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                                                                                COVER STORIES, Page 42

GENERAL MOTORS

What Went Wrong?


Everything at once. How the world's largest corporation broke
down, and why the human cost of repairs will be brutal

By JOHN GREENWALD -- With reporting by William McWhirter and
Joseph R. Szczesny/Detroit


    The end came with all the bitterness of a military
surrender. For weeks General Motors chairman Robert Stempel had
tried to ignore the signals of discontent radiating from a
hostile band of outside directors. When Stempel was hospitalized
with an attack of high blood pressure, board members did not
bother to phone him get-well wishes. When rumors flew that
Stempel was about to be ousted, the board issued a statement
that conspicuously lacked a denial. Finally, Stempel, 59, bowed
to a point-blank demand from a third-generation GM board member,
who told him it was time to leave the post he had taken scarcely
two years ago.

    Even then, Stempel showed flashes of defiance, disdaining
an offer that would have allowed him to save face by resigning
for health reasons. Instead, he laid the cause of his departure
at the feet of the directors, thereby calling attention to the
board's handling of the coup they seemed to be planning.
Declaring that "the effects of rumor and speculation" had
crippled his chairmanship, Stempel stepped down on Oct. 26 from
the helm of the world's largest company.

    The resignation of Stempel, a popular "car guy" who was
the first engineer since the 1950s to run the company, stunned
employees who had heralded him not long ago as an automotive
redeemer who would bring out the best in GM. Like soldiers in
a conquered army, many roamed aimlessly last week along the
corridors of the company's limestone-clad Detroit headquarters.
The ouster shook even Stempel's union adversaries, who feared
what life would be like after the boardroom coup led by John
Smale, 65, the hard-charging retired chairman of Procter &
Gamble. Smale has emerged as a possible Stempel successor and
the real power inside the embattled company.

    Employees braced for a take-no-prisoners conquest.
Together with president Jack Smith, 54, the former head of GM's
profitable overseas operations, Smale and the board seemed
poised to purge Stempel's top lieutenants and embark on a
sweeping new round of layoffs to restructure the former flagship
of American industry. "GM is spooked and in complete turmoil,"
said a longtime supplier. "It is faced with total upheaval
caused by an outside force -- something that once was
unthinkable."

    The bloodletting promises to be deep and wide and painful.
Impatient with Stempel's slowness in carrying out plans to close
21 of GM's 120 North American plants and cut 74,000 of its
370,000 employees over three years, directors now want to
eliminate a total of 120,000 jobs during the decade. A major
goal: to slash GM's labor costs of nearly $2,360 per car, which
is almost $800 more than Ford's and $500 more than Chrysler's.
"It's going to be brutal," warns a GM director. "If the unions
won't cooperate, GM will have to play real hardball. We don't
even have the luxury of thinking about a product strategy. We
aren't going to be thinking great thoughts. GM has a three-year
mission to restore its financial soundness."

    That won't be easy for a company whose U.S. market share
has plunged from a peak of 52% in the early 1960s to just 35%
today. GM last week reported a $753 million loss for the third
quarter and is careering through its third straight year of
deficits. GM's North American division, the heart of its
business, lost an astonishing $7.1 billion last year -- $1,700
for every car, truck and van it sold in the U.S., Canada and
Mexico. The red ink was stanched somewhat by GM's car business
outside North America, whose $2.1 billion profit helped cut the
overall yearly loss to $4.5 billion -- still the most dismal
showing ever by an American company.

    The automaking losses have put GM in the kind of financial
position lately associated with dying airlines and retail
chains. The company has been frantically seeking cash to meet
its financial obligations. GM has sold stock and tapped credit
markets to raise $5 billion in the past year alone, mostly to
pay operating expenses. If the financial squeeze grows too
tight, GM might even file for bankruptcy protection under
Chapter 11 to force concessions in its wage, pension and benefit
packages. "This is not the company it once was," says a GM
director. "There is going to have to be special oversight by the
board for the next three years. Our credibility is at stake in
the credit markets."

    As rumor and anxiety racked the company last week, GM
resembled a nation in search of a leader. "People are waiting
for someone to step up and announce they are in control," said
a senior executive of a major supplier. The betting was that
Smale and Smith would divvy up Stempel's job, with Smale
becoming chairman and Smith assuming the post of chief executive
officer. Smith has been virtually running the company since
April, when the directors installed him as president and told
him to speed up the pace of corporate restructuring.

    Once he gets his new job, Smith is apt to launch the new
round of layoffs immediately, since he will be under as much
pressure as Stempel to let the ax fall. Board members picked up
tough ideas about what needs to be done in talks last month with
General Electric chairman Jack Welch, who earned the nickname
"Neutron Jack" by slashing GE's work force in the 1980s. Welch
reportedly huddled with Smale and several other directors during
a two-day forum of CEOs in Hot Springs, Virginia.

    Stempel's ouster is a landmark in the growing shift of
power from U.S. managers to corporate directors, who had
traditionally been viewed more as rubber-stampers than real
decision makers. As recently as the mid-1980s, not even the
bellicose presence of Ross Perot on GM's board could persuade
the firm to shift gears or change direction. "I did everything
I could to get General Motors to face its problems," Perot said
in the presidential debates. "They just wouldn't do it." Rather
than heed Perot's exhortations to cut executive perquisites and
streamline the bureaucracy, GM spent $750 million to buy out his
stock and shut him up.

    In more than just symbolic terms, GM's crisis ranks as the
most dramatic culture shock in the transition of American
industry from the fat years of the postwar era to the lean years
of today. During the 1950s, GM's gas-hogging V-8s and exuberant
tail-finned sedans reflected the confidence of a nation newly
arrived at superpower status, with seemingly unlimited resources
and skyrocketing productivity. "With GM, you were really talking
about a bold vision of America," says Harley Shaiken, a
professor of work and technology at the University of California
at San Diego. Former chairman Charles ("Engine Charlie") Wilson
immortalized GM's role when he told a congressional committee
in 1952 that "what is good for the country is good for General
Motors, and what is good for General Motors is good for the
country."

    While Big Business has become far more circumspect since
then, it has also become more global. The fate of GM (1991
revenues: $123 billion) has an impact on millions of people
around the world. With more than 715,000 employees in 35
countries, GM meets $22.5 billion in payrolls from Prague to
Kuala Lumpur and buys supplies from 28,000 companies. GM's U.S.
auto business accounts for roughly 1.5% of the American economy,
down from about 5% in the 1950s.

    Its sheer size, however, is one of GM's greatest burdens.
Because of arrogance and inertia, GM has fallen out of touch
with its customers. Except for products of GM's Saturn and
Pontiac divisions, young drivers increasingly spurn the
company's cars for Japanese makes or other U.S. models. The
median ages for buyers of GM's bread-and-butter midsize lines
are 45 for Chevrolet, 55 for Oldsmobile and 60 for Buick. By
contrast, the ages of U.S. buyers of Japanese cars range from
35 to 40. GM has foundered while the more nimble Ford and
Chrysler, which had long scrambled for niches in the
GM-dominated marketplace, cut costs and brought out popular
models like the Ford Taurus and Chrysler's minivans.

    GM has consistently ignored showroom signals about its
cars. The company failed, for example, to develop a new sports
utility vehicle like the Ford Explorer, which represents one of
the hottest market segments. When buyers yearned for minivans,
GM simply slapped new plastic panels on a seven-year-old
chassis and rolled out the Chevy Lumina All-Purpose Vehicle.
Result: while GM has made steady improvements in car quality,
its selection and styling have tended to lag far behind its U.S.
and Japanese rivals. "GM hasn't listened to its dealers," says
an Atlanta Buick dealer. "They haven't paid any attention to the
comments of the owners. We've had problems with supply and the
design of the cars, and Ford and Chrysler and the Japanese have
beaten GM all over the lot."

    How did GM, whose charismatic leader Alfred Sloan
pioneered modern corporate management, get into this fix? In
large part, the company has been a victim of its past success
and an insular culture that has refused to change. For 70 years,
GM has operated along lines that Sloan first laid down in a 1919
memo to top managers of what was then a struggling company.
Sloan separated the firm into operating groups and divisions,
which were presided over by executive committees that set
corporate policy. This blend of top-down control and
decentralized execution helped GM build cars at lower cost than
its rivals, while charging more for the quality and popularity
of its models. "That's a wonderful position to be in if you're
a manufacturer," says James Womack, an M.I.T. researcher and
co-author of The Machine That Changed the World, an influential
study of the auto industry. "GM was a fantastic success."

    But by the early 1960s GM was having trouble building
small cars to compete with imports like the Volkswagen Beetle.
Chevrolet's ill-fated Corvair, which Ralph Nader judged to be
"unsafe at any speed," made few inroads against imports. Yet GM
was lulled into complacency by the success of its Pontiac GTO
and other trend-setting muscle cars. When buyers flocked to
small cars during oil crises in the 1970s, GM's failure to
produce a winning model was ominous. "They had become so
arrogant and efficient at defining trends that when a
fundamental shift took place, they failed to adapt," says
Shaiken. "They couldn't do anything radically different from
what they had done before." The company's rush to downsize at
the end of the decade led to the notoriously shabby quality of
its X-car line.

    GM moved boldly under Roger B. Smith, chairman in the
1980s, but often in the wrong direction. Smith's stated aim was
to gear up the company for the 21st century. Along the way, GM
spent $70 billion on everything from industrial robots to the
purchase of Hughes Aircraft and Perot's Electronic Data
Systems. But despite the spending spree, GM's market share fell
from 46% to 35% during the decade as consumers turned away from
its unattractive products. Nor did GM have much success in
transferring Hughes' electronic wizardry to auto assembly lines,
or in using EDS to standardize its computer systems.

    Perhaps GM's crowning folly during the '80s was the
reorganization of its North American operations into two clumsy
megagroups. The plan gave responsibility for small cars to GM's
Chevrolet, Pontiac and Canadian divisions, and handed large cars
to the Buick, Oldsmobile and Cadillac units. While that may have
seemed sensible at the time, it created a new level of
bureaucracy sandwiched between the automaking divisions and GM's
corporate headquarters. The results ranged from mass confusion
to a proliferation of look-alike models. "Everything Roger Smith
tried failed," says Womack. "The screwball capital investment,
the screwball reorganization. Smith was a guy who didn't want
to hear the bad news."

    Smith's failures put Stempel in an awkward position when
the latter took over GM at the start of the '90s. As Smith's
handpicked heir apparent, Stempel had loyally seconded the
chairman's plans. "Stempel always voted with Roger on
everything," says a GM insider, "even though he used to tell me
he knew things were wrong and disagreed." So even as Stempel
went along with GM's wild ride through the Smith era, he learned
the hazards of sweeping change.

    That helped make Stempel wary of new directions when he
became chairman, just as GM directors began calling for a major
overhaul to fix the company. "We could never get a clear answer
from him on anything," says a disgruntled board member.
"Everything got muddled and waffled. There was never a critical
mass. He was just not up to it. The good news, to his credit,
is that Bob finally did the right thing" when he resigned.

    Stempel's defenders portray him as a scapegoat for errors
that GM's now militant directors did nothing to stop. "He
became captain after the Titanic had already hit the iceberg,"
Shaiken says. A strapping 6-ft. 4-in. former college football
tackle with a booming voice but a gentle nature, Stempel took
a conciliatory approach toward downsizing the work force. When
a United Auto Workers strike shut down 14 of GM's factories in
August and September, Stempel agreed to add 900 jobs at two
Lordstown, Ohio, plants where workers had complained about being
shorthanded. Earlier, Stempel had signed a U.A.W. contract that
let workers draw 95% of their wages for three years after being
laid off as a result of technological change.

    Stempel had the misfortune of becoming chairman just as
the U.S. was sliding into recession. That hindered sales of
GM's 1991 fall line, one of its best in years. The redesigned
models included the full-bodied Buick Park Avenue and the
luxurious Cadillac Seville. "Our sales depend on the economy,"
says Jamal Karmouta, who manages a Chevrolet dealership in
Southern California. "When the economy moves up a little, we'll
be selling more cars." But with GM strapped for cash, its new
offerings for 1993 are limited mainly to a redesigned Cadillac
Brougham and sporty Camaros and Firebirds.

    In the layoffs to come, brutality will have to be
tempered. GM must restructure its business without further
alienating workers whose cooperation will be crucial to the
company's success. While the U.A.W.'s relations with GM have
generally been much stormier than those with Ford or Chrysler,
the union seems willing to give the new management a chance.
Says former U.A.W. president Douglas Fraser: "There's a
fundamental truth -- the workers can't survive unless GM
survives." And Stephen Yokich, head of the union's GM
department, says he wants to help the company become more
productive. But Yokich adamantly opposes GM plans to increase
its purchase of materials from nonunion firms.

    GM must also mollify suppliers outraged by the high-handed
tactics of J. Ignacio Lopez de Arriortua, a former European
colleague of Jack Smith's who manages GM purchasing and is
reportedly under orders to cut the company's $500 million weekly
supply bill at least 20%. To do that, Lopez has been
jeopardizing GM's long-term relations with its partners by
demanding that they constantly resubmit their bids. At the same
time, GM has been dragging its heels when paying bills. "GM's
reputation as a gentleman in the industry is disappearing very
quickly," says a leading supplier. "It's sad to see what's
happening."

    GM's biggest challenge will be to shift from the top-down
style of management that has characterized the company since
Alfred Sloan to a more collegial style in which everyone from
the shop floor to the executive suite participates in decision
making. That is no longer a revolutionary idea among GM's rivals
or industry at large. Ford developed its Taurus using nearly
autonomous teams of workers, and Chrysler last year opened a
mammoth $1 billion technical center that will bring together
6,000 technicians, designers and engineers to work on joint car
projects. Perhaps not surprisingly, Ford and Chrysler have
recently reclaimed market share from Japanese automakers, while
GM keeps losing ground.

    The laboratory for organizational change at GM is supposed
to be its built-from-scratch Saturn division, but so far the
results have been mixed. Saturn's long and costly gestation --
it took seven years before the first model rolled out of its
Tennessee factory -- drained $5 billion from other car projects
and stirred anger and envy within GM ranks. And Saturn's special
status as a stand-alone company within GM has created a snooty
attitude on the part of its dealers toward the turmoil in
Detroit. "Most of our customers don't know who makes the car,"
says a Los Angeles Saturn dealer. "So when people come into the
showroom and we explain that Saturn is a separate corporation,
they think of it as Saturn first and GM second."

    The division has yet to make money for the company, in
part because GM reportedly sells the car at a loss to build up
its market share. All told, Saturn ran a deficit of $1 billion
last year, according to U.A.W. estimates. But Saturn has in
abundance what many of GM's other products so desperately need:
prestige. The upstart division's high-quality products have
proved so popular that customers have to put their names on
waiting lists. If Saturn can translate its popularity into
profits, the formula could help save the rest of the giant
company.

    Yet large corporations like GM often stubbornly resist
change, as underscored by the crises now gripping such American
giants as IBM, Sears and Citicorp. "Big organizations that last
a long time are usually very conservative, like churches or
armies," Womack says. Their size usually helps them forestall
change for too long, so that when the forces finally become
irresistible, the upheaval resembles the centrifugal breakup of
the Soviet Union.

    In GM's case, the company that once bestrode the world now
has trouble paying its bills. "We wasted too much time and
money, and we're finally down to the point where it's nip and
tuck," says a senior GM executive. "To me, the sad part is,
Couldn't we have done it any other way?" Apparently not. But
besides cutting costs, GM must now focus its attention on
something the company has too often seemed to forget: how to
build cars, trucks and vans that more people are happy to pay
money for.