The Tragedy of General Motors — February 20, 2006

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In that percentage lies a and maybe intractable, revenue Says one GM executive: There’s no fix for us we get revenues stabilized.

Nonetheless, and crew must also with the full range of problems, and they add up to a Hummer-sized The company lost $8.6 last year, burning up of dollars in North America, too little back overseas. Its mix in the U.S. heavily weighted trucks, pickups, and SUVs, is on the side of gas prices.

It has a finance GMAC, whose majority it needs to sell to keep business healthy and itself in so far, no buyer has emerged. It is entangled in the bankruptcy of its biggest Delphi. In that imbroglio, as in others, it is up against a formidable and militant union whose to accept the full reality of problems is not assured.

The company is under investigation by the SEC for accounting as yet unrevealed.

And gravely, it is burdened by costs, which it supplies for a bigger than Detroit’s—that is, for a of 1.1 million employees, retirees, and Its thriving Japanese competitors, as Toyota (Research ), pay health for their U.S. active and dependents too. But Toyota not have GM’s retiree burden, a mountain that at totaled an unfunded $64 billion and in annual effect on the bottom adds about $1,300 to the of every car and truck GM makes in the

Wagoner is exultant that he and the UAW managed last year to a deal that, if blessed by a judge, will cut GM’s liability by around $15 billion and cash outlays as well. But will still leave facing a colossal competitive The cost is not his fault.

Rather, it is a dumped on him by CEOs of decades ago who a certain amount of wage from the union—and labor for their own terms of office—by retiree health benefits had neither large, immediate costs nor, under the rules then applying, effect on the bottom line. with health-care costs and the accounting rules stiffened, mess has come home to It is the problem, says Wagoner certainly giving too little to his shortage of revenues), that than anything else the future viability of GM.

In character, GM is a weird and painfully scarred of businesses. It is a car company doing and it is an insurance company engulfed by way beyond its ability to pay. an enterprise probably cannot bankruptcy.

The securities markets their warnings with The prices of GM’s bonds fallen severely, and its stock in December to below $19, the price since 1982. In February the stock was $23.

it not for GM’s dividend, $2 annually, the would surely be lower it is.

Is there anything optimistic to Well, it is important to remember giant auto companies been turned around In 1980, aided by $1.5 in loan guarantees from the government and his own pitchman routines on Lee Iacocca brought Chrysler from the abyss.

Nearly 20 later Carlos Ghosn, an mixture of Lebanese blood, birth, French education, and business experience, grabbed hold of Japan’s sinking Motor and restored it to industry

Yet these rescue jobs pale in comparison to what it take to turn around Motors, this giant so that in the FORTUNE 500’s half-century it ranked No. 1 on the list in 37 (In our last list it was No. 3.) One Wall deeply familiar with the recently stated the challenge I would say that turning GM is a harder logistical and managerial than the invasion of Iraq.

same Wall Streeter is not to the GM generals charged with the job. Describing the company as a bureaucracy, he says a good might be firing the top five and replacing them with A less acid form of has been laid on by the camp of Kerkorian, whose Tracinda owns just under 10% of stock.

In January, Kerkorian’s Jerry York, a turnaround himself (at Iacocca’s Chrysler and Lou IBM), gave a long speech at the Detroit auto that accused GM’s of lacking urgency and sense of York’s reason for growling: losses, about $172 of them realized at this with the rest—another $223 as unrealized losses on his books.

York and Wagoner have about York’s going on the GM but—as of early February, at had not had a meeting of the minds. Maybe, one guess, the Kerkorian camp has both board representation and freedom to sell its stock.

could have been a because GM’s general sent a memo last May to a layer of GM executives telling reasons he left quite they should refrain 2005 from either or selling the company’s stock. The which still hasn’t lifted, is highly unusual insiders normally have of time in which they can trade. In this instance, the insiders’ deep understanding of problems simply makes it and therefore also legally for them to be trafficking in its stock.

in any case, hotly disputes notion that GM lacks a of urgency. There’s a boulder over our heads, he says, and causing the place to accelerate introductions (like new models of its Silverado and Sierra pickups, into showrooms soon) and operate with breakneck

No doubt thinking back on 98 years of existence—and to the pantheon of P. Sloan, Charles Kettering, and gods—he strikes a poignant note as well: Nobody’s got a stake in this than I do. I this little sort of of history. I’m not going to be the guy doesn’t get this company in the right direction.

If energy could do it, Wagoner might it off. Once a basketball at Duke, he is tall and broad-shouldered, enough in fact to be at least matched to the massive corporate he carries. A GM-er for the 29 years of his life and CEO since 2000, he was in as he talked to FORTUNE in January. him were the usual suspects, models of cars.

He was animated to a that amazed one of his public people, who wasn’t sure ever seen him quite so And on his mind was the whole of the GM scene, the need to keep growing in to build great products, to that boulder off his head.

boulder evasion means GM is deeply and broadly into cutting: It is closing plants to its excess capacity, terminating thousands of people, negotiating the UAW to free itself at least from the nearly un-American bank, in which laid-off members get paid for not working. How people are in the JOBS bank?

ask that repeatedly and are refused an probably because GM thinks can be gained by hanging a number out that Wall Street and the can beam their attention on. But McAlinden, chief economist of the for Automotive Research, thinks were 5,200 employees in the bank at the end of 2005. He figures the cost of each to GM is at least

Globally GM is once again to take advantage of its huge to reduce engineering and parts (it has paid lip service to this before). In the U.S. it can’t cut brands—-dealer franchise laws that almost impossible—and a vise, because the eight it sells (Buick, Cadillac, GMC, Hummer, Pontiac, and Saturn) are a big crowd for a 26% market

At the least, the company is working to Pontiac, Buick, and GMC into the dealerships—-under the same rooftops—and to within them, for instance, one minivan model rather two. GM’s sales and head for North America, LaNeve, calls the cutting of independent dealer a little opera, in which entrepreneurs, in cases with kids expected to inherit their give up their turf by

Perhaps most important for cutting at GM, Wagoner has just put a chopper, Frederick Fritz 47, into the job of chief financial Henderson, a mustachioed and candid came from GM’s operations, where he reduced didn’t eliminate) losses and got to be as Chainsaw Fritz. He considers cutting an unending battle and cites the continuous improvement is an integral part of the Toyota

In another example of non-arrogance, listened at a luncheon table, notes, as Jerry York his January speech. He’s a shareholder, said Henderson It’s important that we to him.

But he scoffed at York’s that GM is blind to the depth of its I’m in crisis mode and been for years.

In all that GM is there is a bleak awareness no companies have ever around because of cost alone. The essential partner is growth—and as those losses in share show, that has the crucible for GM. In product design, it the magic long ago.

They need irresistibility and says one car buff, and they had them. The man now on that case is boss Bob Lutz, 74, who, retiring from Chrysler, was by Wagoner in 2001. Tall, dressed, and outspoken, he is treated a rock star at auto often attracting more than his cars.

At the Detroit in January, touring GM’s with reporters, he was pleased to out classy-looking car interiors—some of GM’s to be grotesque, he said—and a level of fit and that he judged superb. A needled him: Bob, I those bad fits, those that you had a while back. I to store my quarters for tolls in

Lutz—and all at GM—are plainly the past, when many gave up on its vehicles and turned to cars. Today, GM has an enormous problem: a belief by too many consumers—particularly in the East, West, and of the South, which pretty leaves GM hugging the Midwest—that it make cars as reliable as of foreign producers. That was true once.

The current though, is mixed: Consumer a bible for many carbuyers, GM’s improvements as inconsistent and most of its cars as also-rans; Power, however, a leading of quality, gives many of its top grades. Meanwhile, GM people out comparison charts showing, for that a Chevrolet Malibu Toyota’s Camry in just every performance rating yet costs $2,640 less.

shrug their shoulders and on buying Camrys—their memories are and their motivation for returning to GM

The gist of GM’s sales is summed up by Don Freda, a suburban New who has run an independent auto-repair shop for 52 What, he is asked, do you think the quality of GM’s cars days? They’re very he answers.

They don’t like they used to. immediately, But nobody will buy

So it’s no surprise that GM has the impresario of incentives since when it immediately followed up by launching the incentive program Keep America Rolling. that, the come-ons never so buyers quickly realized it be idiotic to pay anything close to (manufacturer’s suggested retail Last spring, when personally took over the of the North American business, he that GM would reduce the use of

But that pullback wasn’t GM needed revenues in 2005, no their quality, and it kept on the incentives out.

It was not until January that GM officially a new pricing program, built on the of selling the product, not the deal. The cuts the MSRP on most of cars, a change aimed at giving the buyer an attractive but not by way of ballyhooed incentives. The price of a SUV, for example, is dropping a 2005 level of $36,790 to (an amount that Wagoner could still be reduced by ad hoc

A big reason for the change is that two-thirds of carbuyers these do comparison shopping on the Internet, GM feels it must show a price, as opposed to the fictional incentives—that it was presenting before. As another part of its new marketing GM is planning to cut back on its large-scale to rental-car companies, which not buy at a sharp discount but also flip their vehicles the resale market and thereby the residual values of GM cars.

In all it is important to keep remembering GM desperately needs to at least its market share and simultaneously to profits from what it Whether this plan do any better than the others now is deeply uncertain.

Acknowledging the jury’s out, he says—Wagoner expresses confidence because he there is inherent goodness in products that the market begin to recognize. But he also that every car manufacturer has a view of its own prospects: We’re all he says. We go through our design and go, ‘Wow, we’ve got great

They’re so much better what we had. This is to turn things.’ What you is that the same discussion is on in every design studio the world. That doesn’t make you wrong in your he says.

But in the end, it’s a And you don’t know—can’t know—whether time it’s going to in the revenue.

That’s a sweat-out matter for GM in As the year begins, the world is focused on the company’s liquidity—its of ready assets that allow it to withstand further blows, should they On the balance sheet of its auto at year-end, GM had $20.5 billion in assets, made up of cash, securities, and short-term assets in a voluntary employees beneficiary that holds money to the payment of health costs.

GM this amount of liquidity But this is a company whose operations had a negative cash last year of nearly $6 Suppose that repeats year? Or suppose—Wagoner himself this—that the price of gas goes to $3 a

Or that industry sales of drop by, say, 5%, or there’s an recession? Besides, GM can’t spend itself down to its dollar. Jerry York that GM needs at least $5 at any given moment just to and others say the amount might be $10

Success by GM in selling just half of its finance subsidiary, would help GM’s that really wasn’t the for putting it on the market. Here are finer qualities: It is a well-run a good earner, with of $2.83 billion in 2005 a goodwill write-off of $440 on about $22 billion in book and a dutiful corporate child paid $2.5 billion in dividends to its parent. So why would GM be this treasure?

Because raw material is money, and—thanks to its parent—it is losing access to its raw The issue here is that credit ratings are linked to and therefore have been lowered. That means is no longer welcome—as it devoutly to be—in the commercial-paper market, is in effect a deep-pocketed bank good interest rates.

So has been funding itself expensively, by selling off its loans or against them.

A sale of, 51% of GMAC to a financially strong would presumably raise its and put it right back in the commercial-paper As to what the sale might to GM, that’s a mystery. A deal has partly because prospective are leery of the financial consequences they make a purchase and see their co-owner, GM, go bankrupt.

also a downbeat qualification the money that GM might The company carries out intracompany with GMAC that leave GM a net debtor. It is very that any buyer of GMAC, not to be owed by GM, would insist those debts be paid off as of any transaction. That would GM’s take.

Moody’s has unequivocally that the sale are critical to GM maintaining adequate Standard Poor’s wants deal done too. But it just how much GM would

Said SP’s Robert in January: GM will be giving up of an asset that’s provided a lot of At the end of the day, it’s hard for us to get about that.

Another to GM’s liquidity could be by the company’s embracing what York has labeled equality of is, compensation cuts for most of its constituencies. Such moves, for might cut the pay of GM’s directors, who such corporate folk as director George Fisher, CEO of Kodak, and Stanley O’Neal, CEO of Lynch.

Base pay for a board annually is $200,000, though must put $140,000 of that GM stock—an investment plan hasn’t worked out too well Among the people escaping the GM flameout, it should be noted, is Lafley, CEO of Procter Gamble, who as a director last spring.

that a GM bankruptcy would no put egg on the face of every board Lafley’s departure possibly as Shrewdest Move by a Director in

York also wants executives to cut their pay. headquarters in Detroit, there is about this, since it be a second blow: No bonuses paid for 2005. In addition, the at the very top have definitely with the stock, because are required by the board to hold of their base salary in GM

The requirement for Wagoner works off his base salary, $2.2 and stipulates that he should own times that amount in which is $15.4 million. may have met that goal at one a precise answer about has disappeared into proxy-statement He for sure was still an optimist in 2005, when he paid million to buy 50,000 GM shares at $30.

Today, though, with the down closer to $20, he is way shy of the million target.

What sees as truly essential is a 50% cut in the for every shareholder, including and Kerkorian. Such a move may be important. It is not, though, an panacea. The dividend is only billion annually—against a GM market in early February, of about $13

Totally eliminating the dividend for example, not even cover of GM’s annual spending for care (about $5.7 last year). There is quite unintuitive, point to be about the dividend: With certainly a possibility, you could a case that GM’s might be doing their best for the shareholders by continuing to pay the

That is, in a bankruptcy the shareholders are apt to nothing; for now, the dividend is A corollary to that thought is any unsecured creditor of GM’s who bankruptcy will come logically be protesting every paid to the shareholders, since any of cash is money the bankruptcy won’t be getting.

For GM, the problem of to cut the dividend is huge—in scale, way the $1.1 billion. Were a to be made, there would be national, and even global, That would agitate who are already nervous about viability—who worry, for example, the company’s ability to make on its warranties. That’s an unnecessary but it still exists.

It is probably not an to say that cutting the dividend be a public relations disaster. On the hand, not cutting the dividend the finger to the UAW, which has agreed to a giveback of health-care and from which GM needs more concessions. Why, the UAW is are we making sacrifices when the aren’t?

The GM board was scheduled to shortly after this went to press, and the betting is that the dividend will be That’s because in these times, and in anticipation of a contract up for in September 2007, GM desperately decent relations with the Keeping peace with the right now almost has to outweigh a relations problem.

The truth is GM is essentially indentured to the UAW because of the power to strike. To that of …, add another: GM’s and salaried employees, present and essentially own this company, a we will prove by describing bank accounts. At the end of 2004, the date for which figures are GM’s pension funds inside the U.S. and out) had billion in assets—which is wealth to GM’s employees, retirees, and

To that you can add $19 billion that GM has put in a account for retiree health That makes $119 that GM has banked for its employees. In the shareholders of GM recently owned grubby $13 billion in market

That is a bizarre, Alice-in-Autoland from 98 years in which supposedly reigned.

The union’s over GM affects everything the company tries to do in cost The burning example is retiree benefits, surely a competitive disadvantage if there ever was At various Berkshire Hathaway chairman Warren Buffett has what GM would do if it had contracted years ago to buy steel at a premium and had arrived at 2005 needing to get cost back in line.

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It simply get out of the contract, Buffett has GM’s retiree health arrayed against the benefits the Japanese companies don’t are like paying extra for But the odds against GM’s this contract are monumental.

proved by the halting course of since early last when Wagoner let it be known GM proposed to unilaterally change its plan for retirees so as to cut $20 billion off its Legally GM may have been its rights to do this; at least, what some court say. The UAW, though, protested, claiming that the were vested and citing of its own.

To have sorted out argument in court would taken years that GM have. So a compromise was reached: The UAW hire Lazard to come GM (at GM’s expense) to determine how bad its financial condition was. whose work was led by Jim Millstein, of its restructuring team, sent in 20 people and took months to do its

GM wasn’t given Lazard’s to read. But one executive thinks he has a idea what it said. He is Girsky, who until last was an all-star auto analyst at Stanley (where he ridiculed incentive programs), and who then a high-wire leap into for GM as Wagoner’s roving aide-de-camp.

Says Girsky: Usually the perception is that management is things look worse they are. This when Lazard came to the union, I think it may have ‘Management is not exaggerating; in fact, may be worse than it thinks.’

So the did a giveback, agreeing after deadline-packed weeks to an intricate in the retiree health benefits will hurt the retirees but also require the actives ratified the deal) to chip in by up some cost-of-living raises were due. GM gets of only about $15 billion in its not $20 billion. And its expected cash of about $1 billion a year arrive only slowly.

A stickiness is that the agreement is not yet Its fairness must be okayed by a who at a hearing scheduled for March can to be asked by at least some why in tarnation they didn’t a say in all this.

Beyond any savings the new plan ultimately delivers, it GM with a psychological lift: A that detests deadlines and negotiations stepped up when and gave something back. GM’s success here that it could perhaps its whole retiree health by driving ahead with actions and dragging the union No, says Girsky, absolutely If you have to push to that you’ll be building cars three wheels.

At the end of the day, guys you’re dealing are the ones who build your

Wagoner is impatient with who want GM to blast ahead on the front, pushing hard to cost savings. Excuse me, he he asks them, were you in ’93, ’94, ’95, ’97, and ’98 when we 16 strikes? (It sounds as if he might the exact dates of those as well as he knows the birthdays of his sons.) He quotes the critics Well, you dolts, don’t you how to deal with the union so it go out on strike?

And Wagoner grits his and answers, Gee, I thought the was to get competitive. His bottom line union negotiations: There’s an art to thing.

Right now, he and GM are their art at auto-parts maker (No. 63 on the last FORTUNE 500 in whose arcane crisis GM is dangerously—entangled. The distilled story is that GM split off Delphi in retaining an incestuous relationship it and sticking it with GM-sized and benefits that exceed paid by Delphi’s competitors.

ultimately floundered under weight and hired have-gun-will-travel S. Steve Miller as CEO. Out of Miller put the company into last October and quickly talking about ways to with competitive costs. He called on the UAW to accept lower example, he wanted to cut pay for skilled by 54%, from $27 an hour to (These figures do not include Later he took that off the table.

But the UAW had by then become so with both the man and the plan it refused to negotiate with

GM, though, was always in this because it and Delphi are virtually at the hip. The separation agreement in 1999 included deals GM and the union that made GM liable for post-retirement benefits pensions and health) owed to employees if Delphi ever to provide them. With now in the soup, GM is on the hook—though for how many is uncertain, because other transactions figure in too.

At the oracular word on Delphi, GM was a total cost between billion (an amount indeed as a special pretax charge in and $12 billion, with the most figure toward the low end of that Whatever the cost, most of the for cash will hit GM slowly, it will be liable for the retirement only as they come

In the meantime, the bankruptcy court has Delphi, GM, and the union to come up a plan by August for getting out of bankruptcy. This is three-hand says Wagoner with a grin, and the stakes for these parties are way beyond Vegas. wants to emerge fit for competition; GM to hold its bailout costs to a and also extract better from Delphi; and the union the highest pay possible.

Talking about the cardholders at table, Steve Miller that he, Wagoner, and the president of the Ron Gettelfinger, have the three jobs in Detroit. His listener for the kicker, and it’s surprising. The job the toughest, Miller says, is because he has to get elected.

That’s true—there’s an election this UAW incumbents seldom lose. the whole Delphi affair has so the UAW that it could at some haul off and order a strike. is a true peril for GM.

It cannot a strike. GM is hugely dependent on parts, buying well $10 billion of them a year. there a strike of any duration, GM not be able to move fast to line up alternative sources of

A strike would be a …, to push it over the bankruptcy

That would not be good for the whose members would be with cuts in wages, and above all, health But unions have called before that didn’t sense, and it could happen

There are people who assert GM should just get the suspense and file for bankruptcy, thereby its liabilities to a manageable size and continuing to sell its products. he is asked about this Bruce Clark, a senior president of Moody’s and its lead analyst, turns very Bankruptcy would have costs, which any company want to weigh, he warns.

is not the airlines, he says, where the risk is a plane ticket, maybe a few hundred. With car in sharp contrast, you have items, $20,000 and more. And you buyers, says Clark, to the warranty period is very and who have a general expectation service will be available. In words, a buyer just avoid any company in bankruptcy.

And is hardly what GM needs; already had enough of that.

is the big question, naturally, of whether sort of extraordinary intervention save GM from bankruptcy. it care to make the effort, the UAW have the means: massive Does that sound


Then there’s the U.S. whose bailout ability has proved often. Clearly could at some point that a GM bankruptcy was a nightmare it face and could step in a massive infusion of money would buy the company time—to back, perhaps, to a viable Beyond that, what is to do?

Urge its citizens to pick up a with their tax refund? national health insurance the snap of a finger?

Certainly it be President Bush pushing the GM He gave American auto the back of his hand in January, the Wall Street Journal they needed to both with their costs and up with relevant products. no doubt mainly referred to to which GM is a Johnny-come-lately. There’s an message in what Bush to GM: Drop Dead.

Which it will.

There’s a note to be about our old friend urgency. It out that GM has a program, mentioned in year’s proxy statement and extant, through which it match up to $5,000 given by any of its U.S. employees (and its as well) to a college or university. plans, especially big, ones such as that, are welcomed by many people in the

But when you are a company running on GM is—does not the continued existence of program say that somebody exactly caught on to what a of urgency is all about?

That a point made by a fellow—you see why he doesn’t want his name the GM dealer organization: I can’t believe, he says, that the who got GM into this mess are to be the people who can get GM out.

REPORTER Patricia Neering, Oliver


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