing problems and look-alike cars of doubtful quality were hurting the corporation badly. Automation cost a lot. And it was not improving quality.

An August 1983 cover of Fortune Magazine showed four new GM mid-sized sedans lined up -- a Chevrolet Celebrity, Pontiac 6000, Oldsmobile Cutlass Ciera and Buick Century. True to Alfred P. Sloan's structure, the Buick cost more than the Oldsmobile, which cost more than the Pontiac, which cost more than the Chevrolet. But the four cars looked virtually identical.

There were other problems. Pontiac introduced a new car in 1983 that seemed to reaffirm the division's leadership in creation of exciting cars -- the Fiero, a mid-engine two-seater, sporty, high-performance, beautiful. Less than three months after production began at the Pontiac plant, reports began to circulate of fires in the engine compartment.

There was a problem with low-quality connecting rods breaking and sending shrapnel through the engine blocks, spewing oil and fuel and causing fires. All a few inches behind the driver in this mid-engine car.

The rate of fires was so high that it caught the attention of the National Highway Traffic Safety Administration. In 1987, sales had begun to fall off and NHTSA ordered a recall of all 1984 Fieros to make fixes to reduce the fire hazard. Reports of fires continued. Sales continued their downward spiral. In early 1988, Pontiac halted production of the Fiero.

Instead of serving as an important image-building car, the Fiero had tarnished GM's image further. The greatest auto company in history seemed to have lost its way.

The old guard in Detroit, arrogant, complacent and grown soft with success over the years, allowed themselves to be outdone at every turn by the lean and aggressive Japanese companies.

The top brass paid little attention to the threat from Japan until it was almost too late, and then they usually did the wrong things. What worked in Detroit's golden age of the '50s and '60s didn't work anymore. They "just didn't get it."

The Japanese hit Detroit with an approach to auto making embodying quality of product and efficiency in its manufacture that stunned the bureaucracy-ridden American makers. It was not just a war of technology and marketing, it was a culture war.

The Japanese challenge could not be met with gimmicks, although Detroit tried. The Big Three would have to change their culture.

In the end, the American makers swept their management houses clean and replaced them with a new generation of executives who would play the game the same way as the Japanese, with Toyota, not Fisher Body, as their guide.