GM failed because its liabilities were based on negotiation, not productivity. Americans should learn a lesson.

I recently bought a new 2009 Buick Enclave and know that GM makes world-class cars. The bumper-to-bumper 5-year service warranty and On Star remote diagnostics show that they also know how to innovate and run a service business. Nevertheless, today GM filed for bankruptcy, while Ford and Toyota continue as independent car manufacturers.

General Motors was a phenomenal business that produced huge profits and benefits during its Alfred Sloan era. But eventually, the stakeholders (executives, unionized employees, dealers, politicians) placed liabilities on GM that paid out based on the results of negotiations, not productivity or business conditions. Thousands of dealerships built when GM had a 50% market share were unnecessary today, but state laws and inflexible regulations prevented their closure. Lifetime benefits and pensions negotiated when GM was young and growing cannot be sustained when it is older and shrinking.

Over the years, I’m sure that union leaders were congratulated for extracting “guaranteed” wages, executives got big bonuses for making promises that prevented a strike in exchange for liabilities pushed out far past their retirement, and politicians were re-elected for protecting their patrons. But any “guarantee” that is not based on productivity and a sound business model (that includes a reasonable profit and return on capital) is doomed to fail.

Americans should learn a lesson from General Motors. Our politicians make “guarantees” that lead to applause, re-election, and a comfortable consulting retirement. But these liabilities will not be sustained unless they are connected to productivity and a sustainable way of life, one that ensures our great-grandchildren will have the same blessings that we have.

P.S. GM is still a great company, but a horrible business.