The High Price Of The GM Bailout

Last week General Motors introduced its $41,000 Volt electric vehicle. This is a massive new product program that likely wouldn't exist in a free market, focusing much of the ailing company's attention on a product that won't move in any volume without thousands of dollars per vehicle in government subsidies.

The debut of the Volt has raised new criticisms of the GM bailout for having wasted billions of taxpayer money. Back in April GM and the Obama administration attempted to deflect some of this negative feedback by announcing that GM had repaid $6.7 billion in government loans. What was missing from this announcement, however, was the fact that the money to repay this loan had come from a working capital fund provided by the federal government's TARP program. Switching money from one pocket to another seldom does much for financial health.

But all these criticisms miss the most costly aspect of the government bailout: By intervening in the bankruptcy process, the Federal government kept GM's assets and employees in essentially the same management hands that have underutilized them for decades.

A corporation like GM has physical assets (like factories) and workers of various skill levels who have productive potential. These physical and human assets are overlaid with what we generally shortcut as "management," but which include not just the actual humans currently running the company but its culture, management processes, systems, traditions, contracts, unions, intellectual property, etc. In fact, by calling all these factors "management," we falsely create the impression that it can easily be changed simply by firing the overpaid bums at the top and getting new, smarter executives.

All these management factors could better be called the corporate DNA. And DNA is very hard to change. Wal-Mart may be frighteningly brilliant at what it does, but demand that it change to an upscale retailer that markets fashion products to teenage girls, and I doubt it would ever get there. Sure, it could hire a few new executives, but Wal-Mart would still have a culture aimed at big-box low prices, a logistics system and infrastructure aimed at moving enormous volumes, and absolutely no history or knowledge of fashion. I would bet that I could get to The Gap faster starting from scratch than starting from Wal-Mart.

Corporate DNA is important because it acts as a value multiplier. The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation. Every company that has ever grown rapidly has had DNA that fit this bill ... for a while.

But companies and markets change. Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet. DNA that was once robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes a market's incumbents. When this happens and a corporation becomes senescent with its DNA out of date, then its multiplier slips below one. The corporation is killing the value of its assets. Smart people are made stupid by a bad organization and systems and culture. In the case of GM, hordes of brilliant engineers teamed with highly skilled production workers and modern robotic manufacturing plants are turning out cars few want, at prices few are willing to pay.

Changing a corporation's DNA is brutally difficult. It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years. One could argue that General Electric did this under Jack Welch, avoiding a slow decline into an old-industry dinosaur, though it took Welch decades to craft the turnaround. GM has had a 30-year window (dating from the mid-'70s oil price rise and influx of imported cars) to make fundamental changes, and it has not been successful. If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next three.

So what if the U.S. government had let GM's bankruptcy proceed unhindered? Allowing the GMs of the world be liquidated, with their assets and employees taken up by more vital entities, is critical to the health of our economy and the wealth of our nation. Assuming GM's DNA has a multiplier below one, releasing GM's assets from GM's control actually increases value. New owners of the assets might take radically different approaches to the automobile market. Talented employees who lose their jobs in the transition, after some admittedly painful personal dislocation, can find jobs designing and building things people want and value. Their output has more value, which in the long run helps everyone, including themselves.