Can One Man Save GM?
No, but CEO Rick Wagoner is working overtime to make sure his company rises to the life-and-death challenges ahead.
(FORTUNE Magazine) – "Are we serious about a coupe and convertible?" demands the chairman of General Motors as he reviews proposed Cadillac body styles. "Or are we just going to talk about it for five years?" The mood at the 7 A.M. Friday product meeting at GM's Design Center, north of Detroit, tenses up a few notches, which is just what Rick Wagoner intends. Everyone here knows that the company is in trouble. But as Wagoner studies the projected
images of cars and trucks in development, he wants to be sure his team understands that each arm of GM has to get faster, smarter, sharper--now. Wagoner zeroes in on a new target: A suggested design for Cadillac requires altering the drivetrain. He thinks the idea is a waste of his people's time, and his voice cuts through the room. "We spent $4 billion to shift Cadillac to rear-wheel drive," he declares, "and we need to discuss this." In other words, rethink the project.
The proceedings loosen up once the discussion turns to Hummers. Although the company now acknowledges that high oil prices threaten SUV sales, GM people still love the things. No GM brand enjoys Hummer's consumer awareness--or itsprofit margins. As drawings of new concepts appear on the three-sided screen, Bob Lutz, GM's renowned product-development chief, takes an optimistic stab at what the future sales might be. Wagoner likes to kid Lutz about his tendency to fall in love with new designs--"Bob's approved 100 programs, and we've done seven of them" he says later--and now he observes that when Lutz predicts the sales volume for a particular model, "you have to take Bob's number and divide by two." Lutz smiles as the room cracks up. But Wagoner, ever the numbers guy in a company that worships car guys, has a serious point to make: He reminds the group that they have to design a Hummer that meets its price target instead of trying to engineer a perfect vehicle that won't be profitable.
Crack-of-dawn meetings and grueling days have become routine for Wagoner, 52, as he tries to save GM from financial meltdown. He has been running fast-forward since April, when he took the dramatic step of assuming direct control over GM's North American operations, moving one level closer to product decisions, marketing strategies, and dealer gripes. The challenges Wagoner faces read like a case study of a company that can't be saved. Losing an average of $1,227 on every vehicle sold during the first six months of 2005 (according to a new study by Harbur Consulting), GM's North American operations piled up $2.5 billion in losses. Wagoner has to figure out how to renegotiate health benefits with a powerful union, generate some effective brand advertising (as opposed to just price-cut advertising), keep the whole company motivated--and come up with some wheels that consumers actually want to buy. If that weren't enough pressure, investor Kirk Kerkorian, who once tried to buy Chrysler, continues to increase his holdings in GM.
Every week seems to bring a new crisis. The latest is the collapse of Delphi Corp., the big parts supplier spun out of GM in 1999. Delphi has lost more than $5 billion in the past 18 months, and Steve Miller, its new chairman and CEO, wants GM to shoulder some of the burden by taking Delphi's UAW workers back on its payroll. Three-way negotiations among Delphi, GM, and the UAW are underway. Miller put Bethlehem Steel into bankruptcy in 2001, when it was swamped by legacy costs, and says GM might face the same fate.
And so it goes for Wagoner. For several days in August, GM gave FORTUNE the exclusive opportunity to shadow him as he scrambled to rally his troops and save his company. Sitting in on high-level meetings rarely, if ever, attended by outsiders, we got a front-row view of a top executive at a premier American corporation coping with the challenge of a lifetime.
Far from appearing beaten down by the company's problems, Wagoner, a GM man for 28 years, seems energized by them. "There's nothing like a good battle to raise the adrenaline and get everyone focused," he says on the corporate jet taking him from Detroit to Washington. A former college basketball player, he's prone to sports metaphors. Asked if he has second thoughts about casting his lot with the automaker--he has never worked anywhere else--he doesn't hesitate: "If you are in it for the challenge, where else would you want to be than GM? I think it's the biggest game in town."
This may be the big game, but the most persistent rap on Wagoner is that he isn't willing to swing for the fences: make a bold commitment to hybrid cars or fuel cells, pull off a merger, precipitate a showdown with the unions. He prefers a methodical approach, convinced that better execution on all the critical fronts--cost, quality, product development, marketing --is what will save GM. On hybrids, for example, Wagoner insists GM is being prudent. "Do we have an aggressive hybrid program?" he asks. "Yes. Should we bet the company? That would be a big risk, because the economics aren't there and it's still not clear that in 20 years we'll all be driving hybrids."
Critics say such caution will kill the company. "Rick Wagoner has made it clear that he will steer GM through this crisis with a strategy of gradual transition to a 'new' GM," writes Peter DeLorenzo, a former ad executive who specialized in the auto industry and now writes the popular Detroit blog Autoextremist. "I contend that all they're really doing at this point is managing the continued downward spiral of the company while refusing to take the tough actions and make the hard choices needed." Not so, says Wagoner, who insists that GM's biggest issues aren't the result of management errors but structural problems, like rising health-care costs, that are damn near unsolvable. "We are down to a handful of critical issues that we really need to move the needle on," he says. "And the reason that we haven't advanced as quickly on those, frankly, is not because they weren't identified, it is because they are challenging issues."
"This is war," Wagoner is telling representatives of some 50 dealers from the Washington, D.C., area, who are gathered in a suburban Virginia hotel conference room. "The battle lines are being drawn tighter and tighter, and we need to push out." Every two months Wagoner hits the road to talk with GM dealers, who are on the front lines of that war. Dealers are nothing if not blunt, and Wagoner understands the value of their close-to-the-customer view of the business. Wagoner has made sales and marketing one of the targets of his turnaround effort, and he promoted Mark LaNeve, 46, to the top marketing job in March with a mandate to shake things up. Wagoner believes unimaginative marketing has speeded the decline of GM's brands. One example: GM used the same mix of media to promote both Chevy and Buick, even though low-volume Buick cried out for a more targeted approach than highway billboards and network television. After Wagoner challenged him to come up with something "different and fresh," LaNeve created GM's successful clearance-sale promotion, "Employee pricing for everyone." Now LaNeve, who made the trip to Washington with Wagoner, has to figure out how to wean customers from special deals with newly lowered sticker prices that GM calls "value pricing." The automaker is bracing for several months of sharply lower sales while buyers adjust.
As they prepared for the session, Wagoner warned LaNeve to expect some harsh words from the D.C.-area dealers. They are considered a tough bunch; they've been making money, but their margins have shrunk and they're concerned about GM's falling market share. And true to form, the Washingtonians aren't shy with their opinions. One challenges Wagoner to convince buyers that GM products are competitive with Toyota's and Honda's. Another criticizes "value pricing," saying, "If your message is value, you don't have a message. It's weak, it's lame, and Toyota and Honda have a more intelligent message." A third dealer adds, "One of the things we lack at GM is credibility, and that's why we are not perceived as a value."
Wagoner, sitting on a stool in the front of the room, seems unfazed. He explains that GM is "trying to build cars that are richer and more upscale before we can get a price for them. It is hurting our profitability, but it's important for the future." In the end, Wagoner is forced to concede that GM has a credibility problem that it can't erase until its cars start selling again. In the past it has made too many promises--about quality, performance, and durability--that it hasn't lived up to. "We've been around way too long, and people have heard all our lies," he says in a strikingly candid admission. "We just have to deliver."
Workers in and around Detroit also get face time with the chief. Wagoner schedules 90-minute sessions, known as "diagonal slice" meetings, once a month to talk with ten or so salaried employees from all corners of the corporation. (He holds similar meetings during plant visits.) The meetings have taken on an extra urgency lately, as is obvious the second Wagoner walks into the conference room on the 37th floor of one of GM's towers. Immediately the attendees stiffen. Wagoner tells the group that North America "feels a little better than it did three or four months ago," but his message is mixed. Some of GM's new models have gotten good marks from the automotive press. Others, he notes, have been less well received. He calls the market-share declines in major markets "unacceptable,"and reminds them of the magnitude of GM's health-care expenses.
Although Wagoner tries to present an upbeat image, signs of the pressure he is under seep out in a litany of complaints. Among his targets: ill-trained dealership employees ("We've got a lot of initiatives out there, and sometimes the salespeople don't even know") and ineffective advertising ("Part of the reason we don't have strong brands is brand-related advertising"). He's frustrated that GM doesn't get enough credit for technology leadership ("Anybody who lives south of Toledo doesn't have a view of us") or its charitable work. The company tends to "modestly stand in the back of the room," he says, while other corporations spend $100 million bragging about a $10 million contribution. "That's a little cynical," he adds, "but not completely."
When one employee makes a comment about GM moving production to "low-cost countries," Wagoner points out that GM's North American vehicles are built with 85% North American content. Employees are right to be concerned, because GM is actively considering sending production overseas to save money. GM's Korean affiliate already builds one million cars a year that are badged as Chevrolets and sold all over the world, including in the U.S. As Wagoner has said, GM can't grow fast enough to lower its average cost of building cars in the U.S., so it has to find cheaper assembly and parts capacity overseas.
And that brings him to the primacy of the health-care cost issue. "If we don't fix health care," he tells the group, "we can't fix the North American business." While GM employees have lots to complain about--skinnier benefits, smaller 401(k) contributions, no bonuses--they don't air many gripes at this session. On the contrary, they're thrilled to have an audience with the chairman. After the meeting, Britta Gross, an engineer in GM's fuel-cell program, says, "Rick is a guy trying to do the right thing. A lot of us feel a lot of pressure to do all the right things right now."
Thanks in part to his outreach efforts, Wagoner remains a popular figure within the company. Subordinates give him points for stretching GM's capabilities but staying short of the breaking point. "He's kept the angry barbarians at the gate, and his understanding of the culture is invaluable," says one. "He's pushed it as hard as it can be pushed." Critics, though, say that he hasn't pushed nearly hard enough--Wagoner needs to trim the blue-collar workforce by more than the 25,000 already announced and do much more to reform GM's ponderous bureaucracy.
What Wagoner really needs is a megahit--a Chrysler 300C, a Ford Mustang, or even a 1955 Chevy from GM's distant past--something that will produce long waiting lists and fat margins and help lift the cloud of inexorable decline that hangs over the company. Recent efforts have been mixed. There's the Pontiac Solstice, a two-seat roadster that looks snappy but will lose money, at least at first, because of its small volumes. The Chevrolet HHR is a retro-looking minivan/passenger car crossover that more than slightly resembles Chrysler's PT Cruiser. In fact, the auto press is already calling it the "MeToo Cruiser."
The crucial test will come over the next six months, when GM launches its highly touted new models, including the horsepower-heavy 2006 Cadillac STS-V. All of them must succeed, and one or two need to make a breakthrough in customer awareness, to lift GM's image and wean car shoppers off incentive deals. Advance buzz has been favorable on the most critical ones --new full-sized sport-utility vehicles like the 2007 Cadillac Escalade, which makes its debut in January.
But even a fleet of smash-hit cars won't be enough if Wagoner can't win concessions from the UAW on health-care benefits. Providing coverage for all of GM's 1.1 million active and retired workers and their dependents is slowly strangling the company. GM expects payments to jump $400 million this year, to a total of $5.6 billion, and to go up sharply again in 2006. Wagoner says he's hopeful--"The issue of a shared destiny I think is clearer than ever"--but it's not obvious how he's going to do it. The union certainly doesn't sound particularly amenable to a deal--UAW president Ron Gettelfinger has been publicly calling for Wagoner himself to take a pay cut. (Wagoner made $4.8 million in salary and bonuses last year.)
Fifty years ago, FORTUNE wrote that GM CEO Harlowe Curtice "runs his company with all the urgency of some desperately worried, embattled executive ... whose competitors are breathing fire in his face, and who is in imminent danger ... of seeing his customers desert him in droves." That attitude didn't survive long after Curtice's retirement, but it permeates GM today. And the conditions described in the passage are no longer imaginary.
If Wagoner makes progress with the unions and GM's new crop of cars produces at least a couple of hits, time will start to be on his side. GM's operations are continuing to improve, and demographics will begin to run in the company's favor. Mortality will shrink the number of UAW workers who retired in the early 1990s as part of GM's last big downsizing, taking a bite out of legacy costs. "If we succeed in addressing some of these tough longer-term issues," says Wagoner, "I think we have a chance to continue to be a major force in the industry." For Wagoner and GM, the stakes couldn't be higher. If he can't fix the North American operations, he will probably be out of a job. And General Motors, American icon, could begin a slow, steady slide to extinction. Can he do it? Wagoner's outlook is hopeful but sober. "This is crunch time," he says. "I'm encouraged by the movement that I see on a number of issues. But I would have to say we don't have a lot of time."