Product of the System

(See Cover)

With investor confidence at its lowest ebb since Dwight Eisenhower's heart attack and Big Board stock prices falling $6 billion in one day's trading, Wall Street last week was a cheerless place for anyone trying to peddle large blocks of stock. So discouraging was the atmosphere that long-scheduled sales of stock in two eminently solid corporations (Kellogg Co. and McGraw-Hill Publishing) were abruptly postponed by the investment bankers underwriting them. But the Street's hard-eyed moneymen took a different view when 430,000 shares of General Motors Corp.* went on the block. Within minutes, they tumbled all over one another plunking down $23 million to grab up every share.

In the annals of U.S. business, 1962 seems destined to go down as a General Motors year. Already the world's biggest manufacturing corporation (more than $8 billion in assets), G.M. last week was growing in every direction. At home in the U.S., G.M.'s bread-and-butter car, the standard-sized Chevrolet, was outselling the rival Ford Galaxie by nearly 2 to 1. In Germany, G.M.'s Opel subsidiary was gearing up for fall introduction of its new Kadett economy sedan which seemed certain to lift still higher G.M.'s 11% share of world auto sales outside the U.S. In space, the giant automaker's AC Spark Plug division won a $16 million contract to build the guidance system for the Apollo moonship. And good as all this was, General Motors' precise, silver-haired Chairman Frederic Garrett Donner, 59, was expecting even better. To a blue-ribbon business audience at New York's Waldorf-Astoria, he calmly predicted that in the next two years "an expanding economy will bring sales to an even higher level."

The Better Half. These confident words could not have come at a better time for the U.S. economy. For weeks past, executives in many areas of U.S. business have been increasingly outspoken in their fears that 1962 may slip by without bringing them the really strong recovery they had expected after last year's recession. By contrast, Detroit looks forward tc a year in which auto sales, including foreign imports, seem likely to hit at least 6,700,000 cars--a figure second only to 1955's record 7,170,000. Since the auto industry and its suppliers account for one out of every 19 jobs in the nation, such a surge in car sales should give a significant lift to the whole economy.

Every U.S. auto company is contributing to--and benefiting from--this surge, but none so much as General Motors. With its standard models reinforced by the pizazz-laden Corvair Monza and the compact Chevy II, G.M.'s Chevrolet division alone has grabbed off more of the U.S. auto market (30%) than the whole Ford Motor Co. (26.2%). Between Chevrolet's runaway success and solid, though less dramatic, increases for Pontiac, Oldsmobile and Buick, General Motors as a whole now accounts for 52.2% of all the cars sold in the U.S. (The only company that ever did better was Ford back in 1921, when the redoubtable model T took better than 60% of the market.) The net result: G.M.'s first-quarter profits this year hit an all time high of $374 million--roughly equivalent to the national income of Ireland.

At the Top. It is good management that has done it. Though they would rather submit to the thumbscrew than say so publicly, executives of rival auto companies privately concede the superiority of G.M.'s organization. Says one Detroit titan famed for his aggressive competition with G.M.: "General Motors is the best managed organization in American industry--or, for that matter, anywhere in the world." Says another Big Three executive: "The General Motors system is so well thought out that you could run almost any business in any field successfully by using the G.M. philosophy, method and standards of organizational living."

Even Frederic Donner, a man with an ingrained horror of boasting or "putting on side," lapses into superlatives when he talks of his company. Says he: "We lead the industry in plant, in engineering organization and in dealer organization." And, like everyone else, he attributes G.M.'s pre-eminence to "the System"--a unique blending of centralized policymaking and decentralized execution in which the key decisions are always collective judgments made in committee by some of the best minds in U.S. industry. Says Donner: "It isn't that we just lead miraculously. We have built the facilities to take that leadership."

Never have the G.M. system and the man that heads it been better mated than they are today. When Fred Donner, a trim (5 ft. 9 in., 152 lbs.) and reserved accountant, succeeded flamboyant Harlow Curtice as chief executive in 1958, many an outsider believed that G.M. had turned the driver's seat over to a walking calculator when what the job called for was a sales or production genius. In the three years since, Donner's electronic-quick brain has proved to be everything everyone said of it. (Says Donner of his numbers skill, in characteristic self-deprecation: "Some people can sketch, but to me it comes easily to use figures, almost like a language.") In ultimate tribute to G.M.'s collective judgment, however, Donner has also shown himself deft with people and a first-class administrator. Says one of G.M.'s outside directors: "Fred Donner is the epitome of the G.M. spirit of hard work and analysis. He knows where the company is, where it is going, and how it is going to get there, better than anyone else."

Corsets & Buggy Whips. Since his youth in Three Oaks, Mich. (pop. in 1900: 990), Donner has always seemed to have an uncommonly sure sense of where he was going. The only child of an accountant for the Warren Featherbone Co. (corset stays and buggy whips), young Fred, neighbors recall, "didn't care much for athletics; he read at least two hours a day. And even as a boy he had a routine--so much time for work, so much time for play, so much time for study.''

At the University of Michigan Donner got straight A's (save for one B in history), graduated Phi Beta Kappa ('23) in economics. "He had a great skill in writing and an excellent vocabulary," remembers his economics professor, Dr. William Paton, now 73. "From that, I assumed he could think clearly." Accordingly, two years after Donner's graduation, when a G.M. official came to the university looking for "a bright young accountant with an analytical type of mind," Paton recommended his old pupil. Intrigued by the fact that the G.M. job involved "dealing with projections and forecasting rather than what had happened in the past," Donner resigned his job with a Chicago accounting firm and moved into the auto industry.

Taming the Giant. When Donner arrived at G.M. in 1926, the company was just recovering from the boisterous days of Founder William Crapo Durant. A daring speculator and master promoter, Durant started assembling G.M. in 1908, within a year had stitched together the Olds Motor Vehicle Co., Cadillac, Buick and Oakland (later Pontiac). Instead of stopping there, he went right on buying up more and more dissimilar companies without a thought for coordinating their management. In 1920, when Durant led G.M. to the edge of bankruptcy for the second time, alarmed stockholders, led by Pierre S. du Pont, ousted him from control of the company. Three years later, direction of G.M. was turned over to the man who more than anyone else has shaped the company--Alfred P. Sloan Jr., now 87. As president and later chairman, Sloan ran General Motors for nearly 30 years. And at the very beginning of his regime he established "the System"--the managerial philosophy and practices that have guided the company ever since.

Sloan's seemingly self-contradictory goal was to achieve for G.M. the flexibility and the initiative that are characteristic of small, aggressive companies plus the economies and careful planning possible only in a big and highly centralized organization. His solution was to divide G.M. into a maze of manufacturing divisions and operating groups, each enjoying semiautonomy in day-to-day operations and purely internal decisions. Then, to formulate overall policy, provide central services and balance the competing aspirations of the divisions, Sloan put over them a central staff divorced from responsibility for day-to-day production.

The Response Mechanism. To make Sloan's complex organization function coherently, G.M. has come to depend above all on committees and informal "policy groups" linking the long arms of the corporation. They talk things out face to face rather than write memos. No major corporate decision can be taken without the concurrence of committees at division, group and staff level. This acts as an automatic check on would-be autocrats. Says a Chrysler executive: "One man or even a clique of men cannot effect drastic changes in the General Motors setup. Basically, the G.M. hierarchy can be described as a group of hot shots surrounded by reports that restrain them."

The G.M. committee system has the sound of bureaucracy but is saved from stultification by the drive and competitive urge of the line divisions. The decision to build the compact rear-engine Corvair in 1959 took G.M.'s committees about four months to approve. But the fact that the Corvair was built at all was due to the initiative of then Chevrolet Division Chief Edward Cole (TIME cover, Oct. 5, 1959), who on his own time put together plans for the car long before he had any authorization at all. "Let's face it," sighs a rival automaker. "That big G.M. animal has a fantastic response mechanism."

The response mechanism has not always been infallible. In 1957, when G.M.'s committees might have been concerned with the mounting sales of compacts, they decided instead that the wave of the future lay in Chrysler's finny "Forward Look" cars. G.M. rushed into a crash restyling program, came up with spangled 1959 models that, by G.M. standards, sold poorly. Even more serious were the design troubles of the Buick division in the late 1950s. Sales plummeted, and Buick's dip was not corrected until the System rushed in to provide Buick with new management and new engineers. But the System's response, if belated, was highly successful. Last year's Buicks were conceded even by rival automakers to be the best-engineered cars out of Detroit.

Two for Every Opening. Awed by G.M.'s effectiveness, many another U.S. corporation has tried to emulate the Sloan system-but rarely with comparable success. One reason is that few other companies can match the planning and control system installed at G.M. by Vice President Donaldson Brown just a year before Donner was hired. The Brown system of constant reports--which permits G.M. to forecast for three months in advance every detail of its operations from auto production to profit margins--has for 37 years kept G.M.'s profits moving up at a planned pace in relation to sales. (G.M. showed its last loss--$38.7 million--in 1921.) Only one other major U.S. corporation has such a record: Du Pont--whose planning and control system Donaldson Brown devised before he moved to G.M.

Another vital G.M. legacy from the Sloan era is G.M.'s overriding emphasis on a strong, healthily prosperous dealer organization. Sloan picked his dealers carefully, watched over their accounting methods, and saw to it that they were all geographically spaced to divide the market properly. After the 1955 auto glut--when the company was accused of forcing so many cars on dealers that they had to dump them at almost any price--G.M., with prompting from the Senate's O'Mahoney subcommittee, further improved its dealer relations. It extended dealer contracts from one year to five, hired an ex-judge to decide disagreements between the company and its dealers, and set up elected dealer councils to thresh out problems with company brass. The result is that today G.M.'s 13,800 U.S. dealerships are prized possessions. Says San Francisco Chevy Dealer Ellis Brooks: "Getting a Chevrolet franchise is the dream of everybody in the business."

Above all, however, what makes the System work with unparalleled effectiveness is its tradition of aggressive informality. This is possible because almost all G.M.'s top officers have been working together all their business lives. The company's top 500 executives have put in an average of 30 years apiece with G.M., and it is a rare G.M. executive who jumps to another company--partly because G.M. pays them to stay with salaries that have become industrial legend. Headed by Donner, who drew total earnings of $557,725 before taxes, eight of the ten highest-paid men in U.S. industry last year were G.M. officers. Result is that G.M. is able to keep a reserve bench of executive talent that no other auto company--and probably no other company in any industry--can match. Almost offhandedly Donner says: "We try to keep a manpower pool which is a bit more than twice as large as the number of jobs which it will fill."

The Expert. Despite its superabundance of manpower, G.M. puts scant stock in seniority, has a tradition that anyone who is going to the top begins his rise early. And from the start of his G.M. career. Fred Donner was clearly a comer. Though he has always been attached to the financial staff in New York, his ability to cut through a tangle of conflicting evidence quickly made him a key man in G.M.'s endless process of self-examination, and took him into almost every cranny of the corporation from the dealer organization to overseas operations. "Mr. Sloan emphasized two things," says Donner. "One--get the facts. Two--recognize the equities of all concerned."

The young Donner of the 1930s sometimes annoyed his associates. "His main difficulty back there," says a former boss, "was that he expected everyone to be as smart as he was." But by the time he was 39, Donner was already vice president in charge of financial staff--one of the youngest men the System has ever promoted to such high rank. In 1956 he became chairman of the powerful financial policy committee that, in effect, has final say on all G.M. moves. "I felt this was the last job at G.M. I would have," recalls Donner. "It was a very natural spot for me, and I was happy to have it."

Had Harlow Curtice, General Motors' chief executive from 1953 to 1958, been a different kind of man, Donner might have stayed where he was. "Red" Curtice was responsible for some of G.M.'s most brilliant moves (and hardest selling--the record 1955 year was his). But he was an autocrat by temperament, offended against the System by delving deep into the affairs of autonomous divisions, and was even accused of showing favoritism toward the Buick division he had once headed. When Curtice retired at 65, the System was happy to turn to one of its own--a man who respected its committees and had no close ties to any one division. The obvious choice was Fred Donner.

Divided Rule. Donner signaled the way he would run the company by picking as president crack engineer John F. Gordon, 62, previously vice president in charge of the Body and Assembly Group, Donner and Gordon have never set down on paper any formal division of authority, and feel no need to. "I don't spend the hours on styling that he does," explains Donner. "He does not spend the hours on finance and labor relations that I do. In some areas like distribution we are both active." In everything they work closely together, spending many evenings together over dinner in New York or Detroit--where Gordon is based. "We see each other three weeks out of four," says Donner, "and we have gotten to instinctively recognize anything we ought to talk over before one of us moves in on it alone, or a committee takes action."

From the System's standpoint, the arrangement could not be better. Exults one G.M. director, Morgan Guaranty Trust Chairman Henry Clay Alexander: "There's no sense of jealousy, never a question as to who goes through the door first or who sits at the head of the table." In the Detroit board room, in fact, Donner and Gordon sit side by side at the head of the table--with Donner presiding.

The Little Betters. Even critics of the System acknowledge that General Motors is performing at its best under Donner's orchestrated leadership. Admits one Big Three executive, who hotly denies that G.M. has any monopoly on automotive brains: "Year in and year out over the last decade, General Motors has been a little better than the rest of us in some of the major areas--in distribution or product, in management or styling. This happens to be the year when all the 'little betters' coincided."

A major reason for the coincidence of all the "little betters" this year is that G.M.'s committees simply did not make as many wrong decisions as their rivals did. Donner crows a bit over Ford's last-minute cancellation of U.S. production of the Cardinal after plowing $11 million into development of the much-rumored "compact compact." He implies that G.M.'s insistence on careful evaluation of mountains of fact made clear to him and his colleagues that there was no great demand for such a car. Says he: "We have not found a way to make a small, small car large and comfortable--which seems to be what the customer now wants." G.M.'s committees, in fact, have never quite believed that the compact boom of the late '50s marked the death of the American car buyer's traditional urge to move up to higher-priced cars. For a time, this skepticism seemed likely to lead G.M. into serious trouble. In 1959, when Ford's compact Falcon scored an immediate success while Chevrolet's rear-engine Corvair was something of a dud, it appeared that Ford might grab off the lion's share of an important new market. Almost by chance, however, Chevrolet dressed up some Corvairs with pizazz features to attract customers into showrooms to look at the ordinary Corvair. With that began the Monza and the "bucket seat boom" --another example of the auto buyer's old urge to upgrade the plain and the practical.

No less important, G.M.'s continued emphasis on its medium-priced lines gave it an edge in diversity of product. With their 1962 lines, the other auto manufacturers hoped to persuade the buying public to settle down to a relatively few standard-sized, compact and intermediate models. Gambling heavily on the intermediate Fairlane--which has done well, but partly at the expense of Falcon and Galaxie sales--Ford downgraded its medium-priced Mercury. In similar mood, Chrysler turned the Dodge into a Plymouth-priced Dart, and American Motors shortened its Ambassador. Meantime, to flesh out its own big and standard lines, G.M. showed that it was not above borrowing a good idea from a competitor by introducing the Chevy II--which is so like the Falcon that some Detroiters call it "Falcon III." Result was that G.M. offered autodom's most highly varied line of 1962s, including more pizazz models, more convertibles and more medium-priced cars than anyone else to tempt the trading-up buyer.

Positive & Strong. In his drive to make the little betters a little better each year, Donner drives himself and everyone around him hard. He expects full dedication from even the outside members on G.M.'s board. Says one director: "Fred always does his homework and so do we. He won't tolerate anybody who doesn't." Sometimes a director's "homework" for the monthly board meeting amounts to as much as 7 lbs. of reports.

Firm as he is with directors, Donner is most forceful when he assumes his hat as chairman of the finance committee. "He's not arbitrary," says a fellow committee member, "but he is positive and strong. He can be reversed, but you have to have damn good reason for reversing him." At finance committee meetings, there is no small talk--just "important gossip about such things as the economic atmosphere." Periodically, to support a thesis or answer a question, Donner whips out of his inside jacket pocket a handy little argument settler. Most auto executives have modest ones, but Donner's comes in a specially made 2-in.-thick leather case. It is jammed with scores of photostatted cards, about the size of a playing card. containing in miniature all the latest vital statistics on G.M. and the auto industry, as well as basic figures about the gross national product and foreign trade. (A wine fancier, Donner also has in his pocket file a card listing the vintage years.)

Pro-Yankee. Roughly 60% of the time, Donner operates from behind a paper-free walnut desk in his 24th-floor Manhattan office overlooking Central Park. The rest of his time he spends in Detroit, commuting in one of the company's fleet of twin-engined Convairs equipped with G.M.'s Allison turboprop engines. "He likes to travel before or after working hours," says an aide, "so that he won't miss any time in the office."

In Detroit Donner sleeps in one of the company's eight executive bedrooms at its 15-story headquarters building. He is up at 7:30, breakfasts in the executive committee dining room, and by 8 a.m. is ready to do business with G.M.'s early-arriving executives. Evenings, he sometimes leads a group of the top brass to a Detroit Tigers night baseball game. "I'm very careful to be pro-Yankee when I'm in Detroit," he notes with a grin.

The Commuter. All through his career, Donner has insisted on the privacy of his family life. In Who's Who he lists neither his wife, his children nor his clubs. Three years after he joined G.M., he married Grand Rapids-born Eileen Isaacson, whom he began to court when she came to Three Oaks to teach high school. Winters, they live in a Fifth Avenue apartment. (Their son and daughter are both married.) Summers, they live in a big (22 rooms), comfortable home in Sands Point, Long Island. Donner commutes to the city on the Long Island Rail Road, and from Pennsylvania Station to his office, 25 blocks away. U.S. industry's highest-paid businessman joins rush-hour straphangers on the subway.

Though he plays an occasional game of golf, Donner's prime recreation is still reading--mostly history, which he feels helps him "to learn how mistakes have been made in the past. And successes." No recreation, however, can really compete for his attention against the activity he loves best: running G.M. For despite his quiet, intellectual exterior, Donner delights in the unpredictability and endlessly changing nature of his business. "We're a very restless crowd in the auto industry," he says proudly. "We're always under strain. This business wouldn't be any fun if we weren't under strain. It would be like selling soap or matches."

Trustbusters' Target. The manufacturing and the selling of cars are only part of the strain. Because G.M. has made itself so big, it must live in constant dread of the Justice Department's trustbusters. Since last summer, the Antitrust Division has assigned a special team of eight attorneys to keep watch on the giant automaker. The Government already has four antitrust cases against G.M. in pretrial stages: 1) a criminal indictment charging that the company has monopolized the diesel electric locomotive market by unfair use of its power as the railroads' largest freight customer; 2) a suit alleging that G.M. monopolizes 85% of city and intercity bus sales; 3) an effort to nullify G.M.'s acquisition of Ohio's Euclid Road Machinery Co.; and 4) a suit charging that G.M. and three Southern California auto dealer groups conspired to prevent the sale of Chevrolets through discount houses.

For several years past, there have been persistent rumors that the Justice Department would like to go even further and cut G.M. down to size by breaking off Chevrolet as an independent corporation. (Rival Automaker George Romney has long urged that G.M. be split up.) Now that G.M. dominates more than half the auto industry, the rumors come in louder and stronger. "Dominate," observes Donner dryly, "is a word like discriminate. It was a perfectly nice word until a few years ago."

Donner denies vehemently that G.M. "has ever worked aggressively to stifle competition." But he insists with equal fervor that General Motors does not--and cannot--attempt to hold down its auto sales for fear of antitrust action. No institution, he argues, can sensibly set out to be second best, or to do less than its best. So long as General Motors continues to grow on the strength of price competition and product performance, he believes that both law and equity are on its side.

Always a G.M. Another threat from Washington that currently worries Donner is the Kennedy Administration's proposal (already passed by the House) to tax the income U.S. companies earn abroad at the time that it is earned rather than when it is brought back to the U.S. Under the present law, U.S. companies are permitted to keep an unlimited amount of their foreign earnings abroad free of tax, to expand their overseas facilities. General Motors has used this provision to good advantage to build up the strength of its foreign subsidiaries. Of the cars that G.M. produces overseas, Opel now ranks second to Volkswagen--in Germany, Vauxhall is fourth in Britain, and in Australia the Holden, in the best G.M. tradition, holds nearly half the market.

The U.S. Treasury, argues Donner, is by far the richer for all this. Since World War II, G.M. has brought into the U.S. through dividends from its subsidiaries and exports from its U.S. plants a staggering $5 billion in foreign earnings. Of this, almost 25% came during the past three years to help out when the gold overflow became critical. (One reason why Detroit raises little outcry against foreign car sales in the U.S.: last year the U.S. spent $400 million on foreign cars, but exported autos and auto parts worth three times as much--$1.2 billion.)

Donner expects the rest of the world to buy more than 10 million cars and trucks by 1970--equal to what the U.S. car market is expected to be by then. "The U.S. automobile industry," he says, "can make its contribution in these expanding markets overseas only if investments continue to be made abroad. If direct overseas investments by U.S. business are discouraged by unwise tax policy, our economy will lose an important and rising long-term source of income."

Other Donner concerns of the moment:

> THIS YEAR'S ECONOMY. "The auto industry swings with the cycle, but moves beyond it. It can give impetus to the cycle on the upswing when we have an attractive product, but it cannot provide much upward pressure during a downswing just because the product is attractive. Motor vehicle sales indicate to us that consumer confidence is now at a high level. For these reasons, I am quite optimistic concerning the business outlook for the remainder of the year."

> GOVERNMENT INTERVENTION IN PRICE SETTING. "Prices of comparable General Motors cars have remained unchanged since the 1959 models were introduced. For the automobile industry, the most persistent force influencing prices has been the discipline of competition in the market. I see no reason to believe that it is either wise or desirable for Government to attempt to influence the results through direct intervention in the economy."

> GOVERNMENT INTERVENTION IN WAGE NEGOTIATIONS. "I am a great believer that the best agreements are those which are reached between us and the unions. So far as I know, General Motors has not been influenced by Government actions, either stated or implied, which have limited its freedom to compete effectively in the markets for its products or to carry out free collective bargaining with the union representing its employees. The maintenance of this freedom is the most important single ingredient in sustaining a dynamic, growing and stable economy."

Despite all the crosscurrents presently pulling at U.S. business. Fred Donner looks ahead without fundamental apprehension and with a profound faith in the ability of the G.M. system to cope. It is clearly almost inconceivable to him that General Motors will not go on indefinitely getting a little bigger and a little better than any other manufacturing enterprise in the world. "If I can leave General Motors well staffed with good men in the top jobs and good men coming up under them, and with a cohesion in our forward planning so that the bits and pieces fall into their logical places," says Donner, "then I will feel I have done my job here."

*Part of the estate of Detroiter Louis Mendelssohn, who was treasurer of Fisher Body Co. before it was acquired by G.M.

* Which last week made its first public earnings report: a solid $18 million on 1961 sales of $1.3 billion.

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