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Published: Sunday, 3/23/2014 - Updated: 7 months ago

General Motors practice of squeezing suppliers led to auto flaws

Top engineer ordered: ‘Build them for less’

BLOOMBERG NEWS
Mary Barra, GM chief executive, apologized for the tragedies. Mary Barra, GM chief executive, apologized for the tragedies.
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DETROIT — The cars at the center of General Motors Co.’s February recall were still on the drawing board when a top engineer gathered more than a dozen managers and delivered a fateful message: Build them for less.

At the time, around 2000, GM’s profit margins were shrinking as the company’s U.S. market share leadership was eroding and the cost of providing benefits for workers and retirees was rising. GM’s grand plan to make money on small cars, by developing them jointly with Fiat, was crashing.

As it became clear that GM’s planned Chevrolet Cobalts and Saturn Ions wouldn’t get made on a money-saving global design, Gary Altman, the models’ chief engineer, told the group they needed to find other ways to reduce costs, said a person who was at the meeting in the automaker’s suburban Detroit technical center.

Those Cobalts and Ions are among 1.6 million vehicles that GM recalled last month over an ignition-switch flaw the company says is behind 12 deaths. U.S. investigators and regulators want to know what went wrong, who knew about it, and why the nation’s largest automaker took so long to mount a recall of models made a decade ago.

Mr. Altman’s message, while by no means a directive to build unsafe vehicles, reflected the environment at GM: The cars were the product of a culture of cutting costs and squeezing suppliers, as described by five people with knowledge of the automaker’s engineering, management, and suppliers in the decade preceding its 2009 bankruptcy.

GM also began pressing its supplier and former parts division, Delphi Automotive, to shave pennies off the price of every part to match what several of the people familiar with GM called the “China Cost” — a rock-bottom price pegged to cheap Chinese labor. If suppliers couldn’t match it, these people said, GM would threaten to outsource production overseas.

“It was a chaotic situation inside General Motors back then,” said Maryann Keller, a veteran auto analyst who has written two books on the company. “It was a company suffering from falling margins and desperate to lower costs. So engineers and parts suppliers were under extreme pressure to do whatever they could to take costs out.”

In that environment, basic components could take low priority, such as the ignition switch that GM sourced for Ions, Cobalts, and other models. The right to manufacture the switch had been won by Eaton Corp., of Dublin, Ireland, according to documents from a wrongful-death lawsuit filed against GM.

Delphi bought Eaton’s switch division in 2001.

The switch would cost “as little as $2 to $5 to produce,” Delphi’s current chief executive officer told analysts this month, according to a JPMorgan Chase report.

“We’re continuing to cooperate with GM on reaching an expedited solution,” Claudia Tapia, a Delphi spokesman, said in an email. She declined to discuss Delphi’s relationship with GM during the development and production of the Ion and Cobalt.

Inside that simple part was a spring loose enough to allow the ignition to switch out of the “on” position when bumped, a risk that would grow if the key was weighted by a heavy ring, GM has said. The turned key would then shut off the engine and power steering and disable the air bags.

The fatal flaw in the ignition switch, which GM now says its engineers found in 2001 while developing the Ion, has spurred the automaker’s biggest crisis since its 2009 bankruptcy and bailout.

“This was such an insignificant, inexpensive part to begin with, you almost have to scratch your head and say, ‘Well, why didn’t they do something about it?” Ms. Keller said. “But you’re talking about a company that was under mounting pressure to stabilize its finances, which it was not able to do, and was absolutely counting pennies.”

GM declined to comment on any meetings involving Mr. Altman or make him available for comment.

GM Chief Executive Officer Mary Barra, on the job just two months, last week personally apologized for the “tragic events” that resulted from the faulty switches. GM has launched an internal investigation, and she will testify before a House committee on April 1.

The origins of the crisis engulfing GM go back 14 years. Back then, GM made most of its money selling big sport utility vehicles such as the Chevy Suburban and offering home mortgages through its GMAC lending arm, Ms. Keller said. As the 1990s SUV boom faded, the company’s net income fell from $6 billion in 1999 to $601 million in 2001, according to data compiled by Bloomberg.

GM at the time produced small cars on the cheap to meet federal fuel-economy regulations. The company lost money on each one.

Building a compact car off a single global platform could have changed that. Stamping out millions of similar models would’ve created economies of scale to allow the automaker to turn a profit on a $12,000 car, the people said.

GM’s plan was to develop its Ion, Cobalt, and Opel Astra cars from the same mechanical platform, code-named Delta, these people said. That called for GM’s European operations to take the lead in developing the car jointly with Fiat, in which GM had taken a 20 percent ownership stake in 2000. The thinking went that the Europeans, small-car specialists, could engineer a model with more amenities and a racier ride that would command higher prices than the no-frills Chevy Cavalier, which had been on the U.S. market for two decades.

The effort ran aground over acrimony between GM and Fiat, which slowed the car’s development and endangered the U.S. operation’s deadline. GM and Fiat parted ways in 2005.

As the plan fizzled, GM patched Cobalts and Ions together with parts scavenged from other models. At the engineer meeting, Mr. Altman said that GM’s U.S. compacts would share some parts with the Opel Astra, come up with new ones, and even take some from the aging Cavalier, according to the person who was there.

GM also turned up the heat on its suppliers, especially Delphi, which had been spun off from the automaker in 1999 and depended on GM for 90 percent of its business, according to a person familiar with the supplier.

It wasn’t immediately clear how the pricing squeeze played out in the ignition switch made by Delphi’s Mechatronics division. The switches in the Ion and Cobalt were initially made at a Mechatronics factory in Foley, Ala., which had an expensive union contract, said the person familiar with the supplier.

Based on information the company provided in timelines submitted to the National Highway Traffic Safety Administration, the federal auto-safety regulators, on Feb. 24 and March 11, issues with the switch and its spring arose at GM as early as 2001, and engineers were aware of the issue in 2004.

Engineers had identified the flaw and found solutions by late 2004, according to GM’s Feb. 24 timeline. Yet GM closed the investigation without taking any action, the automaker said.

Engineers came up with another solution in 2005 that “was initially approved, but later canceled,” GM said. A recall wasn’t discussed in those early years, it said.

GM will learn from its mistakes in the ignition-switch recall, Ms. Barra said March 18. She pledged to have “the most comprehensive and responsive process in the industry” for investigating safety defects.



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