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Wagoner's Fighting Chance


Maybe it's time to give G. Richard Wagoner Jr. his due. Just a few months ago, the beleaguered chairman and CEO of General Motors Corp. (GM) was battling a direct assault from shareholder Kirk Kerkorian and fending off speculation that his company was headed for inevitable bankruptcy. Now, Wagoner has won the first couple of rounds against Kerkorian, who isn't going away but has abandoned efforts to unite GM with Renault-Nissan and reduced his stake in the company. And on the strength of improved financials, the bankruptcy chatter has become almost inaudible.

For better or worse, GM is in Wagoner's hands right now. He'll be the person masterminding the next stage of the company's rescue plan--not Renault-Nissan CEO Carlos Ghosn, Kerkorian adviser Jerome B. York, or any other outside savant with strong opinions about GM's problems. Wagoner has already taken a big first step, cutting $9 billion in costs. But in an interview with BusinessWeek he revealed that he is going to have to make cuts of that magnitude again over the next few years. "I don't think you can say the business is fixed, particularly in North America," said Wagoner in an interview in his office overlooking the Detroit River. "We have a lot more work to do."

Wagoner acknowledges that the first- round of cost reductions was a lot easier than the next one is going to be. He will be seeking savings primarily in two places: from labor concessions and a long-overdue makeover of the company's byzantine automobile design process. Next July, GM negotiators will sit down with representatives from the United Auto Workers to hammer out a new four-year deal that will be one of the most important labor pacts in the company's history. GM will be targeting health-care costs and the controversial JOBS bank, a program that pays laid-off workers nearly their full wages.

Just as important, Vice-Chairman Robert A. Lutz is going to simplify the way GM designs cars. Each region of the world, for the first time, will take responsibility for the engineering of particular models for the global market. The U.S., for instance, will focus on sports cars, SUVs, and pickups. Europe will handle midsize cars. The hope is to end years of redundant engineering and save the company billions.

These initiatives are critical because, despite the recent improvement in performance, GM is still just treading water. It's reporting a profit of about $1.9 billion through the third quarter of 2006, after taking into account about $5.7 billion in restructuring charges and other one-time costs. But that was padded by about $900 million from asset sales, tax windfalls, and other one-off boosts. Wagoner & Co. "have been very aggressive in selling their accomplishments," says John Casesa of auto industry analyst Casesa Shapiro Group. "But that contrasts with very weak financial performance."

WALKING THE TIGHTROPE

What Wagoner has achieved so far is not a turnaround. Think of it as a reprieve. Vice-Chairman and CFO Frederick A. Henderson says this year's restructuring has gotten GM only "a little more than halfway" toward Wagoner's stated target of dropping structural costs from 34% of revenue to 25%. If Wagoner hits that target, the company would still have higher expenses than Japan's top carmakers. But GM would be profitable, says Sean McAlinden, chief economist at the Center for Automotive Research (CAR) in Ann Arbor, Mich., and a frequent company critic. He forecasts that the company will be viable, but that it will inevitably surrender the title of world's No. 1 car manufacturer to Toyota. "They have a pretty good plan," McAlinden says. "But they have to keep shrinking."

Retrenchment will be high on Wagoner's agenda next year when GM commences negotiations with the UAW. His representatives plan to go after some long-standing union benefits that workers in other industries, like steel and airlines, were forced to give up years ago. Given Detroit's struggles, the union will have to make concessions. But don't expect GM to make 70 years of ?lavish giveaways suddenly vanish. Wagoner will have to walk the tightrope of cutting labor and retiree costs as far as he can while still leaving UAW President Ron Gettelfinger with a deal he can sell to his members.

Consider the issue of bloated health-care costs, often held up as an emblem of GM's dysfunction. On average, active union hands in industries across the U.S. pay about $3,000 a year toward medical coverage, says CAR's McAlinden. Retirees pay even more. If the 83,000 active GM union workers, who now fork over only a nominal co-payment for their coverage, shelled out what the average U.S. union worker pays, GM could save $250 million a year. If the 450,000 retirees paid that much, GM would save a further $1 billion.

Sounds like a reasonable goal for a company just off deathwatch, but don't bet on such drastic changes. Since the UAW agreed to cut 35,000 GM jobs and a dozen plants, some members feel they have given enough. And that's not the only obstacle. In a hard-won concession, the UAW also agreed that retirees would pay up to $750 a year for health care. Afterwards, some union retirees sued, claiming that their benefits were guaranteed. The courts disagreed--but froze retiree benefits at the current level until 2011. It's possible to modify this deal, but only with judicial consent. "I don't think the problem with health care was created over the past two years," says Wagoner. "We don't expect it to be fixed over two years."

Look for Wagoner to try alternative strategies to cut costs. One idea: funneling the company's retirees into a smaller number of health-care plans without changing their individual contributions, saving millions on larger volume rates from the insurance carriers. Similarly, the company will probably try to cut the cost of the JOBS bank without killing it. GM and the other automakers could negotiate a deal that gives half wages instead of nearly full pay. They could also cut mandatory cost-of-living increases, which cost GM nearly $300 million this year.

The changes that GM is making to the way it designs cars won't get as much attention as the labor talks, but they may be more profound over time. For too long, Wagoner says, GM has made several models that chase similar buyers. While Toyota Motor Corp. (TM) goes to market the world over with one Camry, GM has a handful of rival sedans built with different parts in widely scattered factories. Says Lutz: "We're just doing what Honda and Toyota have been doing."

One implication of this new setup is that different regions will design different vehicles. Brazil will develop small trucks, GM's Daewoo in South Korea will engineer subcompacts, while Australians will take the lead in rear-drive cars. The vehicles will be styled and branded differently, but most of the insides will be identical.

This move reflects Wagoner's recognition that some of GM's best minds work overseas. In Europe, he notes, passenger cars are the heart of the market. In contrast, American engineers regard them as econoboxes. "It gets to societal issues," he says. "Europe had a [high] gas tax before it was an issue in the U.S. Our best ability to do small and midsize cars is in Europe and Asia."

The makeover also stems from GM's need to fashion more new models with less cash. Even though Wagoner has upped product spending, he gets outspent by many rivals. GM's capital expenditures and research and development spending equal 9.2% of its revenue, according to Merrill Lynch & Co. (MER) Toyota spends 12.1% of its revenue on new cars, plants, and R&D, Nissan spends almost 11%, and Honda Motor Co. (HMC) 10%. GM's passenger car business may be the best example of how the company plans to get more from less. Take Saturn. The brand was starved of new cars for years. But by 2009 it will have three cars from Opel, which it will rebadge as Saturns.

Sharing models in this way can save billions. Wagoner says that bringing overseas models to the U.S. slashes 50% to 75% of the development costs of a new model. Since each new vehicle costs about $500 million, GM can cut up to $1 billion out of its Saturn budget and give the brand a full line to sell. "It's very powerful," boasts Wagoner. He is, of course, in no position to declare victory. GM is burning cash, the union won't cave easily, and with Kerkorian still in the background, Wagoner's plan must deliver results. Or he may find his new lease on life short-lived.

By David Welch


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