A Partial Explanation For GM's Woes

Over in The Wall Street Journal, John Schnapp argues that GM's once-vaunted "vertical integration" both handicapped the behemoth and ensured that once they were spun-off, as happened to Delphi, they stood no chance of survival:

Originally vertical integration seemed like a good idea. GM founder William Crapo Durant thought, reasonably enough, that the more value that could be added to a vehicle within GM, the more profit the corporation would harvest. So did his protégé Alfred Sloan, the managerial wizard acquired along with the Hyatt Bearing Company, one of Durant's first initiatives to implement his strategy. Sloan's pursuit of this business model through further acquisitions and internal start-ups of partsmaking units generated divisions whose gross revenues ultimately exceeded $30 billion, making GM the most highly integrated auto maker on the planet, and once greatly envied for it. But this all slipped into obsolescence; the twin flaws were complacency and costliness.

Complacency was a natural outcome of having what amounted to captive customers. GM's auto making divisions bought almost unquestioningly from their sister partsmakers; many on the purchasing staffs hardly knew who alternative resources might be. Even if a buyer did shop an internal partsmaking division's price by getting bids from independent suppliers, the corporate culture permitted the internal division to re-bid until it won. Naturally independent partsmakers disliked playing stalking horse and were reluctant to participate in these charades. The frustrated CEO of one asked me, "Can you think of another industry where your biggest customer may also be your biggest competitor?"

While he was GM chairman in the '80s, Roger Smith challenged in-house partsmakers to demonstrate that they were "world class" by gaining a modest percent of additional revenues from outside customers. No problem. Auto makers affiliated with GM were "outside" enough and easy sales targets. José Ignacio López de Arriortua, a charismatic Basque purchasing executive brought from Europe, launched a brief reign of terror in 1992-93, tearing up valid GM supply agreements with independent partsmakers and forcing jump-ball rebidding. But he never touched the internal suppliers.

The internal partsmakers were increasingly resented for unresponsiveness to their GM customer needs. They were at least complicit in GM's late adoption of such key technologies as disc brakes, multivalve engines and single rail fuel injection.[...]

Worse, workers at the partsmaking units were included under GM's overall collective bargaining agreements, enjoying the identical compensation and benefit packages as their counterparts in the assembly plants. Independent partsmakers -- even those with UAW representation -- consistently enjoyed substantially lower labor costs. This fostered the worst of all possible legacies for a free-standing Delphi -- a shrinking principal customer and Delphi's own self-defeating history. The workers caught now in the considerable uncertainty of the three-cornered negotiations among Delphi, GM and the UAW are understandably angry. They feel that they aren't responsible for the business model that so greatly favored their interests but rather have now become its innocent victims.