The Rise & Fall of General Motors and the Subjugation of the Industrialized World
How the perfect storm of commercial forces created the world’s largest corporation, enslaved us to gasoline, and ultimately brought the car maker to its knees
By Marc J. Rauch
Exec. Vice President/Co-Publisher
THE AUTO CHANNEL
It was once said "If it's good for General Motors, it's good for the U.S.A."
• Have you wondered why and how General Motors, the world’s largest corporation, could fail and go bankrupt?
• Have you ever wondered why gasoline is the primary fuel for passenger cars and trucks for most of the world?
• Have you ever wondered exactly how and why the United States could owe 50% or more of its national debt to oil producing countries?
Read this story and you’ll learn how and why.
Originally published April 6, 2012
Background – The need for speed and power
In the early years of the automobile industry there was uncertainty as to which fuel, and what type of engine would power the new vehicles. There was steam, electric and internal combustion. Although steam power had proven its viability in the first stationary engines and in the first round of land and sea vehicles or vessels, by the late 1800’s diesel was already replacing steam because of its ability to produce higher torque (needed to move heavy vehicles/vessels) and because it simplified the process of locomotion by not requiring a team of men to start the coal or wood fires and keep the water boiling. By comparison, diesel allowed faster starting and required less continuous attention to keep the engine running.
Electric motors could also provide high torque, but the motors required a constant flow of electricity, which could only be guaranteed if the vehicle was tethered to an electrical source. This was okay for light and heavy trains that operated along a fixed roadway, but battery technology and affordability was impractical for personal transportation devices that had the ability to travel in all directions and to non-electrified locations.
The internal combustion engine (ICE) was the solution. There were two types available: spark ignited and compressed hot air ignited. Compressed hot air ignited ICE uses diesel fuel. Spark ignited internal combustion engines are today most commonly associated with gasoline, but ethanol, methanol, natural gas and propane can also work.
Diesel engines were heavier, bulkier and more costly to produce. While they could move heavier loads (torque), they couldn’t quickly provide higher speeds. Additionally, diesels required a fuel injector technology which at the time was also more costly and less reliable than fuel-air mix carburetors. Consequently spark ignited internal combustion engines became the dominant engine for passenger cars and light trucks.
At this point the two most available fuels for spark ignited ICE were liquid; either alcohol (ethanol or methanol) or gasoline. Alcohol enjoyed wide support from automobile pioneers, such as Henry Ford and General Motors’ top scientists, because it could be produced almost anywhere by almost anyone (alcohol distillation technology has been in the public domain for hundreds of years). Alcohol fuels also produced superior performance compared to gasoline. Alcohol-powered engines allowed for higher piston compression, which deliver more speed and power. Gasoline caused a knock in high compression engines that would literally “knock” the engine to destruction. Only low compression, lower speed engines could safely use gasoline. Early on, as speeds were measured against human walking or horse riding, this was acceptable. But as roads were leveled and paved and consumers wanted bigger faster vehicles this was a huge limitation. One of the solutions to gasoline knock was to blend ethanol into every gallon of gasoline. The alcohol quieted the knock, thereby allowing the gasoline-ethanol blend to be used in better performing engines.
Unfortunately alcohol suffered from two major impediments to universal acceptance as a pure engine fuel. The first was cost. Alcohol production has been heavily taxed since the founding of the United States, initially to raise revenues to pay for the War of Independence. As usually happens with taxes imposed to pay for one specific thing, it is nearly impossible to retire the tax even after the initial purpose has been fulfilled. The extra dollars are just too attractive to politicians who need to fund pork-barrel projects to insure re-election, and there was always another war that had to be paid for. (Prior to Congress passing a national individual income tax 100 years ago, tax on alcohol routinely accounted for as much as 40% of the Federal revenue.)
The Federal tax on alcohol reached new heights during the American Civil War, rising to over $2 per gallon. Needless to say this was a devastatingly high tax. Average weekly wages in the 1860’s were about $12 – considered in respect to today’s average wages that would be like a tax of $129 per gallon (in actuality, the current Federal tax on spirits – drinkable alcohol - is $13.50 per gallon).
Kerosene was also taxed to help pay war costs: A paltry 10 cents per gallon!
The alcohol tax was not retired until Theodore Roosevelt’s presidency about 40 years later, when the Free Alcohol Act brought the price of corn ethanol down to 14 cents per gallon and molasses ethanol to 9.5 cents per gallon (versus gasoline at 22 cents per gallon).
Now you’ll recall that I said that there were two impediments to universal acceptance of alcohol as a universal engine fuel. The second problem was, ironically, alcohol’s easy production and ubiquitous availability; it is too simple and easy to make.
By the middle of the 1800’s, as the world’s whale population was drastically declining due to over-hunting, and the price of whale oil was sky rocketing, an alcohol-turpentine blend was used as a less expensive replacement for indoor lighting and heating. But with the development of kerosene in the 1850’s, followed by the imposition of the much higher alcohol tax in 1862, a new use was found for the sticky, smelly black goo that freely seeped up from the ground in Pennsylvania (areas of Poland and Azerbaijan experienced the same phenomena). This was the start of the petroleum oil boom. Although kerosene has an obnoxious smell and black smoke, at least it was cheap.
As the world’s interest in the new fangled automobiles soared throughout the world it was found that the kerosene could be used as the basis for engine fuel, and after additional refining the oil pioneers developed gasoline. By this time one man and his company rose to world wide prominence – John D. Rockefeller and Standard Oil. His enormous wealth was contingent upon oil and its by-products, and in the time-honored tradition of achieving wealth, he used it to secure political and commercial support of his products.
The political bribes paid by Rockefeller catapulted support for the 18th Amendment to the Constitution (the Volstead Act) over the top, insuring its passage. This Amendment, commonly referred to as Prohibition, outlawed the production of alcohol with almost no exceptions. Consequently, in the crucial period just after World War I, as Americans were adopting a whole new mobile lifestyle, the one fuel that could challenge Rockefeller’s gasoline on both a cost and performance basis – alcohol – was declared illegal. Ethanol was rendered dead as a competitor on the commercial battlefield.
Before and during Prohibition, Henry Ford expressed his belief that alcohol (ethanol) was the fuel of the future. His Model T, the product that is said to have given birth to moving assembly line production, was designed and built to use ethanol or gasoline by giving the driver adjustable carburetor and spark advance controls that optimized the performance of the fuel used.
Even after Prohibition commenced, General Motors’s top scientists, Charles F. Kettering, Thomas A. Midgley and T.A. Boyd, continued their belief that ethanol was the fuel of the future. Considering that it was illegal to even produce the small amounts to conduct tests, alcohol was still being experimented with as the best alternative solution to gasoline’s knock problem.
However, in 1921, GM’s scientists discovered that by adding tetraethyl lead to gasoline that the knock was subdued and the new lead-gasoline fuel could be used in advanced higher compression engines. This was the early days of the Roaring Twenties and in order to really roar, the public needed a fuel to set them free.
The leaded gasoline didn’t just give GM the ability to build vehicles with higher performing engines it gave them a unique process that they could patent. GM combined their process with similar processes being tested by DuPont Chemicals and Standard Oil, which gave GM three cents on every gallon of leaded gasoline sold anywhere in the world. They quickly determined that their share of profits in the sale of leaded gasoline would be worth many billions of dollars over the next couple of decades.
The significance to understanding what this meant to General Motors is not just calculated by profits earned, more importantly it explains why General Motors – the world’s largest company and automaker - would come to have no interest in developing vehicles that could get better mileage per gallon of gasoline. It is essentially the same reason why tobacco companies had no desire to lessen the addictive qualities of cigarette smoking. The more gallons of fuel that a vehicle used translated to more profits to GM. In essence, the vehicles could be used as a loss-leader to stimulate gasoline sales.
This new stream of nearly incalculable profits meant that they didn’t have to really compete on an even playing field with other auto manufacturers:
• They could undercut competitions’ products because they didn’t need to make profits from their vehicles, thereby driving the competition into bankruptcy.
• They could accept worker demands that they knew the other car companies would not be able to live with on a long term basis.
• Moreover, even if they didn’t undercut the price of their competition or permit unrealistic employee compensation packages, the added revenue gave them a marketing war-chest that could not be overcome – also ultimately helping to drive a long list of car makers into obscurity.
Any of the above could have given GM a huge edge over the competition, but together it was impossible for most competitors to withstand.
The Worm Turns
Ironically, however, I believe that it was this exalted position that led to their inconceivable plummet.
The gasoline profits allowed General Motors to become a bloated, inflexible entity, incapable of - and disinterested in - meeting the challenges of new design, technologies, demographic shifts, societal attitudes about the environment, and the up-start band of oil-dictators called OPEC. As the years passed, and as new faces came onboard, the knowledge of this gasoline-profit advantage was lost. They thought they were invincible…they thought they were successful solely because they built a better car.
Normally a strong market competitor will strive to set a pace via product improvement that catches the competition off guard. Typical marketing thrusts would be to announce new and improved formulations that deliver more for the consumer’s money, or a longer-lasting ingredient, or better for your health. Up until the mid 1970’s, when it was too late, General Motors only promoted “bigger” or “more powerful” vehicles. And, of course, “bigger” and “more powerful” translated to more gasoline used. American brand competitors followed the lead, tripping over the low bar set by GM. Where GM survived and prospered because of the billions in gasoline profits the other car makers had to try and survive only on product features and benefits, but it wasn’t enough for even the most creative auto makers and most innovative efforts.
Now, I will agree that most Americans probably wanted bigger and more powerful vehicles in the 30’s, 40’s, 50’s and 60’s – much as we still do today during the gasoline-price crisis. However, GM did little or nothing to deliver the bigger, more powerful vehicles while at the same time consuming less fuel. Again, up until the mid 1970’s GM mostly scoffed at the smaller more fuel efficient vehicles that were coming from Europe and Japan. If they designed a small sporty car to compete with a foreign import it was still more powerful and it used more gasoline.
At the same time GM filled it’s executive offices with inept or redundant managers, they allowed the best and brightest new technology or design people to go to foreign manufacturers, they retained for decades the services of advertising and marketing consultants whose only talent was in knowing how to waste more money each new model year, and they built up the walls around themselves until they couldn’t see the figurative and literal tsunami that was coming from Japan.
Perhaps, if the 70’s gasoline crisis didn’t happen, and if the environmental movement failed to take hold, or if the gasoline companies could have continued to lie about the negative effects of leaded-gasoline – and get away with it – then General Motors might have been able to exist without their share of profits from the patents. But the combination of these factors created the perfect storm that set the stage for GM’s tumble.
I readily acknowledge that others before me have cited GM’s lack of effective action as the cause of their near demise and current shaky existence, but I believe that no one has ever put together and articulated the reason why GM would have permitted itself to fall into this position. Many analysts have opined that GM would be okay if it wasn’t for the heavy pension packages that they committed to. Some analysts suggest that as the foreign car makers open factories in the U.S. that they will succumb to the same pension problems and end up struggling like GM. I think that GM might never have survived the competition after WWII if they didn’t have those billions of extra dollars. I also believe that Mercedes, BMW, Honda, Toyota, Kia, Hyundai, Nissan and every other foreign brand that establishes a factory here will not go through the same debilitating pension mistakes because they just don’t have the extra financial wherewithal to get themselves into the same hot water. They may fail, but it’s more likely that they would fail from their own original stupid mistakes.
When General Motors rushed to Washington in 2008 to beg for financial assistance Presidents Bush and then Obama, and all of Congress, should have said no; they should have told GM to get the money from their buddies in the oil industry, which had just experienced a record-breaking profit year. In case there’s anyone out there who is uncertain of how the oil industry makes most of their money, it is from the sale of gasoline for automobiles. Instead of the American public being threatened with “GM is too big for us to lose,” the oil industry should have rightly been assigned that responsibility, particularly since we were already paying for the second and third Middle-East oil wars and providing security for the entire world’s ocean-going oil tankers.
Then, as if Washington didn’t already mishandle the GM financial collapse by giving away our money, the car maker was allowed to escape any responsibility to common stock shareholders, a no-nothing maybe bond swindler* was appointed “Car Czar,” and a member of Exxon’s Board of Directors was named as CEO of the restructured General Motors. The company continues to be deluded into thinking that their tired brand names have any real market value, they have bet their future on becoming a significant player in a giant communist country, they’re chasing an electric technology fantasy that is still decades away from being meaningful, and they have pretty much abandoned the flex-fuel position that they spent several years and untold dollars trying to establish by finally building more powerful cars that used less gasoline. I was present at numerous GM presentations when they pushed and pushed and pushed E85 and flex-fuel vehicles. If it was a wrong direction – and perhaps it was since GM has made so many wrong decisions – then why are many of the executives that were involved still with the company? Why did they bring Bob Lutz back into the fold, again?
Just Good Capitalism
As a devoted capitalist and marketing guy I have to say that the GM action in seeking an inexpensive, exclusive fuel to power the growth of the automobile age was at first blush a great example of what capitalism is about. The problem is that capitalism allowed to run amuck is nearly as bad as unchecked socialism. It may be a convenient inexpensive capitalist idea to dump waste materials from a chemical plant into the river that flows behind the factory, but if the water is also used for drinking by the community down-river who you hope will buy your products, the free-market idea becomes a dead-market reality. In effect, this was the result of General Motors’ patented process as the legacy of the leaded gasoline process continues to plague us.
Chained to Oil
We in America and in all industrial nations of the world, no longer “drink” from an unpolluted spring; we haven’t for more than half a century. We are addicted to using fuel that robs each and every one of us of our hard earned money. What’s more, over-hyped worrisome economic or political news about oil, and the greedy cycle of oil commodity speculation keeps all segments of the financial markets teetering on the brink of disaster. The richest and most wonderful country in the world has become just another debtor-nation. 50% or more of our national debt is owed to other countries to pay for the oil that we helped discover, subsidize, and then protect through two world wars and several regional conflicts. And we are forced to fund terrorist regimes who would like to see us dead.
We willingly support an industry that has given us mass murder billionaires. Every gallon of gasoline or diesel fuel that we buy props up people like Hugo Chavez, Mahmoud Ahmadinejad, Saddam Hussein, Muammar Gaddafi, Bashar Assad, Osama bin Laden, the so-called Saudi royal family, and even Vladimir Putin. It doesn’t matter that three of these men are now dead; the system will continue to churn out new monsters like a well-oiled machine. Their wealth and power is directly derived from our use of gasoline, whether we buy their respective oil or not. The oil and gasoline market is not an open, supply and demand marketplace. It is a tightly closed, tightly controlled fixed enterprise that doesn’t permit rogue competitors or independent action. Boycotts or restrictions on the purchase of oil from an especially insidious dictatorship are an irrelevant weapon; to the point that even threatening such action is a joke. If we refuse to buy oil from Iran, for instance, we still have to buy it from someplace. As we pull oil from the new source, a void gets opened that must be filled. So the Iranian oil fills that void, and another country (customer) who doesn’t share our sense of moral outrage rushes in to buy the Iranian oil – at the same global market price. The other trick that the oil producers use is to sell and/or ship their oil to a middlemen country, such as Canada or India, where it is re-labeled and invoiced and sent to us. So we, the public, are the only ones negatively affected.
When General Motors lost their way ninety years ago the United States lost its economic and energy independence.
Notes on the story:
*My reason for calling Steven Rattner a “no-nothing” is best exemplified by the criticism that he recently leveled at Mitt Romney, after Romney criticized the GM bailout. Rattner said, “If Mr. Romney disagrees, he should come forward with specific names of willing investors in place of empty rhetoric," Rattner wrote. "I predict that he won't be able to, because there aren't any."
While I agreed that there were probably no willing investors to bailout GM – they would have had to be insane – Rattner (Obama) should have forced the oil industry to come to GM and Chrysler’s rescue. How would he have forced them to do it? Simple, he would have said the following: “Either you provide the funds or we withdraw our military and you have to provide your own protection for your oil fields and tanker shipments around the world. In addition, I will give immediate emergency orders to jumpstart a serious alternative fuel program in the U.S. and we will phase gasoline out of use forever.”
If this option was ever explored, we should have been told. If the option was explored and the oil industry refused, we should have been told. If Obama appointed someone as “Car Czar” and he didn’t have the imagination to make a suggestion like this, then he never should have been appointed to this position. But then what should we have expected from a president who is without any experience or imagination of his own.