GM: Live Green or Die

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Three years ago, Toyota was the main threat. Now GM faces competition from Nissan, which announced its own electric car on May 13, and a bunch of startups, some backed by Silicon Valley money, angling to sell their own futuristic vehicles.

Does GM's CEO regret not moving faster? You bet he does. Wagoner wishes he hadn't killed the EV1. And he acknowledges underestimating how the emergence of consumer societies in China and India would help put a $100 floor under oil prices. Today all of that is beside the point. The looming question is whether Wagoner can keep his promises. "It's the biggest challenge we've seen since the start of the industry," he says. "It affects everything we think about."

"START MAKING SOME CALLS"

Rick Wagoner is not a visionary. Like many Detroit execs he's a finance guy and inherently cautious. But in 2005 rising fuel prices began hammering sales of SUVs, long GM's main source of profits. That year, GM lost $11 billion, and board members began signaling that it was O.K. to make long-shot bets to get GM out of the ditch. Lead directors George Fisher and Kent Kresa told Wagoner that, having worked at Motorola (MOT) and Northrop Grumman (NOC), respectively, they understood that new technology can take time to pay off.

That summer, Wagoner began asking his team for options. "We talk about being a technology leader," one executive recalls him saying at a strategy meeting. "But these days technology means fuel economy." Just about every fuel saver was put on the table, from ethanol, clean diesels, and hybrids to electric cars and fuel cells that run on hydrogen and emit only water vapor. With no consensus, recalls GM-North American President Troy A. Clarke, Wagoner stood up and said: "We may not get the calls right. But we have to start making some calls."

In January, 2006, Lutz began pushing the electric car harder. The 75-year-old industry veteran is an unlikely champion for such vehicles. He owns a collection of classic cars, and his fetish for horsepower is legendary in Detroit's macho Car Guy culture. He has denied the existence of global warming—so often, in fact, that Wagoner distanced himself from Lutz's comments. But Lutz is a pragmatist who believes the electrification of the car is the only way to preserve American car culture. "We were agonizing over what to do to counter the tidal wave of positive PR for Toyota," Lutz says. That month, GM came up with the Volt.

No one knew if something resembling supersize cell-phone batteries would work in a car. And GM executives confess the Volt was originally conceived as an image play (its original name: the iCar). But then Hurricane Katrina sent oil prices soaring. For Wagoner, it was a sign of how volatile the oil markets were becoming and a harbinger. Even the much maligned energy policy of the Bush Administration was changing: In his State of the Union address, the President urged Congress to impose tougher fuel economy rules. By January of this year, the Volt had become the centerpiece of GM's green strategy. Douglas Drauch, who runs GM's advanced battery lab, was surprised to learn that management had moved up the time line. His team had only three years to get the batteries ready. "For five years, I came in and played with batteries," Drauch says. "[Now] we're the ones with bull's-eyes painted on the backs of our heads."

Wagoner finds himself on unfamiliar terrain: looking beyond return on investment and placing bets on expensive, unproven technologies. But there is no avoiding the future barreling toward him. On Feb. 4, Wagoner and his team presented to the board a plan that would allow GM to meet the tough new fuel standards. Thomas G. Stephens, chief of power train development, warned directors to expect big costs over the next decade as the company invests in the Volt and all those new hybrids—as much as $6,000 per vehicle to get GM's biggest gas hogs to comply with the new federal rules.