Chief of GM says he won't 'run and hide'

Detroit November 22, 2005; USA Today reported that It seems like the disastrous years 1991 and 1992 all over again at General Motors (GM).

Now, as then, the big automaker closes plants and cuts tens of thousands of jobs.

Now, as then, GM reports multibillion-dollar losses because of problems with its core business - selling cars and trucks in North America.

Now, as then, credit-rating agencies downgrade GM's bonds so it's expensive for the automaker to borrow money.

Now, as then, the CEO says the recovery plan is good and the management team is great.

But now, CEO Rick Wagoner seems under no severe pressure from the board of directors to improve or move. Back then, CEO Robert Stempel's attempts to revive GM weren't enough to satisfy the directors. The board forced out Stempel in October 1992.

Wagoner, CEO since 2000, said Monday that 30,000 jobs will be cut - not the 25,000 he announced in June - and nine factories will be closed, along with two other facilities. And he said that he won't step aside: "I wasn't brought up to run and hide when things get tough."

In June he had said, "I'm very confident we have the right plan, and there's no question that we have the right management team."

Stempel had made similar comments, but they were magnificent denial. Wagoner, 52, seems on firmer footing, though it would be easy to question his leadership. His bold strokes haven't been clear-cut successes. For instance:

Hiring Robert Lutz. Detroit's favorite car guy - the executive who is supposed to know best what connects with car buyers' psyches - was retired from his job as vice chairman at Chrysler when Wagoner brought him to GM in 2001. Lutz was given nearly free rein to renovate the product lineup. It takes several years to get a model to market, so Lutz's handiwork is only now showing up. Pontiac Solstice and GTO and Buick LaCrosse are examples, and the jury is still out.

Wagoner appointed himself to run failing North America in April, forcing him to remove both Lutz and North

American chief Gary Cowger from overseeing North America and to give them new jobs.

Starting an incentive war. GM offered rebates of $3,000 and 0% loans to wake up a market shocked into malaise by the Sept. 11 terrorist attacks. First lauded as brilliant and patriotic, the incentives were quickly copied by rivals. GM has given the industry's most-generous incentives since then, but it has lost, not gained, market share.

In fact, under Wagoner, GM's share of the U.S. new vehicle market dropped from 28% in 2000 to 25.4% this year, according to Autodata.

Pulling out of Fiat. Just before Wagoner took over at GM, the company paid $2.4 billion for a 20% share of troubled Italian automaker Fiat, with a promise to buy all of Fiat later under certain circumstances. In February, Wagoner oversaw a deal in which GM had to pay $2 billion to untangle itself from the alliance.

Wagoner can't be blamed for GM's sheer size. Once a benefit, it now is crippling because GM has so many retirees entitled to generous benefits negotiated over the years by the United Auto Workers union. And providing health care for its large workforce and retirees eats deeply into GM's earnings.

So GM is again forced into a big restructuring, Wagoner presiding, and it's not guaranteed to work. While an auto industry without GM is almost unimaginable, it's not impossible.

"One could paint a doomsday scenario more easily than a turnaround," says Van Conway, president of Conway MacKenzie and Dunleavy, a restructuring firm in Detroit.

The CEO's advantages

But Wagoner has two big advantages.

Instead of being broke, GM has $19 billion in cash to cover losses and buy time for the Wagoner plan - new models better tailored to buyers' wants, lower prices that won't require big rebates, a lower-cost operation overall - to kick in and generate black ink.

Instead of having to remake itself, today's GM benefits from the wrenching overhaul of the early '90s.

Then, GM's manufacturing "was a basket case," says David Cole, chairman of the Center for Automotive Research. Each of its factories was dedicated to building only limited types of vehicles instead of being flexible enough to build whatever was selling best. Flexible manufacturing is a hallmark of Japanese automakers.

It costs more initially to outfit a flexible factory, so Detroit has been slow to adopt it. But a plant that can easily switch among dissimilar models has a better chance of survival when buyer preferences shift. And it could mean that an automaker needs fewer plants.

When the 1992 GM board put John "Jack" Smith in charge, Cole says, GM "really got off on a track that was much more Toyota-like. GM really began to build some strength" in flexible manufacturing.

"That's very different than what was going on in 1992," he says. GM is "much stronger today than in the early 1990s."

The CEO's challenges

Wagoner said Monday, "I have given no thought to anything but turning the business around." That easily could occupy all his time.

The biggest challenge is profits.

GM hasn't had those since last year. It lost $3.8 billion the first three quarters this year. Without positive earnings, the company can't keep investing in vehicle development to make its products appealing so they sell without big incentives. Nor can it develop lower-cost manufacturing so it has more room to lower prices, or offer rebates, and still earn profits.

Wagoner's moves won't pay off immediately. The job cuts won't take effect until after 30,000 workers retire, or are coaxed into doing so early, and their jobs aren't filled. And the plant closings won't start until next year and could take until 2008 to accomplish.

That might not suit billionaire investor Kirk Kerkorian, who owns 9.9% of GM's shares. He's impatient for a return on that investment and is thought likely to demand a seat on the board next year.

Closed plants save nothing in the short term. Unless and until GM can get the UAW to agree, workers at idled factories get nearly all their pay, and no cars and trucks are being built to be sold to offset the cost of that pay. That could be renegotiated during the quadrennial contract talks next year.

What Wagoner said Monday surely will make next year's labor talks tougher, perhaps giving the UAW more reason to strike at a time when GM will be launching new versions of its full-size SUVs, which still are profitable even though high gasoline prices have eroded their popularity.

"It's not brain surgery to know this won't improve the relationship" between GM and the UAW, says Robin Pinkley, labor expert at the Cox School of Business at Southern Methodist University. "It's another signal to the union that it'll always be asked to give up things and never get things."

Perhaps Wagoner's biggest advantage is the forbearance of GM directors. "I know he has the support of the board," Cole says, cautioning, "They don't have infinite patience, so the clock is always ticking."

That seems to be the key: How fast can Wagoner get GM back in the black, which is the same question as how soon can he make money selling GM cars and trucks in the USA and Canada.

Joe Carcello, director of research for the Corporate Governance Center at the University of Tennessee, says that's a big question mark: "How long they'll let the company flounder before they take action - on that one, your guess is as good as mine."