CEO of the Year 1986
Roger Smith, General Motors
July 11 1986 by JP Donlon
In naming Roger Bonham Smith, 61, Chief Executive of the Year, the gray eminences of CE’s panel of judges repeatedly returned in their discussion of finalists’ qualifications to two themes: vision and courage. Both are motherhood concepts whose meanings become loose with usage, but they were more than mere words to the current and former chief executives agonizing over a number of qualified candidates. In the end, it was the sharpness of Smith’s vision of where he wants to take General Motors and his tenaciousness in seeing to that it will get there that impressed everyone.
Vision, perhaps, but courage? Since when does the Kublai Khan of the world’s largest industrial enterprise need that? When Smith assumed the chairman’s suite on the 14th floor of West Grand Boulevard in January 1981, he could have steered a safe, if choppy, course for the chrome colossus. Instead, he tore up a proud, if aging, battleship and is rebuilding it into a squadron of guided missile cruisers and attack submarines – a task easily scuttled if handled halfheartedly. He sought change instead of having it thrust upon him.
The change began shortly after GM recovered from its $730 million operating loss in 1980, its first loss in 60 years. Imports had been making steady inroads into the U.S. car market since the early 1960s. For years, due to antitrust and other reasons, GM remained severely aloof from the threat preferring to concentrate on the more profitable middle- and large-car market. With a cost disadvantage of $2,800 per car it was obvious that Detroit was no longer able to produce a competitively priced small car. Cost cutting alone wasn’t the answer. GM needed to become more venturesome and responsive – not just to the Japanese today, but also to the reality of tomorrow’s market.
Smith responded with a vision of what GM needed to become – a market leader in each of its core technologies by the year 2000 – and the courage to change the company’s metal-bender corporate culture to ensure it would get there. To do this, he is rebuilding the firm on four distinct pillars: automobiles, electronic data systems, high technology (Hughes) and finance (GMAC). By taking the five existing car divisions and GM Canada and reconfiguring them into two super groups, one for big cars (BOC) and the other for smaller cars (CPC), Smith launched the biggest reorganization since Alfred P. Sloan Jr., who put his stamp on the company in the 1920s. Gone are Fisher Body and the assembly divisions, since both CPC and BOC will have their own manufacturing technical and engineering resources to carry out their missions.
Out of this also grew the $3.5 billion Saturn car project which Smith thinks of as a “clean sheet of paper”. Conceived to undercut the Japanese cost advantage in small cars, Saturn isn’t restricted to existing methods, components or GM traditions. It has its own headquarters, management and ultimately its own dealers. It is expected to produce its first car in 1990, before Smith retires, and is expected to yield insights on how GM itself might manufacture and distribute automobiles.
The $2.55 billion acquisition of Electronic Data Systems (EDS) may be Smith’s shrewdest move and clearly one he likes to talk about most. Apart from the clash of cultures which has been much discussed in the press, the Dallas based computer giant is integrating GM’s far flung operations. Ultimately, it will use telecommunications to enhance marketing, raise productivity, improve inventory control and most critically – give GM an information wedge to leverage its market position.
Where GM doesn’t have the technology, it buys it as it did last year with a part-cash, part-paper deal for Hughes Aircraft. Together with its other robotics acquisitions and Delco Electronics subsidiary, GM hopes to apply microelectronic systems and engineering to its products.
Capitalizing on its 67-year experience of lending money to the public, GMAC launched a pilot program of offering home mortgages. GM’s finance subsidiary has tested other financial services such as offering homeowner insurance and is reportedly testing a type of back card that would be used in conjunction with GM products and services. Expect an insurance company acquisition by early 1987.
For all the emphasis on the future, GM has its critics who see its high fixed cost per vehicle and increasing competition – not only from importers, but also from so-called immigrants, domestic assembly operations of foreign manufacturers – as a threat that won’t be overcome by investments in fancy factories alone. The company’s high degree of vertical integration (GM makes 70 percent of what it sells) could be an unwelcome burden, feels Jean-Claude Gruet, auto analyst with Salomon Brothers. He believes GM’s optimistic forecasts for gaining market share are premature. Imports, he predicts, will grow from 28.8 percent in 1986 to 39 percent in 1989.
“Smith’s strategy isn’t the problem,” observes veteran auto analyst Maryann Keller, vice president of Furman, Selz, Mager, Eietz & Birney. “It’s the implementation of the strategy.” The problem with the U.S. auto industry, not just GM, thinks Keller, is that it has yet to come to grips with what really sells cars, namely, value and quality. “A GM executive asked me (while being driven in a new Cadillac Sierra) whether I thought this was a great car. I said: “For $25,000 it would be fantastic. The trouble is, it costs $33,000.” They don’t understand why someone would pass up a Buick or a Cadillac for an Audi 5000.” Smith disputes this view asserting that the company’s up-front investment in high-tech factories and redesigned cars will offer a degree of value and product diversity not seen in the auto industry to date. The Japanese can be beaten at their own game. Roger Smith likes to say he swam the river of change and has reached the other side. But improved morale and an overhauled company aren’t the only changes. In his first year as chairman, a squeaky speaking voice and wooden manner didn’t command the public presence one might expect from the nation’s chief industrialist. A number of public relations gaffes such as announcing new management bonuses a day after the United Auto Workers agreed to concessions didn’t help either. Today, Smith exudes a confidence and ease with the press and public that rivals Lee Iaccoca’s. Unlike Chrysler’s CEO, however, Smith has not succumbed to media slickness. He still exclaims with such midwesternisms as “High Toledo” or as in the following interview, “Not on your tintype.” Naturally private, he nonetheless exhibits a friendly directness and an engaging sense of humor.
Disarmed by this “folksy idiom” during the EDS deal, Salomon Inc. chairman John Gutfreund was impressed with Smith’s “very intelligent, yet unorthodox approach to solving problems.” The investment banker credits him with planting the seed for the idea of a special class of GM stock allowing EDS to operate as an independent company. Recalling Smith’s salad days as GM’s treasurer, former J. P. Morgan chairman Elmore Patterson says, “When he and I were working across the desk from each other, it was typical of him to come up with a more imaginative deal.” “What always impressed me about Roger,” remembers former GM chairman and Smith’s old boss Thomas Murphy, “was not just his ideas and dedication, but his consuming interest in his family. He’s a complete person with many interests.”
Those interests have broadened considerably. Involved in public policy issues such as tax reform and trade, Smith will have his hands full as the newly elected chairman of the Business Roundtable, the most powerful voice business has in Washington. Can he succeed faced with so many challenges? “He thrives on it,” quips GM vice president John W. McNulty, who has worked with Smith from his earliest days with the company. “When someone told Roger that a particular idea would meet a lot of resistance, Roger told him, “When the Nina, Pinta and Santa Maria sailed from Spain, nobody was on the dock waving goodbye.”"
Sailing GM on its own voyage of discovery, Smith expects to open a new world for the automaker. CE’s editor J. P. Donlon and publisher Arnold B. Pollard explored that vision in the following interview at GM.
When you became chairman in 1981 you initially said that you didn’t foresee any changes. After a year, you turned GM upside down. What was your epiphany?
Four years ago we were trying to understand what was necessary to get us out of the red and into the black. Having started the process we looked further into the future – first with the five-year strategic plans and later with 10-year plans. We extended our time frame and decided we had to prepare now to become a 21st century corporation. My friends in Ohio said, “Oh, 21st century! That’s a long way away.” Well, its only 14 years away. We’re only 14 years past the oil shock. In my mind, we’re really late on some things, but it takes a long time to change corporate culture. We said we had to change the structure, the systems and the style. We changed the structure in six months, moved all the boxes around. The systems will take three to five years. The style might take ten to fifteen years. I’m trying to get all our people to let go of the rock of complacency and swim across the river of change. It isn’t easy because most people hang on to that rock. In what some call the frozen middle management you’ll hear people say, “Hey, I’m doing my job OK. I’m not comfortable having 30 of my 38 people put into a paperless office with computer parts ordering. How do I know my consumers will get those parts? What happens if the computer breaks down? Hey, I made a profit in my department last year, go bother somebody who didn’t. Leave me alone. I’m OK.” It’s hard to convince them that, yes, you’re OK now, but look over your shoulder. There’s a herd of elephants coming at you.
What was the key problem that demanded that the imperatives be changed?
When we sat down and tore this thing apart and tried to put it back together, it seemed to me that management was a substantial part of the problem. We’d worked on reducing direct labor, fixed and overhead costs, but we also had to shorten the time from product conception to product entering the market. As we introduced more quality checks, this time was becoming longer and longer – even though we spent millions on simultaneous product engineering and manufacturing engineering. It was obvious we had to improve our management efficiency and shorten the lines of communication. When you start stacking all these levels of management you don’t have a good span of control. It’s not only expensive, but it isolates you from problems. Chevrolet has removed its entire regional sales-distribution level. It used to have sales managers, regional managers and then its district people. We just took that level out – whoosh! It’s helped the sales manager a lot and we’re getting more productivity out of each zone manager. How? Through telecommunications. Without having to talk to anybody else, dealers can interrogate the factory and find out where their orders stand. Soon telecommunications will extend from the customer to the dealer to the manufacturer – all the way to the suppliers. When you order your new Corvette, bingo, the Goodyear and Firestone people will get the tires ready for you.
This is one of the reasons for our buying EDS. We looked at what we had and said, “Hey, we’ve got 7,000 people working on data processing. That’s not enough.” We made up our minds that if we didn’t get EDS we were going to acquire a defunct college in Iowa and start our own college and train people so we could have our own EDS.
Before GM reaches the 21st century it will have to overcome a few problems in the 20th, namely, GM’s declining car and truck market share over the past five years; its decreasing vehicle output per employee and profits per employee; and GM’s unenviable position of being the high-cost producer. How are you confronting these problems?
We’re no longer the high-cost producer. We looked at this problem years ago and came to conclusions that are different from our competitors’. I can’t say about Toyota, but among the domestic manufacturers we make more of our cars in-house than anybody. Ford is next and Chrysler, in effect, is an assembler. That’s not a bad way to be in some respects, but it means that it gives up profits on components. Now, what happened when the dollar shot up? Chrysler, and Ford to a large extent, said, “Boy, we can become low-cost producers by going overseas.” Bingo, they dropped their U.S. suppliers and ran to Japan, Germany, Taiwan – you name it. We didn’t do that. Yes, we put certain operations in Singapore like radios and set up border companies, but we felt we could reorganize our U.S. plants. As the dollar declined and the yen dropped, the pressure on us mounted – no question that out costs rose relative to others. Now look what’s happened. What do you think the people at Chrysler do when they get up in the morning and read the paper?
Check exchange rates. Their solution would have been to find a clever financier to hedge their exchange rate risk for two decades.
That’s what we said. We told our people to compete with a 240 yen to the dollar. By introducing automated manufacturing, we were able to bring radio production from Singapore back to Kokomo, Indiana, on a competitive basis. Don’t misunderstand me. We’re not laughing. But I feel a lot better with our decision to stay when I see how the yen is moving. This is why I say we swam the river of change and are on the other side of the bank. Take Chrysler’s rear-wheel-drive large cars that incur a $500 gas-guzzler tax. What do you get for that 500 bucks? Bad gas mileage.
It’s a little cheaper to have bad gas mileage today.
Yes, but the $500 isn’t assessed on Chrysler; it’s assessed on you for buying it. GM raises prices but Chrysler doesn’t; why? Because paying an extra $500 makes it overpriced. This brings me to your point about our market share. We tore our plants apart to put in front-wheel-drive cars. It cost much time and money to protect our investment components, but that’s behind us. Besides, our market share isn’t down over the last five years, you said. We suffered two bad strikes during 1984-85 while Ford didn’t lose a day. It broke my heart because we were limited in our penetration only by the availability of product.
The problem then was that you didn’t have enough cars. Now you have too many.
I haven’t got too many. I’ve got a lot! There’s an axiom in our industry: the difference between a surplus and a shortage for a dealer is one car. We’re playing the incentive game with interest rates and it bothers me. I shouldn’t be doing it because I’ve got the best product.
So why did you do it?
With the prime rate dropping we had to come up with attractive rates to protect our market share. Our competitors had come out in late December and early January with a big ad blitz. We had already introduced our cars and I didn’t want to reintroduce them. We took our ad money and countered with a promotion to knock their socks off. Look how our penetration came up in December and January and we had no new model introductions. We brought them into our showrooms by showing those big seven point nines (7.9) in the window.
So why did your April promotion fizzle?
You run into this syndrome of ringing the bell and waiting for the mouse to run out to get the cheese and run back to his hole. Pretty soon he wont come out at all. Our industry has to be very careful. We’re telling people, “Don’t buy until there’s an incentive program.” Nonetheless, we’re going to have a very good year. Out of 15 million cars and trucks produced in the U.S., I bet you we’ll get over 44 percent easily. I was in a Chevrolet zone office in Boston recently which displayed a big sign on the wall: Take no prisoners! That tells me we’re going to have a heck of a year. We’ll also get help from a rising yen, from competitors who will be raising prices 17 percent to compensate for it – 17 percent, holy smoke!
Why has GM raised prices? Isn’t this the time to hold them and grab back all the market share you can get?
How much do you need to increase market share? Talking in abstract numbers, if a 10 percent increase in a competitor’s price will increase your market share and they go up to 17 percent, you can increase your prices 2.8 percent and not hurt yourself. Besides, our costs are going up everyday.
How are you dealing with the following four threats to your long-term strategy: slow industry growth – perhaps 2 to 3 percent a year; increased competition, not just from Japan, but from Korea, Brazil and the so-called immigrant companies setting up factories in the U.S.; future excess capacity within the industry; and lastly, a customer base that’s getting older while the foreign automakers are grabbing the younger buyers?
I worry about other threats beyond these, such as the education of our people to bring technology to the company. When a bright kid with a year-old degree from MIT brings an idea for a super chip to a Delco Electronics engineer with an eight-year-old degree, how will the engineer recognize its worth? This concerns me. Slow growth doesn’t worry me much. If we grow 3 percent a year on 15 million cars and trucks – that’s a whole plant. American Motors would give its eyes and teeth for that. Multiply 450,000 new cars and trucks by $10,000 average price – that’s a new business starting up every year. The key factor is not rate of growth but getting share of market. Worldwide, GM will produce 40 million cars and trucks by 1990.
There are a lot of things about increased competition that bothers me – everything from low labor costs to the fact that we’re fighting against the government in some countries. How would you like to run a GM plant in France, for example? We’re just hanging in there pricing smack against the French government which is trying to keep Renault, Citroen and maybe Peugeot going. It’s tough in England, too.
Ford’s competing in Europe all right.
Not too well in France. None of us are. About overcapacity. It worries me. This is why we’re still trying to differentiate our product styling. Back in the 1940′s and 50′s, GM family resemblance was a big asset. Now its backfiring. We must make our cars look more distinct from each other to get our share. Here’s where the investment in technology will pay off. We used to have robots on the assembly line that looked like ducks drinking water – the robot would dip every 18 seconds to make a weld whether there was a car there or not. Now, computer-controlled systems can make welds in different spots for a Buick Riviera or a Seville sedan. If it hadn’t been for this technology, phew, we’d be in big trouble.
But GM isn’t the only automaker investing in new technology. Your competition isn’t standing still.
Oh, no, no, stop! Who built the last five automobile plants in the U.S.?
GM, but others have refurbished theirs.
Listen, you could paint the doorknobs on some of those facilities but that doesn’t compare with the $450 million we spent on each of our new plants. We will soon have the first real, lights-out, factory-of-the-future, flexible automation operation in this country. The computer software alone costs tens of millions of dollars. I’m talking about a real investment. There’s a story told – I didn’t hear it directly – about Iacocca announcing his Liberty car project after we announced our $3.5 billion Saturn car project. Some newspaper guy asked him how much he was going to spend. Iacocca said $150 million. From the back of the room came a voice that said, “Give him one white chip.”
Your cost per vehicle is still high. How much will it come down once this lights-out factory is running?
It won’t drop on 31 May 198X. Some payoffs are imminent and others are longer term. Our current cost problem is due to our front-loading, like two years of reengineering up front. Once we get through the cycle – by the end of 1986 – we will return to a normal plane. Then we’ll have lower manufacturing costs, better quality and lower warranty costs. I can see some of these things in plants today. Our new truck plant, producing vans in Baltimore, is running like a watch. We have a new truck plant coming on stream in Fort Wayne, Indiana, that won’t have an equal.
What about the aging of your customer base? For example, we spoke with a 32-year old, self-employed professional living in Philadelphia. His father always bought Oldsmobiles except for a brief period when he switched to Pontiacs. He, on the other hand, traded his first car, a Chevrolet, for a Datsun and has stayed with imports ever since. He says he won’t consider buying an American car because they are poorly made. How are you reaching such people?
Very carefully. It’s why we told Pontiac and Chevrolet to lower the age group of its buyers. Pontiac introduced the Fiero as a result. Where did Fiero get is customers? Not from that guy’s father who bought Oldsmobiles. Our survey shows that a high percentage came from foreign car buys and what we call foreign car intenders. Look at Isuzu, the M-cars (Sprint), and the Spectrum and Nova. What’s their purpose? To get that first-time buyer. We have the biggest lock on young sports car buyers now. Car and Driver tested a Corvette, Porsche and a Ferrari and said none could hold the road like the Corvette – and the Corvette is only $27,000. My son, who can buy anything he wants, drives a fancied-up Fiero.
Can’t imagine the son of GM’s CEO not driving a GM car.
Oh, no way. He’s a very independent sort. Won’t even work for GM. The point is, the market is changing just as you say. That’s why our strategy is to offer wide choices and concentrate on age, ethic and different culture groups. It complicates our marketing, but that’s why we reorganized into two main groups – to get cars to the market faster and get closer to the customer.
What about reliability? Young car buyers steer clear of U.S. makes because they have lost faith in their reliability and overall quality. A recent J. D. Power survey of one-year car owners shows that GM cars figure to be only average or slightly below average in customer satisfaction. Is this only a perception p