Finally GM Is Looking Good The world's largest automaker has been a laughingstock for 20 years. These guys are making it a leader again.
(FORTUNE Magazine) – It's probably safe to say that nobody under the age of 30 remembers when General Motors was a pretty good company. Their most vivid memories are likely to be of dysfunctional cars like Dustbuster minivans or Cadillac Cateras or Pontiac Azteks. Or of the hit movie Roger & Me, which brutally lampooned Roger Smith, one of the worst in a string of mediocre CEOs. GM lost market share in the U.S. almost every year between 1962 and 2000. It routinely destroyed shareholder value. In 1992, when the board finally ousted Smith's successor, the hapless Robert Stempel, the world's largest automaker was near bankruptcy.
Well, pay attention. Although it's way too soon to call General Motors "cool," good news is busting out all over at the company. Market share rose slightly last year, and it is racing ahead this year; in February, GM gained 1.2 points, reaching 30.9% in the all-important U.S. market. For the first time in 11 years, Chevrolet is outselling Ford. GM recently raised its 2002 earnings goals and revealed plans for its largest-ever introduction of new models. Its share price has risen 50% in six months, as GM has gone from laughingstock to leader.
Some of what's driving GM is very basic: improvements in quality and productivity, the pruning of unprofitable vehicles, and frankly, weakness at its crosstown rivals Ford and Chrysler. The least-noticed ingredient has been the performance of CEO Rick Wagoner, who took office in June 2000. Expected to operate as a play-it-safe leader, Wagoner, 49, instead is making GM move faster and do better. His most daring decisions have been in the hiring of experienced executives from other automakers--former Ford CFO John Devine and former Chrysler vice chairman Bob Lutz--to bring new ideas and plain, old common sense to GM.
All of this is a seismic shift at a company that, as auto analyst Scott Hill of Sanford C. Bernstein puts it, "possesses a legacy of inefficiency few corporations can rival." Hill and other observers began noticing changes at GM last summer. Aggressive head-count reductions and improved operations had made the company Detroit's low-cost producer. A creative marketing campaign, led by zero-percent financing, promoted the industry's strongest lineup of high-profit pickups and sport utilities. Today GM is steamrollering its competition. "The performance of General Motors in February was superb and beyond even our high expectations," said Hill. "Its light-truck performance was bone crushing." Light-truck sales increased 22.3% from a year earlier, hiking GM's share of U.S. sales by an astonishing 5.1 points, to 34.5%.
The payoff came recently when GM announced that it was raising 2002 earnings estimates from $3 to $3.50 per share, and said it expected to more than triple earnings by 2005. That propelled the stock past $60 a share, up from $39 after the World Trade Center attack. Wagoner is watching the numbers carefully to ensure that GM keeps its momentum. He pores over global production and sales data, then phones or e-mails as soon as he sees problems. "I have some affinity for numbers and analysis, and I like to know when we're running behind," he said in an interview with FORTUNE. "I don't like it when we don't get the straight scoop. Those are the things that get my ire up quickest."
GM has tantalized observers with flashes of progress before, only to be dragged down by rancorous union relations, unimaginative executives, messy product introductions, and dull cars. Even today the company is losing money in Europe and Latin America, and operating on the skinniest of profit margins in North America. With 2 1/2 retirees for every active worker, GM has enormous pension and medical obligations. Its pension fund alone is worth $70 billion--twice the market cap of the company. High costs like these explain why GM is willing to outdo rivals on marketing incentives (it spent $2,284 per vehicle in January, vs. $2,015 at troubled Ford). GM believes that it is more economical to keep building cars with paper-thin margins than to cut costs by shrinking the company, thus adding to the pool of ex-workers. The auto business isn't for sissies. In an effort to transform GM's huge size from a dead weight into a lever, Wagoner borrowed a program called Work Out from Jack Welch's General Electric. Wagoner renamed it Go Fast and began using it to reengineer operations and break bottlenecks. Anytime bureaucratic inertia slows decision-making, GM managers gather in a room to sort out the issues. After they decide on a course of action, they request approval from higher-ups. Go Fast meetings at assembly plants discuss how to fix defects in manufacturing and engineering, enabling GM to significantly improve its quality. So far the company has held thousands of Go Fast sessions and trained 25,000 employees in the process.
At times Wagoner acts like a Go Fast committee of one. Last summer he was eager to announce that GM would build a new pickup truck/convertible called the Chevrolet SSR. Subordinates told him he couldn't break the news until each step in the product-planning process--scores of them--was checked off. Frustrated, Wagoner said that as the boss, he would announce plans for the vehicle and let everyone else find a way to get it into production. GM will start selling the SSR in 2003.
The first signs that Wagoner was an activist CEO disguised as a button-down bean counter appeared quickly. After helping ease incumbent CFO Mike Losh into retirement (Losh had developed a prickly relationship with analysts and investors), Wagoner hired Ford's John Devine to replace him. Besides being well liked on Wall Street, Devine has a deep store of industry knowledge and gives Wagoner advice on the operating side. "GM is full of big ideas," Devine says. "What we have been short on is execution." Next came a move even more unusual in insular Detroit. Wagoner recruited retired Chrysler executive Robert Lutz to be a vice chairman and head of product development. A now legendary Motown figure who rides motorcycles and flies helicopters and fighter jets, Lutz, 70, was key to Chrysler's 1990s revival. He has been openly critical of GM's vehicles, so his arrival made it clear to dealers and employees that Wagoner intended to improve the automaker's weak products.
Hiring a popular, media-savvy guy like Lutz was a risk. "Bob Lutz is a charismatic man who is in the papers every day," says John Finnegan, head of GM's finance operation. "There are a lot of CEOs who wouldn't stand for that." True to form, Lutz vaulted immediately into the limelight, conducting scores of interviews and attracting an entourage whenever he appeared in public. After reviewing GM's entire schedule of new models, he changed some and canceled others: LUTZ REJECTS 2 BUICK DESIGNS read one headline in the Detroit Free Press. Yet Lutz and Wagoner have clearly established a rapport. Wagoner gives Lutz plenty of rope on product matters, while Lutz, who was a top executive under Lee Iacocca at Chrysler, praises Wagoner as "the most intelligent person I ever worked for." Wagoner is already thinking of extending Lutz's three-year contract.
After Lutz arrived, Wagoner backed away from a product-development system that he himself had encouraged. Based on research known as "customer needs segmentation," the system was supposed to match the kinds of cars customers said they wanted with GM's often overlapping brands. Younger buyers looking for inexpensive four-door sedans were steered toward the Chevy Impala. Performance-oriented drivers got a pitch for the Pontiac Grand Prix, while older customers heard about the Buick Regal. This strategy produced vehicles that on paper delivered value but failed to excite buyers, because it treated cars simply as transportation devices. "One critically bad thing at GM has been the subordination of design," says Lutz, with characteristic directness. "People who rent our cars at airports look at them and say, 'Isn't this depressing?'" Lutz is deemphasizing research and encouraging designers to create more appealing models.
Earlier in Wagoner's tenure, such critical comments might have irked him. Now, confident and self-assured, he acts like the leader he has been most of his life. The son of a midlevel manager for the Eskimo Pie ice-cream company, G. (for George) Richard Wagoner Jr. was student body president at his high school in Richmond, where he graduated third in his class and was captain of the basketball team. He followed his father to Duke, where he played freshman basketball, was elected president of his fraternity, and graduated summa cum laude and Phi Beta Kappa. The 6-foot 4-inch Wagoner remains a devoted basketball fan; he built an indoor court at his home near Detroit so he could play with his three sons, ages 18, 16, and 11.
After college and Harvard Business School, Wagoner took a job in the GM treasurer's office in New York City, considered a premier training ground for future executives. "He was one of the top two or three analysts out of about 40 or 50," says Finnegan, who worked with Wagoner there. "The other very good one was Stan O'Neal" (who now runs Merrill Lynch and recently joined GM's board). In 1981, Wagoner went to GM's Brazilian operations on the first of four international assignments. There he was quickly promoted to CFO when an unexpected vacancy developed. Recalls Wagoner: "It was a big step and an unbelievable opportunity to go from being a money guy to being in the middle of running the business." He spent six years in Brazil and learned to speak Portuguese.
In 1987 he moved to Canada but soon left for a finance job at GM Europe in Zurich. Wagoner helped arrange the deal to buy half of Sweden's Saab before returning to Brazil as managing director in 1991. When the formerly closed Brazilian market began to open to foreign automakers, Wagoner devised an inexpensive method to alter sheet metal on the old-model cars GM was selling so that they looked more up-to-date. "We changed the economics, and it paid big dividends," he says.
Wagoner's second Brazilian tour ended within 13 months, soon after Jack Smith--no relation to Roger Smith--replaced Stempel as GM's CEO. Smith drafted Wagoner, then 39, to be CFO. "He was young, but it didn't worry me," says Smith. "It was an easy call." Soon Smith gave Wagoner the added responsibility of running the purchasing department; in 1994 he became head of North American operations. At NAO, "Rick was not an unmitigated success," concedes one GM executive. Working behind the scenes, Wagoner began unifying the company's vast engineering and manufacturing systems, setting the stage for productivity and quality improvements that are continuing. But he kept many of GM's old-line managers in place and was unable to halt the company's endless turf wars. "We were a dysfunctional family into the '90s," says Larry Burns, head of research and development at GM.
Saturn, then a growing brand, was starved for new vehicles, while North American operations suffered from uninspired products, a debilitating UAW strike, and an inability to increase truck production fast enough to meet demand. "It took until 1998 for GM just to get enough truck transmissions. Lack of capacity may have cost $7 billion to $9 billion in net earnings," says Sean McAlinden, director of economics at the Center for Automotive Research in Ann Arbor, Mich. (GM admits to losing $5 billion.) Wagoner also antagonized dealers when he approved a plan for GM to buy out some of them. That put company-owned dealers into competition with independent ones. "I learned a lot," Wagoner says now. "Having your key constituents mad at you is not the way to be successful."
Despite occasional missteps, Wagoner by 2000 was the obvious inside candidate to succeed Smith; he faced a heavy load of on-the-job learning. "People who are successful in large organizations learn to be part of a team, to make sure junior people are empowered, and so on," says one GM observer. "Being CEO is different. You want to empower your people and get consensus, but you also want to make firm decisions and give people direction with no debate. That's one of the things Rick is learning."
Wagoner is regarded as personable, accessible, and reasonable. Committees still run much of GM, but under Wagoner they post presentations and reports online prior to meetings. This enables executives to dispose of routine business ahead of time and to finish in a day and a half what used to require three days. Because Wagoner is getting more comfortable in public, he has developed a deft, self-deprecating sense of humor. Last December, during a speech about innovation to an engineering association, he acknowledged that "not all of GM's past innovations have come out exactly the way we intended." Then he cited the accident-prone Corvair--which gave Ralph Nader his start--and the infamous robots at a "factory of the future" in Hamtramck, Mich. Instead of painting cars passing by on the assembly line, the robots turned their spray guns on one another.
Wagoner is poised to benefit from a decade of restructuring at GM, as decisions made years ago begin to pay dividends. For example, unlike other automakers, GM formed alliances with smaller manufacturers rather than buying them outright; this enabled it to avoid the complicated process of integrating operations. Now it is ready to use Fiat engineering on its small cars, develop crossover vehicles from Subaru platforms, and build Isuzu-derived compact pickups. McAlinden believes that sharing resources could save GM $3 billion for each set of vehicles.
GM has already begun a new-model blitz during which it will introduce one vehicle every three weeks for the next five years--for a total of 87 by 2006. Although the earliest ones don't have Lutz's golden touch, they are arriving at a time when Ford and Chrysler are noticeably short of new cars. After a multibillion dollar investment, Cadillac will produce a roadster and sport-utility vehicle next year. GM is also rolling out high-profile niche models like the H2, a less expensive, more civilized version of the Hummer. Look for it this summer.
No one would say GM's problems are behind it. But Wagoner does seem on his way to ending two decades of mediocrity. Given enough time, he might even make GM cool again.