Businessweek Archives

Crisis At Gm


Cover Story

CRISIS AT GM

As passings-of-the-torch go, it was messy. Chairman Robert C. Stempel, a deliberative engineer who is likely to be the last of General Motors Corp.'s old guard to lead the auto giant, resigned early on Oct. 26 under pressure from the company's outside directors, who wanted him to move faster to mend the ailing company. For a few days, Stempel had tried vainly to quell speculation leaking from board sources that his job was in jeopardy. But as rumors and uncertainty paralyzed GM, Stempel tendered his resignation--to "end the chaos," he said.

If that was the goal, it didn't work. For a riveting moment after Stempel's resignation, GM's myriad problems stood more starkly revealed than ever before. Although Stempel agreed to stay on until a replacement could be named, in reality, the world's largest industrial company was leaderless, its board in revolt, its management in disarray. It was as if, suddenly, years of disastrous results, market-share losses, misguided investments, and false starts at renewal could no longer be papered over by management denial. After a first move last April, when it replaced Stempel's hand-picked No. 2, GM's board had taken the ultimate step by forcing the chieftain himself out of office. And the message was finally clear to even the most irrepressible Pollyannas: GM's troubles run so deep that it must recreate itself or tear its management apart in the effort.

Both Chrysler Corp. and Ford Motor Co. reached similar moments of truth in the early 1980s. Chrysler flirted with bankruptcy and needed a government bailout, and Ford had to bring in quality guru W. Edwards Deming to help it revamp itself from top to bottom. Both companies, after missteps, managed to find the strength and resourcefulness to turn themselves around. They did it so well that GM's crosstown rivals have been gaining market share from Japanese carmakers all year--in sharp contrast with GM. Indeed, while the parallels are inexact, GM can take heart from Chrysler's comeback (page 88): As recently as a year-and-a-half ago, it seemed as badly crippled as GM does today.

Now, as GM's new management team takes form behind the scenes, the question is whether it can find the gumption to do what Chrysler did. The driving force behind Stempel's ouster is John G. Smale, 65, the former chairman of Procter & Gamble Co. who heads GM's executive committee. He is widely expected to step in as temporary chairman, perhaps at GM's Nov. 2 board meeting in New York. Even if another executive takes the chairman's slot, the cool, aloof Smale will play a key role in setting GM's tone for the next few years.

It will be anything but a cozy place to work. Almost immediately, Smale promised to announce "our management changes as soon as possible," a message many GMers translated as: More heads will roll. Former President Lloyd Reuss and Executive Vice-President F. Alan Smith are widely believed to be headed for the door.

`STRAIGHT SHOOTER.' More than anything, though, Stempel's exit strengthens the mandate of GM's hard-charging new president, John F. "Jack" Smith Jr., 54. The board promoted Smith last spring to accelerate GM's restructuring. Now, many GM watchers expect him to be named chief executive, although the board may yet choose someone else from inside or outside GM. In the turmoil following Stempel's resignation, all eyes were on Smith as the key figure holding things together. Stephen P. Yokich, the United Auto Workers' fiery top GM liaison, growls about Smale: "I don't know him, and I don't have the slightest idea what he'll do." But he adds that he considers Smith "a straight shooter" whom the union can work with. Adds a top auto analyst: "If Jack Smith quit, GM's stock would go to zero. He's the only one at GM who has credibility with Wall Street."

Smith has already moved fast to address some of GM's worst problems. He has cut white-collar payrolls, frozen salaries, reduced health-care benefits, and put some noncore businesses up for sale. Meanwhile, a top Smith lieutenant, purchasing czar J. Ignacio Lopez de Arriortua, has been squeezing suppliers for price cuts to hack away at GM's bloated costs. While major suppliers are resisting Lopez' demands, some analysts say the measures are boosting GM's bottom line. Despite still-sluggish auto sales, analysts expect GM to pare the losses in its North American auto operation from an astonishing $7 billion last year to about $4 billion this year. Overall, GM is expected to lose about $900 million this year, vs. $4.5 billion last year. Still, those results are hardly rosy, and financial pressures on GM continue to mount. For instance, lower investment returns will force GM to increase its unfunded pension liabilities by as much as $1.9 billion this year, to a total of some $10 billion. Analysts say GM may have to cut its dividend to conserve cash. Meanwhile, rating agencies are threatening to downgrade the company's debt if it doesn't improve fast.

Worst of all, the cash crunch is draining money badly needed to revamp GM's cars and trucks. Chevrolet, GM's biggest division, has been losing market share as it struggles to sell an aging lineup that includes such weak models as the Caprice and the fast-slipping Cavalier, which hasn't been revamped in 11 years. Oldsmobile is also in decline. Longer term, divisions such as Olds hope to gain by modeling themselves after Saturn Corp., GM's successful small-car unit. Meanwhile, Saturn needs $1 billion for more plant capacity.

A REAL DENT. The upshot is that Smith must speed up his efforts now--or he may face the same board restiveness that Stempel did. His first task has to be to focus the distracted company back on its business. Turmoil of the kind raised by Stempel's ouster hurts, notes Chrysler Chairman Lee A. Iacocca. "It's not just gossip at the water cooler. Employees get despondent. It's a hell of a way to motivate."

After that, contends Kim S. Cameron, a University of Michigan professor who is studying GM's downsizing efforts, Smith must forge "a fundamental cultural change" in GM's middle-management ranks. Smith may not be going fast enough in breaking down the clubby GM traditions that allow nonperforming middle managers to go unaccountable, contends another consultant who works with GM: "He has not moved aside enough of the deadwood, the people who are resisting change." Analysts also believe that to make a real dent in GM's stultifying bureaucracy, Smith will eventually have to lay off twice the 20,000 white-collar employees that Stempel had planned to ax.

Stempel got in trouble for dawdling on such moves. The board's revolt was hatched by a core group of 4 or 5 of GM's 11 outside directors. They conferred often by telephone and dined together on the Sunday nights before GM's board meetings on the first Monday of the month, says a source close to the board. "That's where the palace-coup discussions took place," he says. As GM's troubles deepened, the outside directors concluded that Stempel was too reluctant to ax employees. He resisted board pressure to demote Reuss in April and wanted to thin white-collar ranks by attrition, buyouts, and early retirements.

The dissident directors are no strangers to management challenges and boardroom intrigues of their own. In addition to Smale, the source says the group includes J. Willard Marriott Jr., chairman of Marriott Corp., which is itself in the throes of its second major restructuring in two years, and former CBS Chairman Thomas H. Wyman, who was himself ignominiously forced out in a board coup. Also included is Dennis Weatherstone, the mild-mannered, British-born chairman of J.P. Morgan & Co., and Edmund T. Pratt Jr., former Pfizer Inc. chairman. None of the directors was willing to comment.

Smith's steepest challenge in trying to move GM into higher gear is the balancing act he must play with the UAW. He's known for being good at jawboning unions. For instance, in Europe, where he preceded incoming Chrysler Chairman Robert J. Eaton as president of GM's operation, Smith negotiated around-the-clock production in Spain and Belgium without provoking strikes. But this time, he must win the union's cooperation without angering GM directors by appearing to be too conciliatory.

The union worries that Smith will be forced by board pressure to cut deeper than the 54,000 blue-collar layoffs Stempel had planned. That's largely because Lopez' cost-cutting in GM's parts operation could well involve plenty of outsourcing to nonunion suppliers.

Smith has placated union leaders so far by agreeing to offset such lost jobs by trying to make more parts internally where possible. He's also trying to assuage the UAW's fear that a $4 billion jobs fund to pay laid-off workers may run out before GM's UAW contract is renegotiated next September. To help relieve pressure on the fund, Smith has agreed to try to negotiate an early-retirement plan for older workers.

Trouble is, Smith may not be able to keep both the UAW and Wall Street happy. Analysts are expecting big savings from Lopez' efforts, and more outsourcing may be the only way to cut costs fast. Yet outsourcing was one of the main reasons for the series of recent UAW flare-ups that probably hastened Stempel's departure. A strike and a threatened walkout were settled only when the company agreed to save union jobs by doing more work internally. Warns retired UAW President Douglas Fraser: "If they get tough, so does the union."

Avoiding labor unrest is crucial if GM is to address another of its telling weaknesses: inefficient manufacturing. Even though GM operates under the same UAW contract as Ford and Chrysler, it uses more workers per car (chart, page 84), driving its labor cost per vehicle up to $2,358, compared with just $1,872 for Chrysler and $1,563 for Ford, according to a recent study by consultants Harbour & Associates Inc. Smith badly needs union cooperation in instituting work teams and more efficient production processes to catch up.

In the meantime, one of the key imponderables at GM is the role that Smale will play. His experience could be helpful. A shy man who let his lieutenants shine when he ran Procter & Gamble, Smale restructured P&G to speed up product development. He also forced P&G to focus more on meeting customers' needs. Under Smale, the company formed sales teams to work more closely with retailers, a tactic GM could put to good use in working with its dealers. A recent survey of its members by the National Automobile Dealers Assn. found that of GM's seven divisions, only Saturn and Buick ranked above-average in listening to dealer input. Chevy was dead last.

Still, the responsibility for GM's turnaround will clearly fall on Smith's shoulders. And he knows he can't tarry. Notes Michael J. Mulvaney, an analyst at Moody's Investors Service Inc.: "Changing the name on the letterhead isn't the ultimate solution to GM's problems." If Jack Smith can't do the job, his name won't be on that letterhead for long, either.GM'S CHALLENGE

WHAT IT HAS TO FIX...

PRODUCTIVITY Because of inefficient manufacturing processes, its labor cost is

$2,358 per car, vs. $1,872 for Chrysler and $1,563 for Ford

BUREAUCRACY GM plans to cut 20,000 white-collar workers by the end of 1993, but

twice that many may eventually have to go

PRODUCT DEVELOPMENT GM needs to speed new-model introductions and prune weak

sellers

MARKETING It must invest in dealer training and adopt new selling techniques to

match its rivals

...AND TO BUILD ON

SATURN GM must cut losses and invest up to $1 billion to expand the compact-car

division's capacity

OVERSEAS MOMENTUM GM is the low-cost producer in Europe, where it will rack up

profits of about $2 billion this year

MANAGEMENT DEPTH It must hold on to strong second-tier managers through the

turmoil of reorganizing

NEW MODELS On top of a slew of new products over the last 18 months, GM is

revamping the Blazer and other potentially hot-selling vehicles

DATA: BW, HARBOUR & ASSOCIATES INC.

Kathleen Kerwin and James B. Treece in Detroit, with Zachary Schiller in Cleveland and bureau reports


The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus