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~ USA Headed for a 5th Revolution! Why?
#349 GM EV-1: Story Behind the Story. Inside Conspiracy? (Part 4)
Posted by Jordan Abel in Corporate Policy, General Motors, Personal Stories, Uncategorized
Readers: this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about the Revenge Revolution, a list of earlier revolutions and the author, Entry #1.
Periodically I write a "sense check" to assess whether in the next few years, a revolution in the US is still possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US. Most recent sense check, Entry #332.
The past few entries have been a break from the craziness in Washington. In Entries #343-#345 I included some observations about my time working with Lee Iacocca, who died July 2. Entry #346 started discussing another project that continues to generate considerable interest — the GM EV1, the first modern electric vehicle, which was introduced more than 25 years ago.
There are two sides to the EV1 story — product and non-product. The product side has been reasonably well documented. In my view, the non-product side of the story is far from complete, and what's been told so far is misleading. The series of entries — I actually do not know how many — will attempt to provide addition insight. The series will be a good diversion from the madness in Washington and offer a good lesson or two, I hope. (If you have not read Entries #346-#348, suggest you do so before reading this entry.)
As described in previous entries, there was a dichotomy on the GM EV-1 program. The public, the media and most government organizations were interested and viewed very positively GM's efforts to develop and introduce an electric vehicle. Inside GM, the view was just the opposite. Many GM executives intensely disliked the EV-1 program and considered it a waste of scarce funds.
An example of the public support was the number of people who contacted the program seeking information. When the program kicked off, there was no internet. Hard to imagine now but true, no internet. The primary contact was via an 800# and some contact by snail mail. The 800# was staffed by a firm which I had used at Buick.
The firm kept a record of every contact. If you were a first-time caller, you also received a response letter written on executive stationery, which I hand signed with a fountain pen. If I knew anything about the location or something else that might be of interest to the recipient, I would write a short note in the margin.
Over roughly a two-year period, I signed about 25,000 letters. It was not uncommon to return from a week-long business trip and have a stack of 300-400 letters delivered to the house waiting for me to sign.
Did this letter writing effort have an impact? For maybe 10 years after the program, I would be introduced to someone who would say, "Oh, I know you." I would ask how they knew me since we were just introduced. "You wrote me a letter." Then often as not the person would reach into the desk and retrieve the letter.
Most people seemed to retain the EV-1 brochure, which was sent along with the letter. Like many efforts on the program, we broke the mold for what was considered a standard car brochure. The advertising manager on EV-1 was Amy Rader, a history major from Princeton. Amy thought we should have a different kind of brochure. She managed to convince the Robert Frost Foundation to allow EV-1 to be the first commercial use of his works. The EV-1 catalog, of course, was on recycled paper.
Contact with the EV-1 group was not limited to the United States. One day we received a package from a group of high school students in Bulgaria. Somehow they'd heard about the program (remember pre-internet) and completed a class assignment centered on the EV-1. When finished with the assignment they sent us a copy.
Unfortunately, the widespread interest in EV-1 fell on deaf ears inside GM. Part of the cause was frustration among many GM executives with 1980's chairman Roger Smith diversion of cash from product development and marketing programs. As noted in an earlier entry, during the 1980's Smith purchased Hughes Electronics, Electronic Data Systems, stock held by Ross Perot associated with EDS purchase. Also, Smith diverted a huge amount of cash to start Saturn. GM EV-1 was also tainted because Smith had it developed in secret by a company in California. He then held a surprise introduction at the LA Auto Show, including the statement that GM would produce EV-1.
While Roger Smith's follies festered frustration and anger toward EV-1, some of us on the program could have done a better job trying to convey the value of EV-1 to executives inside GM. We did not spend enough time making sure our colleagues at the GM operating divisions understood how the EV-1 program could benefit GM and benefit the operating divisions.
However, even that effort might not have overcome what seems to have emerged over time as the death knell of the EV-1 program. The cause of death was the view by the financial staff that EV-1 was nothing more than a cost center. As someone who cut his teeth on the GM financial staff, I can sort of understand that view, although I do find baffling the lack of enlightenment about the non-product value that EV-1 generated for GM.
The "cost-center" view may have been a cover for at least two other actions. The first was that GM kept claiming most, if not all development cost associated with EV-1 had no other application. Yet, as EV-1 was being developed, elsewhere in GM there were efforts to incorporate many features of EV-1 into regular production vehicles. If one were to track incorporation of electronics into regular production cars/trucks, there was a huge jump after EV-1. I like to remind people that even though GM eventually cancelled EV-1, one the major benefits of the program was accelerating the use of electronics in vehicles.
The acceleration of electronics should have been fully supported by the financial staff…but it wasn't. At the time of EV-1, many electronic features carried a price premium. Yet, the incremental cost to produce many electronic features was almost nothing. With the opportunity to use electronics to increase profit margins on most every car and truck, why was the financial staff so emphatic that EV-1 was a cost center?
The second reason for the "cost-center" claim is more sinister and one I've never heard discussed publicly. I reached the more sinister conclusion based on: (i) early training to be an actuary, which includes trying to find patterns out of seemingly random events; (ii) studying the history of General Motors; (iii) having worked with most of the financial executives involved.
My sinister view is the EV-1 happened to be a convenient mechanism for implementing a conspiracy by the financial staff. A conspiracy by the financial staff is unlike the conspiracy implied in the movie "Who Killed the Electric Car?" The movie suggests a conspiracy among various car companies and other organizations associated with electric vehicles. As noted in an earlier entry, I think the multi-organization conspiracy theory presented in the movie is simply not true.
Ok, then what was the conspiracy inside GM led by the financial staff? And why?
Higher-level finance executives knew that actions during Roger Smith's reign had seriously eroded GM's earning power. Some of this erosion had been hidden by a number of accounting changes. With that understanding, these executives knew the next chairman of GM would have a very rough time trying to stabilize the company and trying to rebuild earnings.
GM had a long tradition of the chairman coming from the financial staff and the president coming from operations. So here are my questions. Who was chosen to succeed Roger B. Smith as chairman? A financial guy? No, a guy from the operating side. Who was chosen to be president? An operating guy? No, a financial guy. Seems a bit odd, huh? Maybe a bit Machiavellian?
Robert Stempel, who was chosen as chairman to replace Roger Smith, was the quintessential engineer. Stempel had a stellar track record in operating roles at Pontiac and Chevrolet but no in-depth exposure to or understanding of finance. No surprise that Stempel was a big supporter of EV-1 since much of his career involved new product development.
The new president, Jack Smith (no relation to Roger Smith) was the quintessential finance guy with almost no experience in US operations that would help him understand how the operating divisions and the supporting dealer organization worked. An example – during a meeting I mentioned EV-1 was generating a high level of interest among teenagers. Smith replied, "15 year-olds don't buy cars!" True, but just from a pure economic standpoint that 15 year-old will likely purchase at least 10 cars/trucks in his or her lifetime, and probably more. And who doesn't remember which brand cars/trucks were "cool" when they were 15 years old?
So, was there really a conspiracy? Was there really a coup d'état at GM? Did the senior financial executives setup Stempel, knowing GM earnings would be rocky the first few years post Roger Smith? If Stempel demonstrated he was unable to stabilize GM, would the financial staff be justified asking the Board to replace Stempel with a traditional finance guy in order to "save" the company?
Stempel faced another problem, which was not unexpected. In the early 1990's, the US economy slid into a recession. As GDP and personal income declined, predictably so did car sales. GM profits also fell. While Stempel continued support for the EV-1, the recession forced GM into a difficult choice. The loss of market share during Roger Smith's reign meant fewer vehicles to cover fix cost. Plus, the diversion of cash for Smith's various projects, especially Saturn, meant GM had no cash reserve.
GM needed to cut costs and few alternatives were available. Product programs and marketing programs at the car divisions had already been raided to fund Roger Smith's various projects. Closing Saturn, even though it was bleeding cash, would have been a PR disaster.
What was on the table for cutting, at least from the financial staff's perspective, was EV-1. I agree and understand that sometimes immediate needs for cash overtake future considerations, even if the long-term consequence may be negative. However, cutting EV-1 made little economic sense. The cash burn rate was not that great. Much of the development could be applied to and increase profits of other GM cars/trucks. Plus, EV-1 was GM's only bright spot. Even with all the other problems inside the company, GM's public image continued to improve because of EV-1.
But did that matter? Stay tuned. My apologies. In Entry #347 I promised to talk about the dynamics of the meeting the day the music died. I'll do that in the next entry.
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