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Wagoner Is Ousted to Maintain GM's Lifeline


He's out. General Motors (GM) Chairman and CEO G. Richard Wagoner Jr. has been asked by President Barack Obama's Administration to step down in advance of GM's getting any further funds from the federal government.

Treasury officials said Wagoner was asked to leave and agreed to quit. Wagoner's ouster will be the first in a series of moves that Treasury will make as it forces GM and Chrysler to restructure. Without a change in the way they do business, Treasury officials say, those companies aren't viable and won't get more funds to avoid bankruptcy.

Wagoner's ouster won't surprise many, and plenty of critics have been calling for his head. True, he was dealt a tough hand when he became CEO in June 2000, inheriting a raft of management missteps that included lavish worker contracts and retiree benefits the company had accepted in fat times. But Wagoner never made the tough decisions to reduce union labor costs, cull GM's bloated family of brands, or get the company to make money on anything but a handful of trucks and SUVs that guzzled fuel. Wagoner was pushing slowly to change GM, but the company wasn't prepared for the fuel-price spikes that started in 2005 or the recession that hit the auto industry like a hurricane in 2008.

His GM revisions came too late

"He deserves it," says longtime industry watcher Maryann N. Keller. "Obama doesn't want to be seen giving money to someone who has had so many bad years."

Wagoner began to push harder to remake GM over the past several years. And the company has been putting out better passenger cars. The Chevrolet Volt electric car, due to hit the market in 2010, shows that GM understands how important fuel economy has become. Wagoner also scored a union contract in 2007 that cut wages in half for new hires and would have given the union $36 billion in cash to set up a health-care trust, extricating GM from high employee medical costs.

But all of that happened much too late. GM was thrown into crisis in 2005, when the company lost $10.5 billion. Oil jumped above $50 a barrel and sales of GM's money makers—full-size SUVs like the Chevy Tahoe—tanked. GM, bleeding cash, bought out thousands of union workers and cut health-care costs.

Wagoner's restructuring moves got the company to roughly break even on an operating basis in 2006 and 2007, but GM lost $31.5 billion in 2008 amid a deep recession and financial crisis. Altogether, since Wagoner took over in 2001, GM has lost $72.8 billion, if you include a $38.7 billion paper loss in 2007 due to lost tax credits.

Someone had to take the blame

To his credit, Wagoner has shrunk GM's payroll by nearly 70,000 jobs since 2005. He has restructured the company to the point where analysts estimate it could break even in a market of about 12 million annual car sales. (Americans buy 15 million or more vehicles in a typical year.) And he did drop the Oldsmobile brand in 2001. But Wagoner still tried to make eight brands work when health-care and retiree costs claimed too much cash to support them all.

The outgoing Bush Administration agreed to extend a $17.4 billion lifeline to GM and Chrysler in December, with a Mar. 31 deadline for the companies to meet cost-cutting and debt-reduction goals. Before the new Obama Administration was willing to extend that help beyond Tuesday, however, it needed a scalp to show the American public that the government wasn't throwing public funds to the same executives that failed.

"He's being tarred as the architect of a strategy that didn't succeed," says Edmunds.com President Jeremy Anwyl.

Wagoner's ouster is more than just public relations, however. One of President Obama's Auto Task Force advisors, former United Steelworkers negotiator Ron Bloom, often used to push companies to change management if the USW was agreeing to make big concessions, notes Leo Gerard, the union's president and a close friend of Bloom. Says Gerard: "We always had the philosophy that the people who got a company into the mess won't get you out."

Errors: fat dividends, Fiat, Hummer

While GM moved methodically to address its legacy costs, Japanese rivals such as Toyota, Honda, and Nissan were blitzing consumers with new vehicles and marketing them hard. As a result, GM's market share on Wagoner's watch plummeted from the 28.1% it held in 2000 under retiring Chairman Jack Smith to less than 20% so far this year.

"He was incrementally moving the company forward," says Anwyl. "He just ran out of time."

Wagoner made other big mistakes. GM was paying $1 billion a year in shareholder dividends until 2006, even as the company needed to borrow $14 billion to shore up its pension fund and cut new-product spending. Wagoner also got GM into a deal with Italy's Fiat Auto that ultimately cost $4.5 billion. While he was chief operating officer, GM bought Hummer, which now needs to be divested.

The Obama Administration Obama will turn GM over to Wagoner's groomed successor, GM COO Frederick A. "Fritz" Henderson, who will be CEO, and GM board member and former Northrop Grumman CEO Kent Kresa, who becomes interim chairman.

GM will be rocked hard. Wagoner is out just as Vice-Chairman Bob Lutz is set to retire at the end of April, when he becomes an adviser. Both leaders were liked and their departures will usher in an era with new management, deep cuts, and strong government oversight. However GM emerges from this crisis, it will be a very different company.

Welch is BusinessWeek's Detroit bureau chief.

David_welch
Welch is a reporter for Bloomberg News and Bloomberg Businessweek in Detroit.

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