Thus GM hoped to meet its retiree obligations—which the company called “legacy costs”—without cutting benefits and risking a damaging strike by the UAW, like the Flint strike of 1998. As for GM’s other “legacy” issues—too many brands and too many dealers—Wagoner would address them gradually too. He remained steadfast in refusing to relive the Oldsmobile experience by paying more billions to more dealers to eliminate more brands.
Gradualism had its own costs, however. The ranks of retirees might start dropping in 2008, but meanwhile their cost to GM was soaring. The company’s healthcare expenses rose by $1 billion in 2005 alone. The “legacy cost” burden wasn’t just a UAW issue. Retired GM executives didn’t have to choose between a 401(k) or a fixed-benefit pension plan: they had both.
As for excess brands, the math was sobering. At the end of 2004 General Motors had 27 percent of the market (down from 33 percent a decade earlier), but nearly half came from just one brand: Chevrolet. The other seven brands each had an average of just 2 percent of the market. This meant that GM’s product development and marketing dollars were spread thinly, like the troops of a fading empire that couldn’t keep enough garrisons to defend its territory. The practical result was that many Pontiacs and Chevys and Saturns tended to be close imitations of one another.
Within GM these cars were known as “look-shares.” Perhaps the most glaring example was the 2005 Saab 9–2X, which was basically a gussied-up version of the Subaru WRX, which GM could produce cheaply because it owned 20 percent of the Japanese company that made Subarus. But Saab’s entire brand image was built around being quirky and different—the car with the key in the floor beloved by Shakespeare scholars with tweed jackets and leather elbow patches. The Saab 9–2X quickly became derided as the “Saabaru,” part of a lineup of aging models and look-shares that were sending Saab sales into a tailspin.
Other GM brands were ailing too. Internal marketing surveys showed that many GM brands didn’t even make the “consideration list” of young shoppers. GM tried to lure them anyway by boosting rebates, on the theory that it could outspend Ford and Chrysler. But Chrysler and Ford didn’t back down, and Detroit’s costly rebate war escalated.
At least GMAC’s car lending wasn’t as lax as its mortgage lending. Some GM dealers in Southern California were taken aback when customers bristled at being asked to fill out a GMAC credit report for a car loan. They hadn’t needed a detailed credit report to get a mortgage from GMAC on their new home, they complained, so why should they need one for a new car? But mortgage lending, which by now was providing most of GM’s profits, was a ticking time bomb.
All this was occurring when the SUV profit bonanza—which had propped up GM, Ford, and Chrysler for a decade—was on the wane. The Japanese belatedly launched a salvo of attractive new SUVs, including the Honda Pilot, the Toyota Sequoia, and the funky Nissan Murano, which looked like it was descended from a moon buggy. By mid-decade Americans could choose from among nearly seventy different SUVs, more than double the number of a decade earlier. If, that is, they were inclined to buy an SUV.
A backlash was brewing against big SUVs, led by groups ranging from the Sierra Club to the Evangelical Environmental Network, a Christian group that launched an anti-SUV ad campaign that asked, “What would Jesus drive?” (Scripture, alas, isn’t explicit.) Detroit figured the backlash would fade, or at least that its effects would be uncertain. But the impact of rising gas prices was becoming clear.
In March 2005 crude oil hit a then-record price of $57 a share, and gasoline soared to an average of $2.11 a gallon, 21 percent higher than a year earlier. Little wonder, then, that sales of full-size SUVs plunged 19 percent in the preceding two months.
Nonetheless GM’s single biggest new-product initiative that year was a new line of full-size SUVs that would be launched early in 2006. Wagoner maintained that SUV sales were just suffering a temporary dip, and that GM would make up for any overall decline by increasing its market share. He had bet on continued strong sales of SUVs, and it was too late to turn back. Fifty years earlier one of Wagoner’s predecessors as CEO had declared: “General Motors must always lead.” As 2005 unfolded, General Motors would indeed lead Detroit’s car companies—to the brink of the abyss.
The year’s first maelstrom hit where Wagoner had held his CEO coming-out party five years earlier: Italy. In early 2005 Fiat was staggering under $10 billion in debt and more than $3 billion in losses over the previous three years. The company brought in a new CEO, Sergio Marchionne, an attorney by training and a hard-nosed negotiator by nature. He was a hyperactive blue-collar sort of CEO who chain-smoked and never wore suits—though he carried multiple BlackBerries and an iPhone and drove a Ferrari, Fiat’s most prestigious marque. To Marchionne, the contractual “put” option that could force GM to buy Fiat, which had cemented the companies’ alliance five years earlier, was potential money in the bank.
He threatened to invoke the option unless GM paid Fiat $2 billion in a corporate divorce settlement—on top of the $2.5 billion GM had invested in Fiat to begin with. Owning an ailing Fiat and all its liabilities was about the last thing GM wanted. So GM lined up lawyers to make the legal case that Fiat had invalidated the “put” provision by making financial-restructuring moves that GM had not approved.
But Wagoner, just as Marchionne had figured, wasn’t willing to run the risk of litigation; instead he agreed to pay up. GM had $24 billion in cash and could easily handle the $2 billion, but the settlement marked an ignominious end to Exhibit A of GM’s global-alliance strategy. The two companies parted, and Fiat disengaged from Detroit—though it was destined to return.
A month later General Motors dropped another bombshell. The company canceled its forecast of $5-a-share earnings for the year and said profits would top out between $1 and $2 a share because of “a significant full-year loss” in North America. The surprise announcement caused the Dow Jones Industrial Average to plunge 112 points, at a time when that sort of drop still was considered a big deal.
GM’s stock tumbled 14 percent, more than it had dropped after the Fiat debacle, and for good reason. The Fiat partnership could be viewed, albeit charitably, as a one-off deal that went bad. But the new earnings forecast exposed GM’s more fundamental issues: softening sales of SUVs and too many mouths to feed—excess factories, workers, managers, retirees, brands, and dealers that added billions of dollars to the company’s costs.
“GM’s big retiree handicap and lower-cost competition has prompted some speculation [about] bankruptcy,” wrote BusinessWeek. But the magazine quickly pulled its punch by adding: “No one who seriously follows GM’s finances sees that as an option, though.”
Well, maybe not yet.
For years GM had been ratcheting up the rebates on its cars to keep its sales machine churning. Those moves allowed the company to pay pensions, benefits, and salaries—and to keep its brands alive (except for Oldsmobile) and dealers afloat. There was even a little left for shareholders, the people who, after all, owned the company. At the Monday morning meetings of the Strategy Board, the company’s ruling council, members would pound the table in atta-boy approval when an executive announced that the factories had exceeded the previous week’s production target, because the extra “units,” as vehicles were called, meant more revenue.
But just because GM could build more cars didn’t mean it could sell them. By the late winter of 2005, the onset of the industry’s spring selling season, GM dealers had 1.3 million unsold vehicles crammed onto their storage lots, and many balked at ordering more despite the pleading and table-pounding of the company’s regional sales managers.
As it happened, the 1.3 million unsold vehicles equaled analysts’ assessments of GM’s excess production capacity—meaning the company had eight or nine extra assembly plants and all their attendant costs. Put another way, General Motors had the capacity to produce enough cars for 35 percent of the U.S. market but was selling only enough cars to account for 25 percent. The chances of gettin
g back to a 35 percent market share, or even to GM’s 29 percent goal, were virtually nil. The “29” buttons that GM executives had begun wearing three years earlier quietly disappeared.
With eight brands to nurture and promote, GM was developing lots of mediocre cars as opposed to a few outstanding ones. Even its best new models, such as the sporty Cadillac CTS sedan, had to make do without features that were common on competing cars, such as the optional all-wheel-drive on the BMW 3 Series. Likewise, the CTS and other potential winners got caught in the clutter of GM’s model overload, competing for advertising dollars against such yawners as the Buick LeSabre and the Pontiac Bonneville.
All those factors, in turn, spelled further declines in sales and market share, adding to the overhang of excess factories and employees that General Motors couldn’t afford. The company might have broken this perverse downward spiral by dropping five or six brands and shedding enough employees for GM to be comfortably profitable with 20 to 25 percent of the U.S. market. But that would mean fighting battles with the UAW and with dealers that Wagoner was determined to avoid.
So in the spring of 2005 he made other moves. GM canceled plans for a new line of sedans so the company could accelerate the development of new full-size SUVs and pickups. They were GM’s most profitable vehicles, but the move only added to GM’s bet on gas prices not going higher. In early April Wagoner reshuffled GM’s executive suite and took direct command of the company’s North American operations, which was tantamount to declaring a state of emergency. It soon became clear why. Two weeks later GM posted a $1.3 billion loss for the first quarter, its largest such deficit in more than a dozen years. The company also canceled all financial forecasts for the year—disavowing its reduced earnings estimate of only a month earlier. GM stock was hovering just above $25 a share—only one-third of its price when Wagoner became CEO five years earlier.
That was bad news, of course, if you had owned the stock for Wagoner’s entire tenure. But it could be good news if you liked to buy a stock when it was cheap, agitate for moves to increase its value, and then sell when the price went up—you know, buy low and sell high. That was the modus operandi of Kirk Kerkorian, the eighty-seven-year-old investor who had cashed in big on Chrysler stock when Daimler-Benz bought the company. And of Jerome B. York, the man who had helped him do it.
The sixty-six-year-old “Jerry” York had been trained at West Point and MIT; he spoke with a soft Southern accent that betrayed his boyhood in Tennessee. He had worked at Ford and General Motors before joining Chrysler in 1979 and rising to become chief financial officer, where his relentless focus on cutting through the “bullshit,” a word he invoked often, had helped to fuel Chrysler’s comeback in the mid-1990s.
York wasn’t there to enjoy it, however, because his work had gained the attention of Lou Gerstner, the CEO of IBM, who lured York to Big Blue in 1993 to help revive the ailing computer giant. There York and Gerstner spotted all kinds of wasteful bull-stuff, including the twenty telephone staffers whose sole job it was to call company phone numbers at random to make sure IBMers changed their voice-mail messages daily. Those twenty people, and 45,000 others, were axed during York’s first eight months on the job, helping to produce a corporate turnaround even more dramatic than Chrysler’s.
In September 1995 York had made another job switch, departing IBM to become vice chairman of Kirk Kerkorian’s holding company, Tracinda (named after his daughters, Tracy and Linda). There York used his knowledge of Chrysler and the auto industry to pepper the company’s management with advice and encouraged the merger that formed DaimlerChrysler in 1998. Having made one fortune in Detroit, Kerkorian figured he wasn’t too old to make another.
On May 4, 2005, Tracinda disclosed it had acquired about 4 percent of GM’s stock and would make a public offer to buy another 5 percent—an investment of $1.7 billion, enough to make Kerkorian GM’s largest individual shareholder. GM shares jumped 18 percent, their largest one-day increase in years. That normally would have been great news for Wagoner, except that backseat driving from Kirk Kerkorian and Jerry York wasn’t what he wanted.
The very next day Wagoner and GM got another jolt. Standard & Poor’s took a step that was once unthinkable but was now inevitable: it downgraded GM’s debt to junk-bond status. In effect, S&P was telling investors it was safer to lend money to Poland or Russia than to General Motors. The consequences were far more serious to GM than wounded corporate pride; the downgrade threatened GMAC and its home mortgage division, Residential Capital. GMAC and ResCap, as it was called, made money by borrowing from the credit markets and lending at higher rates to car dealers, car buyers, and home buyers. With GM in junk-bond territory, GMAC and ResCap would face higher borrowing costs that would pinch profit margins severely.
Fiat. Record losses. Kirk Kerkorian. Junk-bond ratings. Things seemed to be unraveling at General Motors with amazing speed. And as if those hot potatoes weren’t enough, up popped another one: Delphi, GM’s former car-parts business. With $35 billion in annual sales, Delphi Corporation was the largest components company in the world. General Motors thought it had shed Delphi, and its problems, when it had spun off the company to GM shareholders in 1999. But now Delphi was coming back to haunt its former parent company, like some corporate Ghost of Christmas Past.
In the spring of 2005, when GM was tumbling into the red, Delphi posted a first-quarter loss of $460 million and the auditors uncovered problems with the company’s past earnings reports, some of them involving transactions with GM. The Delphi board placed an urgent call to corporate America’s crisis go-to guy—Steve Miller.
Sixty-three-year-old Miller had been a compatriot of York’s at Chrysler during the Iacocca years. After leaving Chrysler in 1992 Miller had made a career of coming into troubled companies as CEO, making the tough decisions that previous management had ducked, and moving on to clean up another mess elsewhere. Sometimes it had worked; other times the company was beyond saving.
The situation at Delphi was bleak when Miller became CEO on June 1, 2005. Delphi’s workers were making an average of $70 an hour, including wages, benefits, and payments to retirees—the same amount made by workers at General Motors. But workers at other car-components companies, even those organized by the UAW, were making less than half that amount, because those companies had different wage scales than GM.
The wages of Delphi workers were way out of whack because the UAW always had insisted that all GM workers be paid the same, whether they were assembling cars or making door handles. Honoring that pay-parity principle had been the union’s condition for allowing GM to spin off Delphi without making trouble.
Delphi also was paying about four thousand idled workers nearly $100,000 apiece in wages and benefits—or $400 million a year—through the Jobs Bank, yet another obligation the company had inherited from GM. Delphi had muddled through the first six years of its existence despite these burdens, partly because its overseas business was handsomely profitable. But Miller wasn’t willing to muddle through anymore.
“We have a problem,” he told the union, “and unless we solve it, we’re going into chapter.” Chapter was CEO shorthand for Chapter 11 bankruptcy, like hoodie is kid shorthand for a hooded sweatshirt. Miller delivered the same message to Wagoner, adding that if Delphi did file, GM would be on the hook for at least $7 billion—and perhaps much more—in payments to workers that the company had guaranteed in the spin-off agreement.
When both company and union officials offered sympathy, Miller was pleased—until he found that sympathy was all they offered. GM told him to get concessions from the union, the union told him to get payments from GM, and both parties suggested he plead with Delphi’s bondholders to reduce the payments owed them. Miller was getting a classic runaround, and everybody just knew he had to be bluffing about taking Delphi into Chapter 11.
What it all boiled down to was that two former Chrysler guys, Miller and York, were riding back into town in the spring of 2005 with the temerity to tell GM�
�General Motors!—how to manage its affairs. GM executives had looked down their noses at Chrysler for decades. York and Miller were like the geeks in Detroit’s version of Revenge of the Nerds. Of course, when that movie ended, the nerds were on top.
In June Wagoner tried to regain the initiative by publicly threatening to cut the UAW’s healthcare benefits unilaterally. That’s exactly what GM already had done with its white-collar workers—who weren’t covered by a union contract. He had raised their co-pays and deductibles to 27 percent of their overall healthcare costs, but UAW members paid hardly anything.
That situation was just fine with the union. “I don’t consider it a problem,” said Ron Gettelfinger, adding that any unilateral benefit cuts would jeopardize seven years of labor peace. That return threat got the company’s attention. The June 30 deadline came and went, leaving GM’s hapless PR people to explain that, upon reflection, the company had decided that dialog would work better than deadlines. To nobody’s surprise, Wagoner and General Motors had retreated once again.
U.S. car sales were cruising toward 16.99 million vehicles for the year, almost an all-time record, but GM was careening toward the largest full-year loss in its history. If GM was losing billions in this kind of market, could the company ever make money? It was the right question, and Wagoner’s reply seemed to signal his resolve to turn things around. “Nobody wants to be the guy who runs General Motors,” he said, “when it goes out of business.” In due course he would find out how it felt to be that guy.
After a disastrous first half of the year, could the second half possibly be any worse for Wagoner and GM? The unfortunate answer came on August 29, when Hurricane Katrina smashed into New Orleans and the adjacent Mississippi Gulf Coast, creating damage and anarchy that stunned the nation. Detroit is 1,070 miles north of New Orleans, but Katrina’s fury struck there nonetheless—not physically, but psychologically. By mid-September gasoline prices had spiked to nearly $3 a gallon in many places, up from $1.75 a year earlier. Any doubts that the halcyon days of big SUVs had ended could be put to rest. Ford administered automotive euthanasia to the Excursion, killing its SUV behemoth after five years on the market. But the situation was more complicated for GM.
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