Behind the Scenes at GM: What Went Wrong?

July 9, 2009— -- It was one of the most brilliant marketing schemes ever devised. General Motors convinced the average American that with each new year, you need a new car. It was the perfect sales pitch for a prosperous country raring to try out a brand new highway system. And the company could offer a car for "every purse and purpose," because from the beginning, GM was really several car companies in one.

"GM came along with this hierarchy of brands, so you can start off life with a practical and modest Chevrolet and then you get to a prestigious Cadillac at the end," explained journalist Paul Ingrassia. "Essentially, in between, maybe you'd go through a Pontiac, an Olds and a Buick."

Each line of vehicles was a marriage of brains and brawn. Designers like Harley Earle, the "Da Vinci of Detroit," would come up with glorious moving sculptures, engineers would add mathematical horsepower, and laborers -- often immigrants or the descendants of slaves -- took on the back-breaking, mind-numbing task of building them.

"In the '20s and '30s, these were horrible jobs to have," said New York Times reporter Mickie Maynard. "There was a caste system, and yet, you could pretty much get hired if you could show up and you had the might to do those jobs. 'Cause they were physically very tiring jobs."

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Out of this sweat and noise, through the Depression and the second World War, rose the United Auto Workers. The union proved its might through sit-down strikes and world-beating productivity. By 1950, GM could easily afford to give pensions and health care to its workers. As a result, employer-based coverage became the American way ... and a UAW card became a ticket to middle-class security. Men without high school educations could buy homes and cars, and send their children to college.

Through the '50s and '60s, life in Motown was good. But with higher GM profits came greater union demands. In 1970, after a two-month strike, employees were given a sweet deal known as "30 and out." If you started on the line at 18, you could retire at 48 ... with full benefits for life.

According to Ingrassia, GM's attitude was "we can afford it. "

But the deal only shortened the fuse on a ticking bomb, because as the work force aged, GM would have to spend more on retirees and less on cars.

"There wasn't any leadership on the union side," said Maynard. "They had to get re-elected. There wasn't any leadership on the company side. They couldn't afford a strike."

GM: Quality Control Issues

The '70s also brought oil shocks and new regulations. GM frantically tried to re-engineer a more efficient fleet, while cutting costs by building the various brands, from Chevy to Caddy, the same way.

According to management expert Jim Womack, it was a fatal error: People noticed that all GM cars looked alike. "Why would I pay premium money for a car that's actually this other car?"

Because smaller cars meant smaller profits, executives cracked the whip on labor, demanding more, faster.

"They go from 60 cars an hour, not to 65, not to 70, they go to 100 cars an hour," said Ingrassia. "Quality nosedived." At the end of a GM assembly line were two doors: Major Repair and Minor Repair.

The 1977 Chevy Vega was just one result, as ABC correspondent Bill Weir attested. "This thing dripped so much oil, my dad called our driveway "The Black Sea."

But this was just one of GM's problems by the '80s. The other came from Japan, and brands with funny names like Nissan, Honda and Toyota. These cars were called "econoboxes." General Motors, said Maynard, "just looked down their noses at these little cars."

But the Japanese were smart. They knew politicians would block an import invasion, so they built plants here, in the American South, where there was no history of car-building, no preconceived notions, and no union. Just job-hungry workers willing to try the Japanese style.

"Rather than having long assembly lines where people did their thing and didn't care what the quality was, and just kept passing it down the line, they had teams of people," explained Holstein. "These people cared about the quality; they're competing against other teams; they're evaluated; they're rewarded on the basis of the quality of what they do."

The assembly lines at Toyota had something Americans never imagined -- a cord that would stop the line until a problem was fixed -- shifting quality control to every worker.

Will James, who manages a Toyota plant in Indiana, tells ABC it is not uncommon to have 3,000 to 4,000 cord pulls in an eight-hour shift.

This is the heart of the Japanese philosophy known as kaizen: constant improvement. As Ingrassia notes, it means using "the brains as well as the bodies of the employees."

With the kaizen system, the Japanese captured a new kind of consumer: one whose priority was reliability. "The Baby Boomer generation," said Holstein, "became convinced that it was stupid to buy an American car." And, he notes, they handed that attitude down to their children.

GM: Too Little, Too Late

Through the '90s, GM made some feeble attempts at reinvention with the Saturn and the electric car, but both were allowed to wither as a loophole in pollution laws gave rise to the SUV. Americans seemed to want bigger cars again and GM could make a bigger profit making them, especially since they had seen the light and adopted the Japanese style.

Workers at GM's Lansing plant told ABC's Weir about the new attitudes. "What I don't think many people get is the quality concepts we have adopted," said one. "The union and management work as a team, not this fight, fight, fight."

In recent years, GM workers have been reinvigorated by new plants and by this new sense of teamwork. Designers, rather than accountants, have led the company's vision once again. Overseas, GM has actually started to turn a profit, especially in China, where the new rich love the Buick.

But the positive trends have been too little, too late. Last summer gas prices rose, killing the SUV and truck business. When the economy collapsed in the fall, people stopped buying cars altogether. It was too much for a sick behemoth, tens of billions in debt.

On Sept. 16, 2008, GM celebrated its 100th anniversary. Just two months later, GM CEO Rick Wagoner was standing before Congress, pleading for a bailout. If the auto industry were allowed to go under, Wagoner told a Senate committee, "the costs would be catastrophic in jobs lost, income lost, government tax revenue lost."

But the nation was suffering from "bailout fatigue" and the pleas of the auto execs were met with anger -- especially after ABC reported they had flown to Washington in private jets. Quipped one congressman: "It's almost like seeing a guy show up at the soup kitchen in high hat and tuxedo."

The executives' lack of any real plan also bothered lawmakers. Representative Michael Capuano summed it up bluntly: "My fear is that you're going to take this money and continue the same stupid decisions you've made for 25 years."

Two weeks later, the auto execs made a great show of driving back to Washington, but to no avail. A bailout bill died in Congress and the industry seemed headed into the abyss.

Just weeks before Christmas, former President George W. Bush gave in. Given the state of the economy, Bush said, "allowing the U.S. auto industry to collapse is not a responsible course of action."

Bush gave General Motors $13 billion in loans and 101 days to come up with a restructuring plan, pushing the ultimate verdict onto the next president.

GM: Bankruptcy

President Barack Obama responded by appointing an Automotive Task Force, led by veteran Wall Street dealmaker Steve Rattner. At the end of March, Obama announced the task force's verdict: The plan didn't go far enough. But the government chose to give GM another loan, and another 60 days. Wagoner, however, would have to go.

It fell to Rattner to inform the GM veteran he was out. "He was a real gentleman about it," Rattner told ABC. "He understood exactly why it was necessary and maybe didn't fully agree but accepted it."

Taking over from Wagoner was Fritz Henderson, the son of a Buick salesman. Henderson had spent his entire career at GM, mostly fixing operations overseas. "Rick Wagoner was seen as a great guy," said Holstein. Henderson, Holstein said, is more willing to make tough decisions than was Wagoner.

Over the next two months, Henderson and the Auto Task Force concluded that bankruptcy was the only option. "I am now the CEO for 60 days and recommending that we need to place General Motors in bankruptcy," Henderson told ABC. "It was a very difficult -- extremely difficult day."

On June 1, 2009, the unthinkable occurred: General Motors, once the most powerful company in the world, filed for bankruptcy.

But they filed with government backing, and with agreements in place to slash their debt and labor costs. The GM that emerges should be dramatically reformed.

"Give us another chance," Henderson pleaded with the public. "The GM that many of you knew, the GM that, in fact, had let too many of you down, is history."

But the cost of decades of mistakes is vast. Tens of thousands of jobs will be cut and more plants shuttered. GM will sell three of its brands -- Hummer, SAAB and Saturn -- and kill the venerable Pontiac.

Particularly bitter has been the decision to close 2,400 dealerships -- some owned by three generations of the same family.

Then there are hundreds of plaintiffs like the Dinnigan family, who believe a faulty GM seat belt snapped the spine of their 10-year-old daughter, Amanda. They were hoping a lawsuit or settlement could help pay for her half-million-dollar a year medical care. But after bankruptcy, the "new GM" isn't liable, and the "old GM" is broke.

Not even executives are immune. Henderson told ABC News that a substantial portion of his net worth has been wiped out. But he shrugged it off. "It is what it is," he said. "How do we look forward to create a new valuable General Motors?"