GM: A Morality tale of the dangers of Incomplete Capitalism

GM made many, many mistakes over the years. But one big one was obsessing on “capital” and ignoring other less easily measured aspects of the auto business.

This New York Times article profiling GM (and Ford’s) race to catch Toyota on quality is really a morality tale about how a single-minded, obsessive focus on short-term financial returns is a misplaced corporate strategy. These three comments in the article tell the story:

…for years American carmakers made so much money from high-margin behemoths like pickup trucks and S.U.V.’s that ignoring quality held little financial downside — at least in the short term.

Look at what happened in 2000. G.M. sold 8.6 million vehicles and earned profits of $4.45 billion. That same year, Consumer Reports listed 35 “reliability risks” in its annual car guide. Fifteen were made by G.M.

“In the ’80s, I had a tire supplier tell me: ‘All Detroit cares about is that the tires are round, black and cheap. And if they’re cheap, the first two aren’t important.’ ”

In other words, finance rules. Everything else can be ignored. Only one link is necessary to run a business.

Even though Detroit has been lamenting the decline of their market share and the rise of Japanese brands for 30 years, as long as the finance guys could put out a decent  number this quarter, the reliability ratings don’t matter. I can hear the finance guys now saying, “Clearly, the consumer is getting “enough” quality because our profits are up this quarter.” Or maybe even, “Well, go measure that quality thing in a way I can compare it to revenue and profits and then maybe I’ll think about it.” 

Granted, the link between quality and sales is more difficult to measure than the link between margins and an aggressive procurement policy that emphazises “low bid wins”. And as Detroit has seen, improving quality doesn’t happen in one quarter. So it doesn’t fit into the quarterly financial results mantra.

So the fundamental question is: what are companies in business for: quarterly profits or long-term shareholder value (even at the cost of lower short-term returns)? There are a lot of wiped out former GM shareholders who would have voted for the latter.

I think they would say that GM was an incomplete capitalist.


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