“Oh, shit!” My husband's language while driving had never been notable for its restraint, but in this case the outburst was entirely justified. Driving along a country road near Palo Alto, on a beautiful California April day in 1979, he had been watching the gasoline gauge drop to empty. We had run out of gas while looking for gas. For the second time in a decade, political turmoil in Iran had combined with misguided US price controls to produce empty pumps and long lines at gasoline stations, particularly in automobile-dependent states like California. If I'd been more savvy about the economics of the American automobile industry, I might have realized what this situation implied for the fortunes of the company I was about to join and wondered if I'd made a mistake in deciding to make a sharp career turn by becoming the chief economist of General Motors. But in my naïveté, I never connected the dots and anticipated the problems that were about to confront GM. Even less did I foresee its total inability to meet these challenges head-on.
We were on the other side of the country from our home in Pittsburgh because I was spending a year on sabbatical leave, free of teaching duties, at the Center for Advanced Study in the Behavioral Sciences in Palo Alto. High on a hill overlooking the campus of Stanford University, the center each year gave some forty to forty-five social scientists the opportunity to think, read, and write in their own specialties, while at the same time promoting interaction among scholars in different fields. To encourage contemplation, the center provided each fellow with a simple study cabin, a single room comfortably furnished but without a telephone. In the days before cell phones and the Internet, this arrangement was very effective in giving us the opportunity to be alone with our thoughts. Above the center's redwood compound were more hills, with pebbled paths up and down, which groups of us would run, breathlessly if not always swiftly, dodging not only cowpatties but the cows themselves, which stared at these huffing creatures with bovine astonishment. When we arrived in summer, the dry season, the hillsides, dotted with pines and live oaks, were a shimmering golden brown.
Late in January, when the California hills had turned from gold to green, Lake Lagunita had reappeared in the dry bed below the center, and we were reveling in outdoor tennis games, I ran across the compound to take a phone call from Paul McCracken, my old boss at the CEA. McCracken, now back at the University of Michigan Business School, was also a consultant to GM. He told me that an executive from GM, Roger Smith, wanted to meet with me while he was in Palo Alto visiting his daughter at the Stanford Business School. I had no idea who Mr. Smith was or why he wanted to see me, but I said fine, I'll treat him to one of the center's excellent lunches. Back in Michigan, it was widely known that Roger Smith was slated to become the next chairman of GM within the year.
The gentleman who appeared at my rustic office was a short man with thinning, wavy blond hair and a squeaky high voice, wearing a business suit that contrasted sharply with the casual jeans and T-shirts that prevailed on the Hill. After a few pleasantries about his daughter's life at Stanford and the contrast between January in Detroit and Palo Alto, Mr. Smith suddenly asked, “Would you be interested in being vice president and chief economist at General Motors?” My first thought was that, with his fair complexion and mottled skin, the man must have had too much sun. But I was curious enough to ask him to tell me more about the job, from which the longtime incumbent was about to retire, as well as why he thought I would be a good fit.
It would have been hard to imagine a more improbable candidate to become a high-level automotive executive than me, who couldn't tell a Chevy from a Ford without a guidebook, left the mysteries of what went on under the hood to my husband, and drove a slightly rusty six-year-old Dodge station wagon as the family car. But Roger Smith wasn't proposing that I design, build, or sell cars. What attracted him, aside from Paul McCracken's apparently enthusiastic recommendation, was my reputation as an academic economist but, even more, my government experience and the visibility it had brought with it.
The Price Commission had made some significant decisions affecting GM, and I suspect that my efforts to minimize the damage to the economy from price controls, both there and then at the CEA, had come to the company's attention. As the largest firm in a heavily regulated industry, GM relied on its chief economist, among other duties, to make its case to the Congress and various regulatory agencies, and the ability to articulate the arguments persuasively was important. On my side, my varied career experiences combined to pique my interest. To an economist whose specialty was international macroeconomics, GM's sheer size and impact on the American economy, as well as its operations on several continents, made it enticing. My work on the Price Commission and at the CEA had given me an insider's view of the importance, and the complexity, of relations between government and business. And membership on the boards of Procter and Gamble, Westinghouse, and Manufacturers Hanover Bank had given me insights into how large multinational firms made critical business decisions.
In the back of my mind was also the thought that I was being offered an opportunity to make my mark in the business world, an arena that no one in my family had entered, at least in living memory. I told Mr. Smith that I would think hard about his offer but, because I didn't know whether we would still have one child at home for the next couple of years, in any case I wouldn't be able to give him a definite positive response for several months. “Okay,” said Mr. Smith, “I'd rather have a yes in April than a no in February.” Not until I had been at GM for some time did I realize what a remarkable reply that was. Generally, in industry, people are expected to say yes or no to an offer or a promotion within a few days at most.
The key question was whether Laura would return to the school in Pittsburgh she had attended since kindergarten or go off to boarding school the following year. The free and easy California culture that had unexpectedly produced what looked to Bob's and my astonished eyes like a positive orgy of partner swapping up on the Hill, also pervaded the Gunn Senior High School in Palo Alto, where she was spending her sophomore year.
The transition from a small, all-girls private school in Pittsburgh to a large public high school in Palo Alto would have been sharp in any case. But Laura, who was used to demanding teachers and a solid curriculum, found herself, as a latecomer, shut out of all the honors courses except English. Her other classes she dismissed, with adolescent scorn, as “ridiculous.” “I do wish Mr. Love wouldn't let kids smoke pot in Algebra,” she would say, slamming her books down on the kitchen table, “because then we have to teach it all to ourselves after school.” Or “The social studies teachers keep showing films in class because they're too dumb to lecture.” I thought she was indulging in teenage hyperbole until I met the teachers in question. And Gunn was reputed to be one of the best public high schools in California.
What Laura did learn during that West Coast year was how to handle social situations involving alcohol, drugs, and casual adolescent sex without either violating her own standards or being shut out of the social whirl. Bob was pulled away from a dinner party more than once by a call from Laura, saying, “Dad, would you come and pick my friend Tammy and me up at so-and-so's house?” which he did promptly, no questions asked.
The nadir of this California culture struck us when I had to find a pediatrician to fill out Laura's health form for Phillips Andover, the boarding school back east where she had been accepted for the following year. She had applied there because her experience at Gunn had made her more and more certain that she didn't want to return to the Ellis School in Pittsburgh where, she said, given the use of drugs that had begun to pervade the social scene, she would have to “choose between being a pothead and a pariah.” She knew she would encounter the same issues at Andover, but she felt that in a larger and more varied school environment she would be able to find friends who shared her outlook.
I made an appointment for her with a highly touted pediatrician on the Stanford medical faculty, and she pedaled down to his office on her bike. When I got home that evening, I found her white-faced with fury. When I finally wormed the reason out of her, it turned out that the doctor had asked her if she was sexually active (she had just had her fifteenth birthday) and, when she said no, suggested that some psychiatric sessions might help her overcome her frigidity problem.
A colleague to whom I poured out my indignation asked me if I was considering a malpractice suit. “No,” I replied, “I'm much too busy keeping my husband from committing homicide.” Even after she had moved beyond the “problem” pinpointed by the doctor, Laura was still angry, and her conviction that women deserved more respect from the medical profession was a factor, I'm convinced, in her decision to become a physician herself.
Once Laura's schooling was settled, Bob and I decided that we could handle the complexities of a commuting marriage, and I finally said yes to Roger Smith. The more I thought about it, the more the notion of this major career change excited me, creating another piece to fit into the jigsaw puzzle of my professional life. My training in economics had given me a set of analytical tools, what I think of as a mental filing cabinet, to work with. As a professor, I had used this tool kit to teach and write for captive audiences, students and professional journals already solidly anchored in the economist's perspective. It was a tempting new challenge to use it instead to persuade the unconverted, business executives and members of Congress who, rather than sharing the unspoken assumptions of economics, tended to be highly skeptical of them. I never dreamed that the real challenge would be a persistent and ultimately unsuccessful battle to change an ingrown, self-satisfied, and self-destructive corporate culture.
The competitive decline of America's Big Three automobile companies had begun during the first oil shock in 1973. The combination of a sudden surge in gasoline prices, caused by OPEC's sharp cuts in petroleum output, and an artificial scarcity created by US government price controls on domestic oil, caused a sudden shift in the preferences of American consumers. Buyers turned away from the large, powerful cars that were the Big Three's specialty toward the smaller, more fuel efficient vehicles in which Japanese producers like Toyota and Honda excelled, and which they were exporting to the United States in increasing numbers.
If only I had read a book with the prescient title Paradise Lost: The Decline of the Auto-Industrial Age1 published the same year as that first oil shock, I might have been better prepared. In it the author, Emma Rothschild, argued that a productivity slowdown, skimping on investment, and technological backwardness were bringing about the decline of the US automobile industry. She described a variety of new ventures, many of them showcased at a government-sponsored exposition called Transpo ′72, that offered possible sources of revival. General Motors' display included recreational vehicles, mass transport, and experimental “city cars,” including a minicar and an electric-gasoline hybrid suitable for rental car fleets that could be picked up and dropped off around town. Many of these new vehicles were eventually introduced in the United States, years later, but GM wasn't in the forefront of building and marketing them. Despite its slogan at Transpo ′72—“GM is a total transportation organization”—the company chose to focus on incremental improvements in its cars and trucks. Its gradual but persistent decline in market share was under way, however much those in charge tried to explain it away as just a temporary glitch.
The encroachment of Japanese vehicles on the US market was speeded up by the second oil shock of the 1970s, set off by the Iranian Revolution of 1979. The worldwide decline of a mere 4 percent in petroleum production sparked panic and a sharp rise in oil prices.2 In the United States, the Carter administration responded by imposing price controls on gasoline, causing severe shortages, which pushed consumers, even more precipitously than in 1973, toward the small, fuel-efficient cars that were a Japanese specialty.
This may have been the reality of the firm I was about to join, but neither the company nor the American public had yet absorbed the impact of what was happening. My friends congratulated me on joining “Generous Motors.” And that quip closely matched the company's image of itself: the nation's largest corporation, stable and secure, with a dominant market share, large profits even in bad times, and an iconic role in American society. As the combined pressures of recession and growing Japanese competition made me the frequent bearer of bad news during my first few years on the job, senior executives assured me that the world would soon “get back to normal,” by which they meant a world in which GM sold half of all the vehicles purchased in the United States, as it had in its heyday.
Like my appointment to the CEA, my arrival as one of the first female vice presidents in the notoriously macho automobile industry attracted a good deal of press attention. But, unlike that first episode, this time the press mostly played it straight. With the exception of the business editor of a small California newspaper, who referred to me as a “delicious looking dame,”3 the outpouring of press reports on my new position described my background without coy references to my appearance.
Although GM's official headquarters and the center of its operations were in Detroit, the chairman's and treasurer's offices were in the elegant General Motors Building on the corner of 59th Street and Fifth Avenue in New York City, and that's also where the chief economist's office was located. We chose my old hometown, Princeton, as a reasonably convenient suburb in which to live, with good train service and many old friends from our earlier life there. The house we bought, a large, half-timbered stucco structure with a hedge of magnificent rhododendrons, served as a striking backdrop for a photo of us that accompanied an article in Fortune magazine about a new phenomenon: husbands who were willing to become “trailing spouses” as they relocated for their wives' executive jobs.4
These living arrangements meant hectic commuting schedules for both of us. Bob drove an hour to Newark to fly to Pittsburgh every Tuesday morning to teach and reversed the trip on Thursday evenings. Meanwhile, I took a 7:00 a.m. train each morning to Penn Station, where a GM driver picked me up in a current model Cadillac to drive me to the GM Building and took me back to catch a train that got me home around 8:00 p.m. And during most weeks, while Bob was in Pittsburgh, I spent a day or two at GM headquarters in Detroit, spending the night in one of the sterile, impersonal bedrooms reserved for visiting executives on the top floor of the stolid granite GM Building there.
I was well aware that the corporate environment I had stepped into was very different from the academic one I was used to. I quickly overhauled my wardrobe and accepted that, for the first time in my professional life, I had a real boss, something no tenured professor would ever admit to. At the same time, I moved rapidly to make an impact on that environment by means of two hiring decisions that could never have occurred without me. I offered a job to a smart, assertive young Greek economist who was being blackballed because she had lodged a harassment complaint against her employer, the United Nations. I did the same for a woman who, seven months pregnant when she applied, said she would like to work part-time after the baby was born and then ease gradually into a full-time position. The personnel department's functionary was appalled. “There's no precedent in this company for the risks you are taking with these hires,” she declared, but she couldn't overrule the decisions of a vice president. The first woman didn't last long at GM; the other has spent her entire career there—I had batted .500.
It took me longer to come to terms with more fundamental differences in the way academic and corporate economists functioned, and to adapt to these new demands. At the University of Pittsburgh I, like my colleagues, was judged by my output of basic research, work that developed and tested new theories and models. At General Motors, my success depended on how well my staff and I used both theory and evidence to help resolve pressing problems confronting our employer. As a professor, I could plug away at an article until I felt it was ready for publication, while all the work we did at GM was tied to tight deadlines dictated by the needs of the business. In my academic life, I was a specialist in international economics; GM, like the CEA, required me to apply my skills more broadly, bringing together insights from whichever branches of economics were relevant.5
Universities are the last frontier of individualism; my lectures and research output were my own, as were the plaudits or brickbats they attracted. In business, as in government, I soon discovered, achievements are almost invariably collective, and the ability to listen, interact, persuade, and compromise is as important—if not more so—than simply being right. And, while trenchant criticism is an academic tradition, the corporate world requires the softer touch that had been one of my father's hallmarks. I soon learned that I couldn't criticize subordinates in front of other people, or write comments like “bullshit” in the margins of their work.
Perhaps the biggest difference of all was the ambiguity of my perspective, which, I soon discovered, was a mixed blessing. I had a double vision as an insider and an outsider, and that was both my strength and my weakness. Because I was one of the few at GM who wasn't born there, I brought a different perspective from those of employees who had started their careers at the company, but I was also continually being tested. I had to continually prove myself.6
Although I didn't realize it at the time, the role changes that accompanied my move from Pitt to GM echoed the much more dramatic shift my father had made in midlife. Up until he became an American citizen and the US military began to ready itself for war, all his brilliance had been focused on various aspects of pure mathematics, and his fundamental contributions to the great scientific issues of the early twentieth century were largely individual achievements.7 From about 1937 on, his focus shifted to applied mathematical research in the military field and in numerical analysis, computers and automata, as well as the application of game theory to economics, all of which involved working as part of a team.8 He was sometimes criticized for having abandoned the purity of abstraction for the messy problems of the real world, but, convinced as he was that he was fighting a battle of Armageddon, he expressed no regrets.
My situation was hardly comparable to my father's, but I did decide almost immediately after I arrived at GM to work at changing the role of the chief economist from providing economic data and analysis, as well as material for speeches, to the chairman and the financial staff to producing output that could be useful to the operating units, the profit-making side of the house. My personal focus would be, I told myself, to explain the world to GM and GM to the world. But I quickly discovered, to my dismay, that this shift meant coming to terms with GM's deeply embedded and profoundly dysfunctional culture.
Maryann Keller, an astute observer of the automobile industry, summarized GM's self-destructive attributes as a Goliath complex, a parochial worldview, leadership by the numbers, and contemptuous paternalism.9 To this list, I would add the incredible isolation of the company's top executives, the inhabitants of the legendary fourteenth floor of the GM Building in Detroit.
General Motors had long been accustomed to being the largest automobile company in the world, and the belief that the economies of scale arising from its size were a fundamental source of competitive advantage ran throughout the company. I heard Roger Smith opine more than once, and in all seriousness, that being CEO of the largest firm in the United States should entitle him the highest compensation of any chief executive, regardless of how the company's profitability stacked up.
The GM I joined in 1979 was proud of being known as a midwestern car company. The Midwest was its world, and its lack of understanding not only of its Japanese competitors' sources of strength but even of its own customers' attitudes was devastating. It did make use of a standard market research tool, focus groups of potential customers, but it did this so late in the design and production cycle of a new model that, as I commented in frustration, practically the only thing that could still be changed on the basis of their comments was the color of the seat covers.
Since the late 1950s GM's chief executive had almost always been drawn from the ranks of the finance staff, whose members were the company's elite: recruited from the best schools, afforded the highest pay scale, and responsible for coordinating information and decision making for top management. Because their primary attention was to the numbers in making product and investment decisions, the concerns of designers and engineers were too often pushed aside. And these financial “hi pots” (high-potential employees whose careers merited special nurturing) were skilled in the art of making the numbers support whatever decision the chairman favored.
Coming from the ruthless up-or-out tenure system that governed faculty appointments at major universities, I was astounded to discover how rarely anyone was fired at GM. The job security enjoyed by blue-collar workers, with generous benefits guaranteed at the end of a lifetime career, extended to salaried staff and even to the executive level. Incompetence in the higher ranks might prevent someone from being promoted, or even lead to being shuffled off into a backwater position, but the company's paternalism was near-certain protection against being shown the door. When Elmer Johnson, newly arrived as an executive vice president, tried to institute a rigorous evaluation system that called for dismissing those who ranked at the bottom of the curve, his effort was short-lived; although the chairman never explicitly overruled Elmer's innovation, the old practices crept back. And the talented African American factory manager Elmer had installed as personnel vice president to execute the new system soon left the company.
Transported by GM drivers (no one used the “foreign” word chauffeurs) in late-model GM cars into the private garage under the GM Building, the company's top executives ascended by a private, key-operated elevator to the fourteenth floor, where their area was protected by two sets of heavy, electronically locked doors, a security guard, and a receptionist. They lunched together in their private dining room—actually, there were three levels of executive dining rooms in the building—and could leave at the day's end uncontaminated by contact with the ordinary mortals who ate in the large cafeteria on the first floor.
These executives were isolated not only from the rest of the world but from each other. Their offices were all along the same corridor, but there was no spontaneous popping in and out or casual talk around the water cooler. The door to each executive's office was generally closed; in order to enter, one had to make an appointment and be admitted by the secretary who sat on guard in the outer office. This protocol didn't apply, of course, if the visiting executive stood above the visitee in the corporate hierarchy, and a summons from one's superior always sent the recipient sprinting down the hallway.
This was a culture that provided an effective bulwark against reality. With their heads planted firmly in the sand, the majority of GM's top management clung stubbornly to their belief in a stable, reasonably predictable world. The incursion of new Japanese competitors who happened to be in the right place with the right kinds of cars when the oil shocks hit was seen as a temporary or at least reversible aberration. For most of them, furthermore, the only vehicle market that mattered was the one in the United States, which accounted for some 70 percent of GM's production and sales. The idea that the markets and the competition relevant to the company's fortunes were rapidly becoming global was foreign to their thinking.
The picture of the world I tried to persuade GM's management and directors to accept was very different. I began by shifting my staff's forecasts and analyses away from treating the United States as a basically self-sufficient economy, onto which international trade and investment were tacked almost as an afterthought, to seeing it as fundamentally interdependent with the rest of the world. In the decades immediately after World War II, when exchange rates were fixed, foreign competition had not yet revived, and very little capital moved across international boundaries, a decision by the Fed to push interest rates up had affected GM mainly through a drop in total vehicle sales. Sales fell both because Americans cut back on spending in general and because the cost to automobile dealers of financing their inventories and to customers of financing their car purchases rose.
In the more financially integrated world of the early 1980s, in contrast, the sky-high interest rates that resulted from Paul Volcker's determination to break the back of double-digit inflation brought funds pouring in from abroad. With exchange rates no longer fixed by governments, this capital inflow caused the dollar to appreciate relative to other major currencies, making imports cheaper and exports more expensive and putting GM's products at a competitive disadvantage vis-à-vis imported vehicles. Both the business risks and the appropriate responses were different in an economy that was now far more open to the outside world.
I made these points over and over again in presentations to the top management and Board of Directors before this integrated worldview sank into minds that found it strange and unfamiliar. Some of GM's shareholders took real umbrage at my internationalist perspective, writing angry letters to the company protesting the appointment of Marina Whitman, a member of two “treasonous” organizations, as a vice president of their company. One of these organizations was the Council on Foreign Relations, since its establishment in 1921 the incubator and home base of America's East Coast foreign policy establishment—most secretaries of state, many other cabinet secretaries, and several US presidents have been members. It was a men-only club until the 1970s when, fresh from the CEA, I was one of the first women to join.
The other object of the shareholders' anger was the Trilateral Commission, a group of 150 high-profile members, equally divided among North America, Europe, and Japan. It had been founded in 1975 by David Rockefeller, with the aim of pulling Japan, our former adversary and by then an important ally, solidly into the ambit of the “Western” world. No one could fault the commission's organizers on their ability to select as members the rising political leadership of the United States. The winner of the 1976 presidential election, Jimmy Carter, his two major opponents, John Anderson and George H. W. Bush, and 26 senior appointees in the Carter administration were all members, as were Walter Mondale, Bill Clinton, and numerous high-ranking members of subsequent administrations, both Republicans and Democrats.
The powerful positions occupied by members of both organizations, and especially the fact that David Rockefeller, the multimillionaire head of Chase Manhattan Bank, was a leader in both of them, strengthened the spread of conspiracy theories. On the left, both the council and the commission have been suspected of existing to further global business and banking interests at the expense of ordinary folk. On the right, they have been accused of promoting world government and chipping away at the sovereignty of the United States. Some of the more paranoid opponents of the internationalist outlook they represent have even spread rumors of a secret fleet of black United Nations helicopters poised to invade and take over the United States.
My views about the integration of the global economy didn't shake the complacency of GM's senior executives until I laid out the implications in more detail. In op-ed pieces in the New York Times, I hammered home the idea that the trend toward more fuel efficient cars was worldwide, and that the bottom line would almost certainly be a stepped-up pace of innovation and competition in an increasingly global—rather than national—automotive industry.10 Furthermore, I pointed out, the two oil shocks were producing both an uncomfortable transition from cheap to expensive energy and a diffusion of economic power toward newly industrializing countries.11
With these pronouncements, I was striking at the heart of GM management's long-held beliefs. “You're exaggerating,” the vice chairman said testily after he'd read these opinion pieces in the predigested selections of newspaper clippings that were handed to the top executives every morning by their drivers as they got into their cars. “You'll see; these changes won't last, and customers will shift back to GM cars.” My entire career at GM was marked by growing frustration as my economist colleagues and I were unable to persuade our top decision makers that competition from foreign producers was here to stay and would only intensify. As I, along with a few other brave souls, repeatedly tried to bring the fast-changing competitive dynamic to bear on senior management's thinking, I felt like the princess of Greek myth, Cassandra, whose dire warnings about the true nature of the Trojan horse were fated to be ignored, resulting in the destruction of her father's kingdom. My father's Cassandra-like observations, in the early 1930s, about Europe's coming fate had proved all too accurate; was I fated to be just as prescient, and just as helpless to change the outcome, I wondered?
Ironically, among these would-be changers of the culture was Roger Smith himself, the individual most often blamed for GM's downfall. Although our motives and ways of going about it were very different, we were both among the handful of executives who saw the future and tried to jolt the company into adapting. As I look back on these efforts, I'm reminded of my father's long-running battles with the military bureaucracy as he fought to ensure the United States' military superiority in the Cold War. The big difference was that my father and his allies were successful,12 whereas Smith and I, along with other would-be reformers, failed to break GM's mold of inertia and complacency.
Roger Smith had started trying to change some aspects of this GM culture even before he became CEO. As early as 1974, as executive vice president, he had formed a small group to develop the broad, long-range strategies for the future that the company lacked and enticed a far-thinking, British-born engineer named Mike Naylor away from another GM division to head it. But old habits die hard. The operating people, focused on building and selling cars, strongly resisted what they saw as the pie-in-the-sky abstractions of strategic planning.
Soon after I started at GM, Mike and I invited several group vice presidents to take part in a standard strategic planning exercise. It consisted of showing the audience a matrix of several strategies and scenarios and then asking them how their ranking of the various strategies would change under different scenarios. How, for example, would their ranking of strategies change if the auto companies were to find themselves in a fully regulated industry, like public utilities? Or how would they react if the price of a gallon of gas, which had just risen above a dollar for the first time, were to rise to three dollars?
But these group vice presidents refused to play ball. Rather than thinking seriously about how they would act in such situations, they nodded in agreement with the colleague who said, martini in hand, “Aw, come on, I'm not going to waste my time thinking about that stuff. That's never going to happen. If it did, oh hell, I'd retire and move to Florida.”13 Naylor and I tried to come up with different approaches. But we never did find a way to unlock their thinking. And by the time those scenarios turned into unimaginable reality—when gasoline prices spiked above three dollars, vehicle demand imploded and, eventually, government intrusion into all major decisions was the quid pro quo for using taxpayer money to rescue GM and Chrysler from financial collapse—all those executives were long gone to Florida or the great beyond.
Once he became CEO, Roger Smith tried other ways to crack open the inflexible GM culture. Traditionally, the route to the company officer ranks was through promotion from within; Smith took an unprecedented tack by recruiting outsiders who had reached high positions in their own fields to join the company at the level of vice president. Eventually, these would include Betsy Ancker-Johnson, a physicist who had been deputy director of Oak Ridge National Laboratory, to head the Environmental Activities staff; Bob Frosch, another physicist, who had run the National Atmospheric and Space Administration (NASA), as chief of the Research staff; Steve Fuller, a highly regarded professor at the Harvard Business School, to head the Personnel staff; Elmer Johnson, a high-profile corporate lawyer and adviser to leading corporations, as executive vice president and general counsel; and myself as chief economist. Roger's effort to bring in fresh thinking was genuine, but every one of us outsiders in the end retired or left the company frustrated by what he or she saw as a failure to break through the old boys' network and make a significant dent in the way the organization thought and operated.
Smith's attempts to bring the outside world into GM didn't stop with recruiting individuals. In the course of his chairmanship, he brought both Electronic Data Systems (EDS), along with its founder, Ross Perot, and the Hughes Aircraft Company into the GM fold. He had various reasons for making these breathtakingly expensive purchases, but among them was the hope that EDS's aggressive culture and the innovative high-tech atmosphere that prevailed at Hughes would have an impact on GM's bureaucratic style. But although both these acquisitions proved to be huge financial successes for GM when they were sold or spun off as separate entities once again, neither was ever functionally integrated into the parent company or stimulated the cultural change Smith had envisioned.
General Motors' hidebound culture was a many-headed Hydra. During one of my weekly trips to Detroit, I discovered a group of about a dozen economists, entirely separate from the Economics staff, called Legal Economics. Its sole function was to produce a book laying out the arguments against breaking up GM, in case a renewed spate of antitrust suits, such as had occurred during the 1960s, were to raise that possibility. Although the US Senate had held hearings in 1968 on whether GM constituted a monopoly and should be broken up, by the time I arrived on the scene a decade later, the rapid buildup of Japanese competition had made such a threat one of the least of GM's problems.
I managed to persuade my boss, who also had Legal Economics under his wing, that it should be dismantled, and that I couldn't imagine any useful role for its director, whose professional skills were hopelessly outdated. Since our common superior, an amiable Canadian, was clearly unwilling to take on the unpleasant and, at GM, almost unheard-of task of firing someone, I said I would deliver the message. But I hadn't counted on his giving the man a raise just before he sent him down the hall to my office to get the bad news. The unhappy ex-director was both confused and infuriated by this mixed message and took out his anger on me, the bad cop in the farce. When I confronted my boss with the situation he had created, his explanation was “I felt sorry for the guy.”
This unnerving episode typified an unwillingness to take individual responsibility that ran throughout the company. I soon discovered that GM headquarters operated through decision making by committees at meetings, which diffused the pinpointing of responsibility, leading me to murmur in exasperation, “Nobody here but us committees.” These committee meetings consumed an inordinate share of the workday, particularly because every attendee demanded that his staff brief him beforehand on the issues on the agenda, to avoid any chance of being blind-sided. And, in the end, after all the presentations and the discussions, the chairman's view was the one that counted.
Two of the most important committees were the ones on pricing and production scheduling. Although the same top executives belonged to both, the two functioned independently. No one seemed to be concerned with the relationship between the expected demand for particular models, which drove production scheduling, and how they were priced. I had managed to pound the concept of a demand curve into the heads of undergraduates, who knew it would be on the exam, but I had no such success with GM executives. My objection, that the company wouldn't have to lean so heavily on customer incentives to move the merchandise if it made decisions about prices and volumes jointly from the start, fell on deaf ears.
Despite setbacks like this, I was becoming expert in the corporate hand-to-hand combat involved in bringing into my fold several activities key to the goals I had set for myself as chief economist; I hadn't been labeled a pushy broad at Japan's Keidanren for nothing. One was the Corporate Strategic Planning Group; another was GM's European Advisory Council (EAC), another string in my bow aimed at moving GM toward a more global perspective.
The twice-yearly meetings of the EAC were among the highlights of my job. This council, consisting of some of Europe's most prominent citizens from more than half a dozen countries, had been created by Roger Smith to advise on economic and political conditions affecting GM's operations in Europe. My task as chairman was to acquaint them with how things were going there for us, and to lay out the questions on which we especially wanted their wisdom and guidance. Drawing out the views of these leaders on issues affecting GM's business success was stimulating enough. But what I learned from these men—yes, they were all men—at the dinners preceding our meetings ranged far beyond issues germane to GM's European business to encompass almost every aspect of political, economic, and security developments in Europe. It was like once again sitting in on the conversations around the dinner table in Princeton when I was a teenager, except that now I was an engaged and respected participant rather than a sulky and impatient listener.
One of the ways in which I tried to focus GM senior management's attention on the new realities was by sponsoring, in 1982, an intensive analysis by the Economics and Financial staffs of the reasons why the Big Three's production costs averaged fifteen hundred to two thousand dollars more per car than those of the Japanese imports, even after including the costs of transportation across the Pacific. The key message of the study was that the US auto industry was in big trouble and that its problems were long-term structural ones that would not be cured by economic recovery from the ongoing recession of 1981–82.14 Now that there was a single worldwide auto market, rather than national ones separated by different consumer demands in different countries, we simply had to dramatically reduce the large cost differential. Part of this cost gap was due to external factors like tax systems and exchange rates. But, the study revealed, the vast majority of this disadvantage was attributable to US management and US labor; primarily to the higher per-hour cost of labor and lower labor productivity in the American auto industry.15
This analysis of the relative cost disparity got its authors in trouble with almost everyone. Ford and Chrysler had been insisting loudly that the most important causes of the cost differential were differences in the overall tax systems of the two countries and the “artificially” low value of the yen. Since these were disadvantages created by government policies and beyond the control of the automobile producers, they argued, it was up to our government to eliminate them or, if that proved impossible, protect the domestic industry by placing restrictions on imports.
The United Auto Workers (UAW) had a different but equally vehement objection. As part of GM's labor negotiations, I was sitting across a table from the head of the UAW's GM Department, Don Ephlin, discussing with him one-on-one the GM analysis of the US-Japanese cost differential. Ephlin was normally an even-tempered man, known for promoting a cooperative problem-solving relationship with management. But he blew up at my explanation that about half the cost difference was due to our higher labor costs per hour and the other half to differences in labor productivity. “That makes it sound,” he spluttered, “as if everything was the workers' fault, that management's failings in the design of both the products and the production process, and its long-standing lousy relationship with our union, had nothing to do with it.” Startled and embarrassed, I replied, “But that's not what the study said; it stated clearly that both management and labor bore some responsibility for the cost gap.” It had never occurred to me that what I had regarded as a value-neutral piece of accounting would be seen from his perspective as putting the blame exclusively on his members.
Quite a few analysts, journalists, and legislators reacted by insisting that the Japanese advantage was due almost entirely to better management. I responded whenever I was asked that it was “all of the above— better motivation and productivity, lower wages, new plants, lower materials costs and, well maybe, better management on the Japanese side.”16 An independent study produced jointly by the University of Michigan and the consulting firm Arthur Anderson came to basically the same conclusion.17
The differing explanations of the Japanese cost advantage became a huge bone of contention because they provided ammunition to various sides in the ongoing wrangle over US trade policies. In 1980, as the Japanese share of car and truck sales in the United States was moving inexorably upward, and the size of their competitive advantage was becoming clear, Ford and the UAW jointly petitioned the US International Trade Commission (ITC) for a so-called escape clause action, which would impose restrictions on imports of Japanese cars for a minimum of five years. Those of us at GM who opposed import protection managed to hold off strong pressure to join the petitioners by persuading Roger Smith to support our position. The company refused to join the Ford-UAW action, with the result that they lost the case.
Ford and the UAW persisted, though, despite a testy comment from Henry Ford II to Ford CEO Philip Caldwell: “I'm sick and tired of GM sitting back and letting us carry the ball on the Japanese…You know, Phil, we're in business to sell cars. I don't feel that this government lobbying has gotten us much so far except for some bad publicity in the mass media and the financial community.”18 The difference of opinion between the two companies surfaced publicly at the 1981 plenary meeting of the Trilateral Commission, to which both Caldwell and I belonged. Caldwell made a vigorous case for protectionism, while I minced no words in voicing my strong doubts about going that route. Our disagreement was highlighted in an article in the Washington Post.19
At the beginning of his first term, in 1981, Ronald Reagan negotiated with the Japanese government a so-called Voluntary Restraint Agreement, limiting imports of Japanese cars to 1.68 million annually for a three-year period. Just before the president took this action, I sent a strong memo to my superiors, urging them to resist the siren song of protectionism. Although import protection would undoubtedly reduce competitive pressures and increase our profitability in the short run, I argued, it would work to our disadvantage in the long run, by reducing our leverage with the UAW in bargaining for wage concessions and modification of some of its restrictive work rules. It would also subject the United States to retaliation from our trading partners and could easily lead to a breakdown of the trend toward a liberalized trading system, a system that was essential if multinational corporations were to be free to operate on an increasingly global basis, including investing in facilities overseas. “The only reason to sacrifice one's long-run position to short-run advantage,” I concluded, “is if you don't think you can survive to enjoy the long-run otherwise. Chrysler is obviously in that position. I hope, and believe, that we are not.”20
Once the restraints were imposed, I defended this action in public statements and interviews, saying, in effect, “They will give American producers a breathing space in which to adjust to intense foreign competition, and, besides, there is less danger that they will become permanent than some of the protectionist legislation being proposed in Congress, which they have been designed to fend off.” Inside GM, though, I warned that this move carried several dangers to our ability to compete. One was that it would encourage Japanese firms to evade the quotas by building auto plants in North America, adding to global car-building capacity, which already greatly exceeded worldwide demand. Another was that, since the Voluntary Export Restraints (VERs) would limit the number of cars sold in the United States rather than their total value, the Japanese would logically move up-market and begin to produce the larger, more expensive, and more profitable vehicles that were the heart of the Big Three's business. And finally, the increase in profits generated by quota-induced artificial scarcity would accrue primarily to the Japanese manufacturers, allowing them to invest more resources in newer, better products and processes.
When the VERs' original three years were up, their extension for a fourth was a foregone conclusion. Ronald Reagan may have been philosophically on the side of liberalized trade, but he knew better than to terminate them in an election year. When it came time to discuss a fifth year, Roger Smith, alone among the CEOs of American car companies, called for them to end. In an op-ed piece in the Washington Post headlined “It's Time to End the Auto Quotas,” he outlined all the investments GM had made and was making to become more competitive with the Japanese. “So let's drop the restraints,” he urged, “and get on with slugging it out in the world marketplace. The discipline of worldwide competition not only can assure that customers have access to the best products at the best prices, it also speeds up the pace of technological innovation and industrialization and industrial modernization, which means more growth and better jobs.”21
I felt a glow of triumph that my oft-repeated arguments had received the imprimatur of the chairman's byline. I found out the downside when the host of Automotive Report on WJR, Detroit's most listened to AM radio station, cast Roger and me as allies opposing most of the other executives at GM on trade policy, saying, “A very important philosophical question on whether General Motors should continue to support total free trade with the Japanese is now going on inside the number one auto company…The debate…has had chairman Roger Smith and New York based economist Marina Whitman on one side, with GM President F. James McDonald, Vice Chairman Howard Kehrl and numerous vice presidents on the other side.”22
The allegation of a Smith-Whitman alliance on trade issues did me no good in the eyes of many other GM executives. The heads of GM's divisions, the very operating executives I wanted to persuade that the Economics staff earned its keep, were determined to oppose my antiprotection arguments every chance they got. As one of them put it, “The time has come to rise above abstract principles and do what's best for General Motors.” Their hostility to my views on trade, I began to sense, was undermining the credibility of my staffs forecasts and analyses in their eyes.
President Reagan did refuse to extend the VERs for another year, to the consternation of Ford and the UAW. Japan continued to impose such quotas unilaterally, though with a substantial increase in the number of cars allowed, until 1994. By that time, the Japanese producers had made full use of all three of the strategic opportunities created by the VERs that I had warned about. They were setting up manufacturing plants in the United States, building larger and more expensive cars for the US market, and investing their quota profits in new products and processes; these moves became critical factors in the decline of the American auto industry. I had the satisfaction of having been right, but that only heightened the backlash against my well-known opposition to import restrictions, which led UAW president Owen Bieber to refer to me privately as “that free-trade bitch at GM.” My colleague who overheard the remark wasted no time in passing it on to me.
Roger Smith did believe, as a general proposition, that an open world trading system would give GM maximum flexibility to plan its sourcing and operations on a global basis. But his first concern was with the company's bottom line, and he had more practical, immediate reasons for favoring an end to the VER program. He had never shared his colleagues' blindness to fast-moving developments in the worldwide auto industry, and he knew that GM would have to compete in the increasingly popular small-car segment of the market. But when he saw the original cost estimates for producing such a vehicle, Smith killed the proposal, saying that there was no way the company was going to ramp up to produce cars it would have to sell at a loss.
Smith had in mind his own radical plans for establishing GM as a player in the market for small cars, but it would take several years to bring them to fruition. To bridge the gap, he admitted on station WJR's Automotive Report, “[We] do have programs to bring in from Japan some small, very fuel-efficient, low-priced cars—in limited numbers.”23 A continuation of the VERs at their current levels would have allowed no room for these additional imports; only the substantial expansion of the quotas by the Japanese government when it extended the program unilaterally made his bridge strategy viable.
On the other end of the bridge, Smith had a two-pronged approach to building such vehicles in the United States on a cost-competitive basis. One he described on the same radio program: “Our Saturn Corporation, eventually with assets of $5 billion, will build and operate—in the United States—its own new, highly integrated manufacturing and assembly complex. It will use new technologies in product and processing and will have separate franchises and a separate labor agreement, using concepts worked out by a joint GM-UAW task force.”24 This announcement set off a hot bidding war among several states, eventually won by Tennessee, for what would be advertised, when it was up and running, as “A different kind of company, a different kind of car.”
The other prong to Smith's strategy emerged from the secret discussions he had been having with Eiji Toyoda, the chairman of Toyota, about a joint venture to manufacture small cars in a shuttered GM plant in Fremont, California, using the Toyota production system and a teamwork-based working environment. The two executives regarded this pioneering idea as a win-win proposition. General Motors would get an inside look at the vaunted Toyota system, and Toyota, which was planning to build its own plants in the United States, would test the waters in working with unionized UAW workers.
The proposal, which had to be approved by US regulators, was challenged by Chrysler on antitrust grounds, and I found myself in front of first a judge and then a congressional committee defending the plan for a New United Motor Manufacturing, Incorporated (immediately and ever after known as NUMMI). The proposal had been structured, I emphasized, to be pro- rather than anticompetitive and imposed no restrictions on either firm's ability to continue its fierce rivalry in the United States and throughout the world. Furthermore, I insisted, the knowledge GM would derive from the proposed joint venture with Toyota was essential to Saturn's success.25
Chrysler's general counsel argued that the joint venture would in fact restrict competition. Fortunately for me, the committee's chairman, Congressman John Dingell, a strong supporter of the US auto industry and a fearful opponent in the halls of Congress, shared GM's view. He lobbed such softballs to me and such hard-hitting questions to Chrysler's representative that I caught myself feeling sorry for the guy.
As it turned out, my promise that NUMMI would provide a learning experience for Saturn and GM in general was thwarted by the internal bureaucracy charged with implementing it. Smith had intended that GM midlevel executives would go to NUMMI in teams of four, spend several years learning the secrets of the Toyota production system, and return as a team to incorporate them into company operations. But the GM divisions resisted bringing these bearers of foreign ways of doing things into their fiefdoms, and the returnees were reluctantly reabsorbed into the company one by one, a process guaranteed to thwart the changes that were to have been GM's gain from the joint venture. In yet another example of the company's tendency to stick with or revert to its traditional habits, many of the innovations that had made Saturn a new kind of company were gradually abandoned by Smith's successors. The Saturn line of vehicles was phased out as part of GM's government-mandated restructuring in 2009, and the NUMMI plant closed when neither GM nor Toyota showed any interest in continuing to keep it open.
Roger Smith's strategy for producing small cars competitively in the United States typified the visionary side of his nature, in which he saw highly automated factories and paperless offices as the main instruments for restoring and maintaining GM's competitive position in a global struggle for automotive dominance. During his time as CEO, GM invested heavily in the latest and most automated production processes. Why, then, did his long-range planning ultimately fail to achieve its creator's goal but rather took the company to the edge of bankruptcy?
Like the heroes of Greek tragedy, Smith was a great man with some ultimately fatal flaws. His greatness lay in his intelligence, creative thinking, and ability to make big decisions rapidly. But he misunderstood the sources of the Japanese advantage and couldn't make midcourse corrections when his plans blew up in his face. He failed to see that the heart of Japanese product and process innovation lay not in high-tech automation, which they used sparingly, but in a finely honed integration of product design, process simplification, and human behavior. When the expensive machinery Roger was so proud of became the butt of bad jokes about robots dropping windshields and painting each other, he was unable to get the problem effectively diagnosed and fixed. Instead, all the spending on automation took GM from being a low-cost to a high-cost producer, absolutely the wrong direction at a time of intensifying competition.
He was also thrown off course by men with powerful personalities and overweening ambition, men he admired and had worked hard to bring into the GM fold. He was surprised and furious to discover that he couldn't control them, leading to several high-profile disasters. One such miscalculation was the arrangement he made with Horst-Dieter Esch, the hotshot chief executive of the German firm IBH, which purchased one of GM's subsidiary businesses. Although GM's lawyers had warned him that the proposed relationship might be illegal in Germany, Smith was “too quick to structure transactions to accommodate Esch, IBH's flamboyant founder and chairman…Esch ran his company the way Roger would like to run his, out of his vest pocket.”26 Ultimately, Esch was sent to prison for fraud, and Smith dared to set foot in Germany only after GM attorneys checked with a German prosecutor's office to make sure that their chairman wouldn't be arrested.27
Another misjudgment was the general counsel that Roger brought to GM in 1983. Elmer Johnson was a tall, handsome, silver-haired lawyer noted not only for his legal triumphs but also for his ruthlessness in business. Roger wooed this man with a larger-than-life reputation with the promise of a rapidly expanding role in the company and a chance at the gold ring of CEO. His responsibilities were broadened several times during the next few years. In 1987, he not only was made an executive vice president and a member of the Board of Directors but was named by Smith as one of four contenders to succeed him as CEO.
Soon after that, relations began to sour. Instead of showing up regularly at the many policy committee meetings in which senior executives were expected to participate, Elmer sat alone in his office, writing long, thoughtful memos on how the company's operations could be improved. The coup de grâce was a twenty-five-page document in which he severely criticized the management of one of the two major car groups into which the company's automotive operations had been divided during the wrenching reorganization of 1984, gave detailed suggestions about how the group should be revamped, and suggested that he be put in charge of the group to implement those recommendations.
Many of his substantive suggestions later proved to be on the money. But they earned the enmity of Roger Smith, who didn't appreciate being told how to do his job. Despite the promises with which he had lured Elmer to GM, he soon had no intention of giving this man, seen as a troublemaker, one of the company's top operating positions. His response to the memos was icy silence, and Johnson felt himself being squeezed out of Smith's inner circle. Frustrated, he resigned in mid-1988 to return to his law practice and later wrote a book criticizing America's dependence on automobiles.
The most explosive incident that arose from Roger's failure to understand human nature was his disastrous relationship with Ross Perot, the charismatic founder and CEO of EDS. General Motors bought the data-processing company in 1985 after a complex negotiation, led by Elmer Johnson, that resembled a mating dance as much as a business transaction.
Roger's attraction to EDS derived partly from his belief that the firm could bring order to GM's inefficient, crazy-quilt, data-processing and business systems. But his hot pursuit also owed a great deal to his admiration for Perot himself, and his hope that some of the EDS founder's scrappy, shoot-from-the-hip decision-making style could be transferred to GM's slow-moving bureaucratic culture. For this reason, Smith promised Perot unprecedented independence within the larger company. It was agreed that EDS would operate as a separate profit center, with a separate class of stock (Class E), whose stock-market value would hang on its performance. Perot also became a member of GM's Board of Directors.
It wasn't long before what had been conceived as a marriage made in heaven moved toward a divorce carried out in a hell of resentment and confusion inside GM and a storm of unfavorable publicity outside. Almost immediately, Perot began a barrage of public criticism of the way GM ran every aspect of its automotive business, refused to allow GM access to EDS's books, and publicly spoke out against the acquisition of Hughes Aircraft. In a famous put-down of the GM culture published in Business Week, he chortled, “The first EDSer to see a snake kills it. At GM, the first thing you do is organize a committee on snakes. Then you bring in a consultant who knows a lot about snakes. Third thing you do is talk about it for a year.”28
By the end of 1986, Perot had resigned from the GM board, and GM had bought back all his shares of GM and EDS (Class E) stock for seven hundred million dollars in a departure also negotiated by Elmer Johnson. The company was widely accused of using “greenmail”—excessive payment as a bribe—to get rid of Perot, and, although EDS's market-capitalization of twenty-seven billion dollars when it was spun off a decade later was of enormous financial benefit to GM, the episode was an extremely painful one for the company's morale inside and its reputation outside.
This pain was due not only to Perot's shenanigans but also to the internal discomfiture created by the failed integration of EDS into GM. The other members of Smith's leadership team were resentful that they hadn't been consulted about the EDS acquisition, and the chief financial officer, whom Smith had put in charge of the operation, was oblivious to the human fallout from such a wrenching change. Company managers rapidly came to the conclusion that EDS's pricing was ripping off its parent company. Data-processing employees at GM were deeply shaken and hurt by their forcible transfer to EDS and the substitution of its much riskier compensation structure for GM's secure pay and benefits. Everyone was taken aback by the gun-toting security guards who controlled access to EDS's secretive Detroit headquarters. Roger Smith, a whiz at mathematics and finance, had once again failed to take an accurate measure of human nature.
Even today, twenty years after Roger Smith's retirement and several years after his death, I feel a twinge of disloyalty in my description of his failings. Roger was unfailingly supportive of my career at GM and, for a man widely reputed to resent criticism, was surprisingly open to whatever candid evaluations I offered of a proposed decision or action. Bob O'Connell, the financially creative and blatantly ambitious chief financial officer who was being touted as one of the possible successors to Smith, cautioned me that being “so rough” with the chairman could be a career buster. Like my father, I put a high value on being close to the center of power, but, also like him, I never shrank from “telling truth to power.” I knew I had won this gamble the day Roger called me into his office and said, “I have good news and bad news. The good news is that I'm offering you a promotion; the bad news is that you'll have to move to Detroit.”