What Killed GM?

Saner fuel-efficiency and antitrust laws might have saved the company.

By Burton Folsom, Jr. & Anita Folsom
Monday, April 06, 2009

What has caused General Motors Corp. to collapse to the point where it seeks federal loans and succumbs to the Obama administration’s dictating its CEO and board members? While there are many factors, don’t discount the very visible hand of the government. GM’s problems were compounded by regulations and antitrust laws.

First, federal fuel-economy standards (which began slowly taking hold in the 1970s) forced GM to make cars that fit government mandates, not consumer choices: So-called CAFE standards require GM to produce fuel-efficient product lines that do little for the company’s bottom line, just to balance out the larger, thirstier vehicles that sell profitably. Which explains why GM is not only going forward with the 100-mpg plug-in hybrid Volt — which Obama’s task force on the auto industry has judged as “not economically viable” — the company plans to make three plug-in vehicles, no doubt in order to comply with Washington’s new mandate of a fleet-wide fuel-efficiency average of 35 mpg by 2020.

More subtle, but more sinister, were the antitrust laws. Since the 1920s, GM held a dominant position in the U.S. auto industry because Henry Ford stuck with Model T’s while GM launched annual changes that improved the comfort and quality of its cars. Over the years, GM created innovations ranging from the automatic-ignition starter to leaded gasoline to Freon for air conditioning.

But in the eyes of government, GM’s success sounded an alarm. Big companies like GM, according to the Justice Department’s prevailing interpretation of the Sherman Antitrust Act, threatened “to restrain trade.”

Corporations deemed to be too dominant, such as James J. Hill’s railroad empire or John D. Rockefeller’s Standard Oil, were broken into multiple companies by judicial edict, even though customers eagerly bought their cheap and high-quality products. When GM began to control more than 50 percent of the American car market, the Justice Department put GM on its investigation list.

What was GM to do? If it persisted in innovating and cutting costs, Ford and Chrysler might shrink more. GM might be broken into several companies. If GM held prices high and allowed Ford and Chrysler to compete, maybe GM could survive intact.

John DeLorean, longtime executive with GM, stated the obvious 30 years ago: “General Motors’s competitors in America exist by reason of GM’s sufferance. GM has the potential to eliminate Ford, Chrysler, and American Motors any time it desires” by cutting prices. “General Motors,” Delorean observed, “sets the prices for the automobile industry.”

DeLorean was frustrated with his fellow GM executives in the 1970s because they refused to venture seriously into the making of small cars — Japan was beginning to capture market share. But why should GM innovate? Ford and Chrysler might wither away.

DeLorean and other talented managers quit and moved elsewhere. GM stayed still and ossified.

When unions wanted higher wages and less work, the easy answer was yes. Avoid strikes, share the wealth, and keep Ford and Chrysler in the game. As DeLorean observed in 1979, GM had not made a “major automotive innovation” in 30 years. Meanwhile, Japan improved its small cars and slowly eroded GM’s dominance.

If the U.S. government had allowed GM to produce the cars it thought best for customers, and to expand freely, would GM now be a profitable, innovative corporation? Maybe not, but maybe so. At the very least, such policies would have increased the chances that some company would have continued the American dominance of the auto industry that started when Henry Ford installed his assembly lines.

The lesson for politicians: Quit strangling American entrepreneurs and let them compete. What was good for General Motors is still good for the nation.