Crash Course

by Paul Ingrassia

  In December, back in Detroit, Wagoner made another big move: the stunning announcement that GM would close its 103-year-old Oldsmobile division, one of the original building blocks of the company. The move was long overdue because Olds sales had plunged nearly 75 percent in the preceding fifteen years, but GM watchers were impressed, and rightfully so. Wagoner was tackling Olds-mobile’s decline head-on instead of just ducking it, as GM had done for years.

  He soon pulled off a surprise coup by reaching outside GM to hire John Devine, the former chief financial officer of Ford, as GM’s new CFO. The move shocked GM’s finance staff veterans, who regarded themselves as the company’s elite, but it delighted Wall Street, where respect for Devine was high. Even more dramatic, in August 2001 Wagoner lured sixty-nine-year-old Bob Lutz, whose vehicles had so dramatically revived Chrysler in the mid-1990s, to become GM’s product czar.

  After the 9/11 terrorist attacks, Wagoner made yet another daring move with ramifications far beyond the auto industry. While Ford was cutting production in anticipation of a sales slump, Wagoner acted to spur car sales by offering interest-free financing on every car and truck in GM’s lineup. The program, called “Keep America Rolling,” sent Americans pouring into GM showrooms to buy cars, thus keeping GM’s factories running and keeping money flowing to parts suppliers, dealerships, ad agencies, and virtually every corner of the economy.

  The gambit proved successful and made Wagoner a symbol of America’s determination not to shrink in the face of adversity. GM executives began sporting lapel buttons that read “29,” symbolizing their determination to keep 29 percent of the U.S. car market. All the moves reflected a corporate self-improvement program that Wagoner called “Go Fast,” to speed up decision making at the notoriously sluggish company. And in the eyes of the business press, it seemed to be working.

  A Forbes headline declared “Time to Praise GM.” Fortune wrote that despite being slow to launch new trucks, GM was scoring big with the Chevy Avalanche, which converted from a pickup to an SUV like an adult Transformer toy, and the Cadillac Escalade EXT (as in Extreme), a $50,000 SUV on steroids that attracted professional athletes just as, well, real steroids were doing. “Expected to operate as a play-it-safe leader,” Fortune stated, “Wagoner instead is making GM move faster and do better.”

  The praise seemed eminently justified. But one can always tell skill from luck by its duration. And behind the scenes, developments were occurring that would undermine the duration of GM’s apparent gains.

  In mid-2001 an internal “deep dive” analysis at GM concluded the company had far too many U.S. brands, too many dealers, too many factories, and too many workers, all of which added huge layers of unnecessary costs. The report recommended taking action, while times were good, to cut the excess baggage in every one of those categories. But when the recommendations were presented to Wagoner, he waved them off.

  The decision to close Oldsmobile was proving unexpectedly difficult for GM, because America’s car dealers command considerable political clout. There are dealers in virtually every state legislative district in the country, and they contribute generously to candidates from both parties. Over the years the dealers had parlayed their power to get stringent state franchise protection laws. Any car company that wanted to drop a brand had to compensate dealers, who had considerable leverage in negotiating a settlement because of the franchise laws.

  As a consequence, the cost of killing Oldsmobile was running past $1 billion. The stories of aggrieved dealers were hitting Wagoner emotionally, because of Oldsmobile’s long heritage at GM. The result: the pain of closing Oldsmobile doused discussion of eliminating more GM brands, just as the 1998 Flint strike had made talk of confronting the UAW strictly off-limits. Wagoner’s “Go Fast” was becoming, in effect, “Don’t Rock the Boat.”

  After only a year as CEO, Wagoner was moving to a more deliberate and cautious approach to solving GM’s fundamental structural problems. Instead of broaching sensitive issues with the UAW, GM would use attrition and retirements to trim its hourly workforce over several years. And instead of closing more brands outright, GM would slowly consolidate three of them—Pontiac, Buick, and GMC truck—into a multibrand franchise that dealers would sell under one roof.

  It seemed a play-it-safe strategy designed to minimize the threat of strikes by angry unionists and lawsuits by aggrieved dealers. But by rejecting decisive action, Wagoner was betting that GM could rely on steadily growing profits to meet its cash-flow obligations for years. And to produce the profits, he placed some risky bets—one of which had nothing to do with cars.

  Between 2002 and 2006 America was enjoying the greatest housing boom in history. GM’s financial arm, GMAC, was betting big on what looked like a golden opportunity: augmenting its core business of financing GM dealers and car buyers by expanding its lending for home mortgages. The strategy was producing spectacular financial results.

  In 2002 GMAC proposed moving into commercial lending as well. In the boardroom discussion, one director objected, saying that further growth in mortgage lending would be a better bet, because at least GMAC had expertise there. The director was Stan O’Neal of Merrill Lynch, who a few years later would approve Merrill’s own entry into the mortgage business. Before the decade was out, mortgages would blow up on both Merrill and GMAC, and on many other financial firms. O’Neal would be axed, and Merrill Lynch, a company as symbolic of America as General Motors itself, would be sold.

  Meanwhile, Wagoner’s second big bet was that profits from gas-hungry SUVs and pickup trucks would continue. That bet assumed that gasoline would stay priced where it was in 2003 and 2004—around $1 a gallon, even less in some states. Wagoner’s manaña strategy, in effect, was a big bet on continued cheap oil.

  By coincidence, in June 2004, National Geographic magazine carried a cover story titled “The End of Cheap Oil.” One GM executive showed the story to Wagoner and suggested GM might be relying too heavily on trucks and SUVs. Wagoner retorted that the same faulty thinking had made GM the last company in Detroit to cash in big on the truck boom, and he wasn’t about to repeat that mistake. As usual, GM was slow to sense where the market was heading. Wagoner wasn’t about to hedge his bet on gas prices staying low.

  In the fall of 2003, meanwhile, Chrysler’s “butts in seats” marketing strategy gave way to a new sign of desperation: locker-room humor. One television commercial for the new and longer Dodge Durango SUV showed two men using side-by-side urinals and talking about their, um, vehicles.

  “It’s seven inches longer; my girlfriend loves it,” said one man to his friend. “You should drop by tomorrow; I’m going to wax it.” Another commercial showed a woman in sexy lingerie discovering that she had a Dodge Ram tattoo on her cheek. Yeah, that cheek. The commercials grabbed more attention than Chrysler’s cars. The first new vehicle launched since the merger, an SUV crossover called the Chrysler Pacifica, was proving to be an overweight and underpowered flop.

  Chrysler lost nearly $550 million in 2003, causing overall earnings for DaimlerChrysler to plunge 91 percent. In April 2004 Jürgen Schrempp sounded a brave note at the company’s annual meeting in Stuttgart. “When the going gets tough,” he told his restive shareholders, “running away or changing a winning strategy isn’t the right course of action.” Germany had its own particular brand of executive hubris.

  By the summer of 2004, however, Schrempp’s perseverance appeared to pay off. Dieter Zetsche, after parachuting into Auburn Hills three and a half years earlier, had slashed costs, sacked veteran Chrysler executives, and revamped the entire product plan. Dodge belatedly launched a new minivan with a fold-flat third-row seat, just like the Honda Odyssey, but the surprise hit was the new Chrysler 300C. It was a rear-wheel-drive sedan, with a mawlike front grille, that could be bought with a special engine: a 340-horsepower V8 Hemi (the term referred to the hemispherical cylinder heads).

  Car and Driver and the other automotive-enthusiast magazines lavished praise on the 300C, even th
ough it got only fifteen miles a gallon—not much more than some of Chrysler’s SUVs. Zetsche, like Wagoner, was doubling down his bet that cheap gas would continue, but at least ailing Chrysler finally had a hit on its hands. In September 2004 the 300C alone outsold every Cadillac model combined.

  In Maine, Gene Benner finally started to think that “things were getting on the right track” at DaimlerChrysler, as he put it. Like other dealers, his major interest was in getting a steady stream of good products to sell, and the disarray of the merger’s early years had been a big disappointment. But his dealership had held its head above water. And if the 300C was a portent of more new cars to come, Benner thought, maybe the merger’s early promise finally would be fulfilled.

  After billions in losses between 2001 and 2003, Chrysler was starting to make money again. Its earnings jumped 48 percent in the third quarter of 2004 and more than doubled in the fourth. That should have made Schrempp a happy man. But Chrysler’s revival was relative; the American subsidiary still was producing less than one-third of the annual profits that Daimler had projected before the merger.

  Worse yet, just as Chrysler was showing signs of life, the flagship Mercedes division took a tumble. In 2003 and 2004 Consumer Reports removed all Mercedes-Benz models from its recommended list because of quality glitches. Earnings at the Mercedes division tanked too, partly because management was fixated on fixing Chrysler. The press began asking whether Schrempp, whose contract lasted until 2008, might be fired and replaced by Zetsche.

  In Dearborn, at the same time, Bill Ford was learning that it isn’t always good to be king. Ford Motor regained profitability in 2003, albeit barely. Late that year Standard & Poor’s downgraded Ford’s debt to triple-B-minus, just one notch above junk-bond status. The CEO sent an e-mail to employees, saying the move “does not accurately reflect the state of our business.” His message seemed to be borne out when the company earned $3.5 billion in 2004, but that was still less than half of what Ford had earned in 1999. Ford wasn’t making much money for a company of its size, and it was spending nearly $3,700 on buyer discounts for every vehicle it sold.

  Hefty as it was, that amount actually looked good compared to General Motors, where rebates and discounts were averaging a staggering $4,500 on every car and truck. The company was continuing to lose market share despite the best efforts of Bob Lutz, who was finding it difficult to focus his efforts and resources in a company that, even after killing Oldsmobile, now had eight brands: Chevrolet, Pontiac, Buick, Cadillac, GMC, Saturn, Saab, and the latest addition, Hummer. The new Pontiac GTO, a reborn version of the iconic 1960s muscle car, wrapped a hot engine inside a body that resembled an insurance adjuster’s fleet car. The decision to stick with plain-vanilla styling was a classic GM cost-cutting move, but it backfired when the car flopped.

  Reducing rebates was simply out of the question, however, because it would mean selling fewer cars, and General Motors needed every sale it could get. By 2003 the company had more than 460,000 retirees and spouses, who outnumbered active employees by nearly three to one. All were collecting pension and healthcare benefits, and UAW members—active workers and retirees alike—still didn’t have to pay annoying deductibles or co-payments for doctor visits.

  General Motors had to keep the factories running just to pay for this crushing burden. But the company wasn’t yet desperate enough to seek better terms from the union, even though the ever-combative Yokich had retired. He had been succeeded, in 2002, by fifty-eight-year-old Ron Gettelfinger, a short, wiry man with a modest mustache who didn’t drink, had quit smoking, and only rarely cursed—qualities befitting the younger brother of the Most Reverend Gerald Gettelfinger, the Roman Catholic bishop of Evansville, Indiana.

  Ron Gettelfinger had started at Ford’s factory in Louisville, Kentucky, in 1964, earned a degree from Indiana University while working, and climbed through the union’s ranks. No gregarious glad-hander, Gettelfinger owed his ascent to mastering the details of contracts and the art of negotiation. After becoming UAW president, he banned the regular Friday afternoon golf outings between union officials and their management counterparts because the coziness offended his sense of propriety. “I don’t like saber rattling,” he once told The New York Times, “but if people think that cooperation means capitulation, they’ll be in for a surprise.” In his own way, Gettelfinger was wedded to UAW dogma.

  Facing this landscape, in 2003 GM launched a massive sale of thirty-year bonds to fund its retiree obligations by spreading out the repayment period. It was much like a homeowner refinancing mounting credit card debt with a new thirty-year mortgage. GM put a rich yield on the bonds, and investors proved so eager to buy them that GM sold $17.6 billion worth, far above its original $13 billion goal. It was one of the largest corporate bond sales in history, and enough for GM to fully fund its pension obligations—at least for the moment.

  About the only people on Wall Street who weren’t impressed were the debt analysts at Standard & Poor’s. They figured, correctly, that GM was just substituting one kind of financial obligation for another. To them GM, like Ford, was edging closer to junk-bond status.

  GM earned $6.50 a share in 2004—which would prove to be the company’s last profitable year. Nearly seventy cents of every dollar came from GMAC, which was writing home mortgages more profitably than the parent company was selling cars. Wagoner nonetheless called the results “solid” and added: “We strongly believe the auto business is a growth business.” Like many at GM, Wagoner had talked himself into believing that he and the company were on the right track.

  There actually was growth in the U.S. car business, but it was coming from the import brands instead of the Big Three. Toyota surprised everyone, including the other Japanese car companies, with the amazing success of its gas-electric hybrid, the Prius. The Prius’s breakthrough engine used only electricity at speeds below thirty miles an hour, and then switched to a tiny gasoline engine at higher speeds. The result was fuel economy upward of forty miles a gallon in city driving, which was unheard-of in a car big enough for a family. Even though Toyota made plenty of gas-guzzling SUVs too, the Prius gave the company’s reputation a shiny green glow.

  By the end of 2004 the import brands had grabbed more than 41 percent of the U.S. market, an incredible increase of nearly 10 percent in just five years. The losers were GM, Ford, and Chrysler, whose collective market share had fallen below 60 percent. Just a few years earlier the Japanese had seemed stalled out in the United States, but no more. They were on a renewed winning streak led by their own Big Three—Toyota, Honda, and an amazingly resurgent Nissan.

  TEN

  THE HURRICANE THAT HIT DETROIT

  When 2005 began, Detroit’s car companies remained America’s Big Three, clinging tenuously to the position they had held in their home market for eighty years. But Toyota was closing the market-share gap on Chrysler, which remained barely ahead, 14 percent to 12. Detroit’s dominance was about to disappear like taillights in the haze of a humid summer night, perhaps the taillights of the new Nissan 350Z. The speedy, sexy “Z-car” was a reborn version of the sleek Japanese roadster that had first appeared in the fall of 1969. Nissan had abandoned the car, however, in the late 1990s as the company teetered on the brink of bankruptcy.

  In its nadir year of 1999, Nissan had sought salvation in desperation. After DaimlerChrysler backed away from a deal, Renault had swooped in to buy 37 percent of Nissan. The French company then had installed Carlos Ghosn (it rhymes with cone), whose nickname inside Renault was “le cost killer,” at the helm of Nissan. Like Jac Nasser, the forty-five-year-old Ghosn was an ethnic Lebanese; he had been born in Brazil, was a French citizen, and spoke four languages, though none of them was Japanese.

  Nonetheless, he arrived in Tokyo like a man on a mission, quickly closing five factories and axing 15 percent of Nissan’s workforce in a country where lifetime employment was about as sacred as the emperor. He also set about revamping Nissan’s bland-as-bread product lineup with the
hot 350Z and other stylish new models.

  The year after Ghosn’s arrival Nissan stunned the business world by surging back into the black with profits of $1.6 billion for the first half of its fiscal year, its best financial performance in a decade. Within a couple more years the company wiped out its crushing $20 billion debt load, defeated a UAW effort to organize its factory in Tennessee, and reintroduced the Z-car. It also started building a second U.S. assembly plant.

  This remarkable turnaround happened because Carlos Ghosn had embraced just the sort of take-no-prisoners approach that might have helped, say, General Motors—except that GM was mired in battles that Nissan didn’t have to fight. In the spring of 2005, for example, GM tried to ban smoking on its assembly lines, as was done in the Japanese and German “transplants.”

  Assembly line smoking was bad for all sorts of reasons. It pushed up GM’s health insurance costs, and it caused the occasional cigarette butt to be flicked onto the seat of a new car. But the UAW, some of whose members lived in a different reality, mounted a spirited defense of the “right” of its members to smoke on the job. Yet again General Motors backed down. In the rights-versus-responsibilities balance, the union often stood for the right to be irresponsible, and the company accepted the ridiculous.

  Rick Wagoner had opted for measured methods to resolve GM’s issues, including the mounting cost burden of its retirees. The company’s actuarial tables showed that its ranks of retirees, with their pensions and healthcare bills, would start shrinking in 2008, when time and the grim reaper would take their toll on people who had retired decades earlier, in the company’s peak-employment years. Meanwhile the $17.6 billion of bonds that GM had sold in 2003 would provide bridge financing.