FORTUNE Cover Story: The Tragedy of General Motors; Likelihood of Bankruptcy High for Troubled Automaker as It Grapples with Union Woes, Lack of Revenue Growth--and an SEC Investigation

NEW YORK--Feb. 7, 2006--

Turnaround Would Be a "Harder Logistical and Managerial Task Than the Invasion of Iraq"

In an in-depth analysis of America's largest automaker, General Motors, FORTUNE comes to some troubling conclusions. "Bankruptcy isn't going to occur next week," says editor-at-large Carol Loomis. "But down the road--say, past 2006--its probability is high." Many doubt that GM can turn around its reeling North American auto operations, now reduced to an embarrassing market share of 26%. In that percentage, reports Loomis, lies a harrowing, and maybe intractable, revenue problem. Says a GM executive: "There's no fix for us unless we get revenues stabilized." The story, "The Tragedy of General Motors," appears in the February 20 issue of FORTUNE and at www.fortune.com (http://money.cnn.com/magazines/fortune/fortune_archive/2006/02/20/ 8369111/index.htm) on February 6. (Due to the length of this URL, it may be necessary to copy and paste this hyperlink into your Internet browser's URL address field.)

General Motors CEO Rick Wagoner and his crew must deal with the full range of GM's problems which add up to a Hummer-sized load. The company lost $8.6 billion last year; it's product mix in the U.S.--heavily weighted towards trucks, pickups, and SUVs--is on the wrong side of gas prices; a majority interest in its finance subsidiary, GMAC, must be sold to keep that company healthy; and it is inextricably entangled in the bankruptcy of its biggest supplier, Delphi. "In that imbroglio, as in countless others, it is up against a formidable and sometimes militant union whose ability to accept the full reality of GM's problems is not assured," says Loomis. "The company is even under investigation by the SEC for accounting sins, as yet unrevealed." Troubles loom so large that one Wall Streeter deeply familiar with the company recently stated the challenge starkly: "I would say that turning GM around is a harder logistical and managerial task than the invasion of Iraq."

Loomis also reports that GM's general counsel sent a memo last May to a sizable layer of GM executives, telling them--for reasons he left quite vague--that they should refrain throughout 2005 from either buying or selling the company's stock. This prohibition, which still hasn't been lifted, is highly unusual because insiders normally have "windows" of time in which they can legally trade. In this instance, says Loomis, perhaps the insiders' deep understanding of the company's problems simply make it unfair, and therefore legally perilous, for them to be trafficking in GM stock.

In an interview with FORTUNE, Wagoner hotly disputed the notion that GM lacks a sense of urgency. There is a "boulder hanging over our heads," he tells FORTUNE, and it's causing the company to accelerate product introductions and otherwise operate with "breakneck speed." The company is deeply and broadly into cost cutting; it is closing plants, terminating thousands of jobs, and negotiating with the UAW to free itself at least partially from the JOBS bank, in which laid-off union members get paid for not working--at a cost of at least $100,000 annually for each of the roughly 5,200 such employees.

"In all that GM is doing," says Loomis, "there is a bleak awareness that no companies have ever turned around because of cost cutting alone. The essential partner is revenue growth--and, as those losses in market share show, that has been the crucible for GM. In product design, it lost the magic long ago." The gist of GM's sales problems, reports Loomis, is summed up by a man who has run an independent auto-repair shop for 52 years. What, he is asked, do you think about the quality of GM's cars these days? "They're very good," he answers. "They don't break like they used to. But nobody will buy them."

Other issues facing Wagoner and GM's management include whether GM executives should cut their pay and, more importantly, whether GM should cut its dividend. Doing so would be a public relations disaster, says Loomis, but not cutting the dividend gives the finger to the UAW, which has already agreed to a "giveback" of health-care benefits and from which GM needs many more concessions. "Keeping peace with the union right now almost has to outweigh a public relations problem," says Loomis, not the least because the union's leverage over GM affects everything that the company tries to do in cost cutting.

The biggest question, concludes Loomis, is whether some extraordinary intervention might save GM from bankruptcy. "Should it care to make the effort, the UAW would have the means: massive givebacks. Does that sound likely? No." Then there's the government, whose bailout ability has often been proved. But certainly it won't be President Bush pushing the GM cause. So who can save the company? "I can't really believe," says a GM dealer, "that the people who got GM into this mess are going to be the people who can get GM out."