Why GM Remains Far From the Finish Line

A refreshing new book recounts the problems that sank the huge automaker--and could again.

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It's out of bankruptcy, sales are up, and less than a year after a government bailout, General Motors is starting to pay back its debt to taxpayers. It sounds like a comeback in the making.

But a few speedy laps around the track don't win an endurance race, and GM still has a lot to prove before it reclaims pole position in the auto industry—or even becomes profitable. In his new book, Sixty to Zero: An Inside Look at the Collapse of General Motors—and the Detroit Auto Industry, longtime Fortune writer Alex Taylor III recounts the numerous missteps, over decades, that ultimately led an industrial titan into bankruptcy. I spoke with Taylor recently about whether GM has really become a new, invigorated automaker, or is only trying to act like one. Excerpts:

Now that GM has a fresh start, can you look back and list the main things that went wrong and sent GM into bankruptcy?

The book is more a personal reflection of a cold-headed analysis of what went wrong, but I'd say these are hard-working guys who, unlike our friends in the financial community, work long hours for not a lot of money. They're actually good people. But in the 1960s the finance guys began to take over GM from the car guys, and they started making a lot of decisions without thinking about the cars and the customers. They were too slow, they didn't react to more nimble competition, and they built a lot of bad cars. It's amazing how long memories last. It was a big company that didn't adapt. Some people think Toyota today is where GM was 20 years ago. It was a big iceberg that just melted. It's happened to other big companies. Sears basically fell apart and succumbed to Wal-Mart. IBM nearly collapsed. It's Schumpeter's creative destruction.

[See what the government probes into Toyota are likely to find.]

Did GM destroy itself?

No question. They used to complain about all kinds of things, like the yen when it was weak against the dollar. But look at Ford, which is now going strong. GM was just as capable as Ford. They had a lot of smart guys. [Former CEO] Jack Smith was a smart guy, [former CEO] Rick Wagoner had a lot of the right ideas. But it wasn't enough.

Wagoner seemed like he was on the path to fixing GM, but then he got fired last year when the government got involved. What were Wagoner's biggest mistakes?

Absolute stubbornness in terms of the number of brands. They got rid of Oldsmobile but kept Saab and Saturn and all these underperformers. The problem is, they never had enough money to support all those brands. So one brand would have a good year, but it was at the expense of another brand having a bad year. Wagoner believed they needed all that shelf space, which is why he insisted on all eight brands till the end.

What were some of the pivotal moments that led to GM's demise?

The peak year for GM was probably 1955. Harlow Curtice was CEO, and that's the year Time magazine made him Man of the Year. The 1955 Chevy was a great car, with a lot of technology for an inexpensive car. But Curtice fell out of favor with Alfred P. Sloan, Jr., who was chairman. Sloan pushed him aside and put finance guys in charge of the company. They ran roughshod over the car guys.

In the 1970s we had the energy crisis, then Roger Smith took over in 1982. He got the company into such bad shape that it never recovered. He started Saturn and spent billions on it, he bought EDS from Ross Perot, then paid Perot to go away. And he reorganized North American operations in a disastrously inefficient way in 1984. Then Robert Stempel came in 1990. He was an engineer who was not equipped to run the company, especially in a tough environment like the recession in the early 90s. GM had an activist board back then, and the board kicked Stempel out, then fell asleep for 20 years.

Rick Wagoner became CEO in 2000. He basically said that the 1984 reorganization had been so traumatic he'd never try something like that again, but he did have some good ideas. Like a long-term strategy for turning around its dealings with the union. The problem is, the engineers kept designing cars for engineers like themselves, who were 60, while the Japanese and Europeans were designing cars for people who were in their 30s and 40s.

GM forgot how to make cars. Design was subordinated to manufacturing and they tried to do everything by the numbers. They had all these brand managers responsible for getting the product right. But the kind of stuff that Bob Lutz can do from his gut, hundreds of brand managers couldn't do. By the early 2000s, everything was driven by research.

[See the cars that sank Detroit.]

Lutz was the "car czar," brought in to refocus on the quality and appeal of the vehicles. What did he accomplish?

Lutz got the process streamlined. But GM still has the same problem internally. All their improvements are based on the way their own cars were 10 years ago, and they end up so satisfied with their own improvements that they don't notice others getting even further ahead. That's why Hyundai and Kia and others have been able to sneak up on them.

The new Jim Collins book, How the Mighty Fall, outlines five stages of decline that failing companies go through. Does GM follow a particular model of decline? GM fits the model of other old industrial companies. Look at the Fortune 500 from 1954. Some of the biggest companies were meatpacking companies, railroads, old industrial companies that didn't adapt. Wagoner used to complain about "barnacles," these things that attach to a ship as it ages. GM had too many barnacles.

IBM might be the best example of a company that faced the same problem. They made mainframes, and Lew Gerstner transformed the whole company into something new that focused on services, not mainframes. GM didn't adapt that way.

[See 10 discontinued cars to steer away from.]

Has it now changed enough to be competitive?

It's an open question how much they've changed. They now have a non-auto CEO and CFO, which they've never had. But other than that, they have the same inmates running the asylum. They finally got rid of the guys who have been there for 40 years, but replaced them with guys who have been there for 30 years. They're weak in Europe. They're strong in China, but China can't keep going at the rate it's been, and even Chrysler is starting to look like it can do things GM can't. The bureaucracy remains the same. It's not as responsive as it needs to be.

What can they do to change it?

They can do what Alan Mulally did at Ford. Every week he gathers his 17 top executives and says, 'Here's where the business stands this week and here's the goal. Now how are we going to get there?' Mulally is a great communicator, and sooner or later the message gets through. Everybody knows what the goal is. The result is that people at Ford are pumped up. Even people at Chrysler seem pumped up. At GM, it still feels like the attitude is, we're back, eat our dust. They have no spirit of the underdog.

How would you rate GM's cars these days?

GM has a habit of fixating on certain vehicles. They're still saying that the Chevy Malibu is an outstanding vehicle. Well it was pretty good when it came out, but sales have been weak and other vehicles have come along that are awfully good, like the new Hyundai Sonata. And you wonder if GM notices.

So the company still has problems. But you like these people, don't you?

I do. They're decent, smart people who are easy to be around. I liked Jack Smith and I liked Rick Wagoner. Wagoner was a leader since he was about six years old. He's an affable, intelligent guy. It's hard not to like him.

So where did he go wrong?

He didn't have the cutthroat nature to offer what GM needed at the time they needed it.

What could he have done differently?

He could have killed the dying brands sooner. He could have been tougher with the union. He could have dealt with Delphi more boldly. He didn't bring in enough outsiders.

[See 6 myths about car recalls.]

When the auto bailout happened last year, Americans seemed split about GM. Some people felt you have to support the home team, but a lot of other people were remarkably angry about it. They really seem to despise GM. Any idea why? Because GM was so big and so successful for so long. It's like hating the New York Yankees. There were obviously some problems with the cars along the way. It probably began with the Corvair in the 1960s. That stuff has stuck to GM more than it has stuck to any other automaker. It didn't help that for a long time they had bland commercials, either. The all-American brand. They sort of wrapped themselves in the American flag and figured that's enough.

GM is still the biggest automaker in the United States, with about 20 percent of the market. How do you see the future of the U.S. auto industry?

GM will probably settle in at about 17 to 18 percent market share. Ford will go up a little as GM goes down. Chrysler will find stability at some point. The Japanese can have feet of clay, and we're seeing that Toyota obviously has some huge managerial issues. I think they've maxed out for the time being. Nissan probably has room to grow. Hyundai has made nice gains and they'll probably keep growing. And at some point we'll have to make room for the Chinese, at the low end.

I'm probably most bullish on Volkswagen. They've done better than anybody at stretching a single platform across a variety of brands, like VW, Audi, and Skoda.

Do you think the Chevy Volt and other electric vehicles could give GM a boost?

I think the Volt has been a mistake from the time it was conceived. Mainly it was a way for GM to overtake Toyota and the Prius. The Volt will be very expensive and very limited in what it can do. It will have some small utility, but it's a vanity project. They wanted to trump Toyota at something and they found a way to do it. Lutz was the Volt's biggest backer, and I suspect that now that Lutz is out of there, current management is going to take a very hard look at the Volt.

They came up with the Volt partly because their hybrid strategy has been a disaster. They still do not have a competitive hybrid on the market.

[See how the Chevy Volt could transform driving.]

How's the new CEO, Ed Whitacre, doing?

I can't tell yet. He has a certain amount of native ability. He has this tendency to drop in on people unannounced. There's some fresh-air value to that, but I'm not sure it's going to last long. His main job is finding a replacement for himself.

What does GM still need to do to really turn the corner?

They need more outsiders. Less patting themselves on the back. They need to be a little more ruthless. The attitude still is that some progress is enough progress. But everybody else keeps making more progress. But they've got a great history and some very good cars. It's a good company that could become a great company.

[See why Americans seem to be lousy drivers.]

Has GM built any great cars lately? Trucks, yes. Great cars? No. They've built some good cars. The Cadillac CTS, the Malibu, the Chevy Equinox. The Corvette has always been good. But the last great car they built? That's a stumper.

Have you ever owned a GM car?

Yes, one. My third car was a Chevy Vega, in the 1970s. Luckily I totaled it before the engine melted down.

Do you ever recommend GM cars to people who ask for advice about what car to buy?

Sure, but here in the northeast, they're out of fashion. Nobody really wants to be seen in a GM car. And GM's not the best in any category—except maybe light trucks, and that's going down—so why settle for second best?