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The White House task force in charge of salvaging the carmaker is using a heavy hand. Is it hurting or helping?
The Obama Administration has "no desire to run an auto company on a day-to-day basis," says White House spokesman Robert Gibbs. If so, somebody forgot to tell the team of Treasury Dept. staffers and management consultants now camped out at the Detroit Renaissance Center, a hotel and office complex anchored by General Motors' (GM) headquarters. There, GM executives are mapping out a survival strategy ahead of a government-imposed June 1 deadline to squeeze concessions from bondholders and the United Auto Workers union or face bankruptcy.
Make no mistake: The White House and the task force overseeing the restructuring of both GM and Chrysler since February are calling the shots. The latest GM plan unveiled on Apr. 21 to slash more jobs and dealerships, shut down the Pontiac brand, and swap up to $27 billion in unsecured debt from bondholders for equity has heavy government input.
Treasury has a couple dozen staffers and executives from Boston Consulting Group (BCG) scrutinizing operational details at the car company. (BCG is getting paid $7 million from the government for its work on both GM and Chrysler.) Auto task force leaders Steven Rattner and Ron Bloom, both seasoned investment bankers, talk to GM CEO Frederick A. "Fritz" Henderson almost daily, weighing in heavily on big financial decisions. Elsewhere in the company, GM managers say they are encountering all manner of suggestions from the government. Henderson, who disputes the idea that the government is micromanaging, does liken Washington's role to that of a "private equity player" with ultimate veto power over its investment.
GM can't complain too loudly. After all, it has received $15.4 billion in government loans and needs much more to survive. Plus, without government pressure, GM likely would not have made some critical restructuring moves. In fact, GM is about to embark on a crash diet that will leave it a much diminished though more focused company, whose dominant shareholders could ultimately be the government (50%) and the United Auto Workers (39%).
Some GM insiders fret that Treasury's key players have precious little industry experience. On the flip side, they do bring a new perspective. Car czar Rattner is co-founder of the Quadrangle Group and has gained unwelcome attention of late for his alleged connection to a scandal involving a New York State retirement fund. Rattner's No. 2, former United Steelworkers negotiator Bloom, has restructured plenty of companies but not carmakers. The lone exception at the top is Xavier Mosquet, head of BCG's Detroit office and an auto industry consulting veteran.
Rattner and Bloom, both financial pros, have spent the past two months flying to and from Detroit. They worked closely with Henderson in crafting a plan in which GM will ask bondholders to swap $27 billion for a 10% equity stake, which works out to payment of about 5 cents for every dollar of debt. If bondholders don't agree, GM says it will file for bankruptcy, and these creditors may get less. Henderson says approval by Treasury officials wasn't required for this plan, but adds: "We had to make sure they were comfortable."
Other advice has been less welcome. During the week of Apr. 13, about a dozen Treasury staffers and outside consultants arrived at GM's sprawling technical center north of Detroit. They reviewed the company's lineup of brands. At that point, GM had announced plans to phase out three weak brands—Hummer, Saab, and Saturn—out of a total of eight.
BCG pushed GM to go further and dump Buick and GMC, even though both make money and get much better pricing than mainstream brand Chevrolet. One source close to the review said the consultants took a view that since Toyota (TM) sells just two brands—its namesake line and the top-shelf Lexus cars—why couldn't GM just sell Chevy and Cadillac? "They wanted to know if we have a robust plan for each one," says Mark LaNeve, GM's vice-president for North American sales and marketing.
GM pushed back saying that Buick and GMC not only make money but also bring in different buyers than Chevy or Cadillac. Plus, Buick will get three new sedans—two of which are sold in China—and could boost profits by garnering more global sales volume. The BCG team didn't demand that the brands be killed, but sources say the review was intense and GM executives felt pressured by the government's hired guns. By the third week of April, GM had satisfied the feds that its four core brands—that is, Buick, Cadillac, Chevrolet, and GMC—had value. But Henderson decided GM couldn't keep Pontiac with its weak sales outlook.
GM managers were caught off guard by other questions from the task force. One issue was when the Chevrolet Volt electric car, a product designed to leapfrog the current field of hybrid-electric cars, came under scrutiny. "They couldn't imagine why we were spending the time and money to do the Volt," says one senior GM product developer.
Another example: One Treasury official asked when the new Chevy Malibu sedan goes on sale. It has been in showrooms for 18 months.
Inside GM, executives have little choice but to adapt. "It's an indictment of our management that they're here," says one designer. But this bizarre alliance is probably GM's best hope for survival.
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