The company’s revamped line of big SUVs—the Chevy Suburban, Chevy Tahoe, and GMC Yukon—were scheduled to launch in January 2006, thanks to Wagoner’s orders to accelerate their development. It was a logical decision, if one ignored the market’s shift away from SUVs. The vehicles were GM’s only source of domestic profits, because there was no way to make money on small and midsize cars without getting concessions from the UAW that everybody knew were impossible.
Car companies need three to four years to develop new vehicles, and GM’s big new SUVs were just three or four months away from being introduced. General Motors had no choice but to charge ahead with a product plan more suited to 1995 than to 2005.
On Saturday, October 8, another storm struck. Shortly before noon a group of lawyers walked into federal bankruptcy court in lower Manhattan and put Delphi Corporation—the nation’s sixty-third largest company, according to Fortune—into bankruptcy. The UAW had rebuffed Miller’s demand to cut wages and benefits and scrap Delphi’s Jobs Bank. But Miller, it turned out, had been dead serious about “going into chapter.”
The day before Delphi filed, Miller had granted two-year severance packages for twenty-one top Delphi executives, as an incentive for them to stay with the company despite the bankruptcy. It wasn’t the best PR move. But what followed next illustrated the bitter labor-management divide that, more than a century into its existence, still plagued Detroit’s auto industry.
“Once again, we see the disgusting spectacle of the people at the top taking care of themselves at the same time they are demanding extraordinary sacrifices from their hourly workers,” the UAW declared. At that point the time-honored Detroit script would have been for Delphi to shut its corporate mouth, take its lumps, and move on. But Miller was playing a different game.
Instead of sweetening their severance packages, he said, maybe he should have put Delphi’s executives into the Jobs Bank, where they would have to be paid forever instead of just for two years. With that tart statement hanging in the air, Miller then flew to New York for a series of briefings with The New York Times, The Wall Street Journal, the major news magazines, and the television networks.
At each stop he delivered a sympathetic but sobering message: the era of high-paid but low-skilled jobs was over. U.S. companies could no longer pay uncompetitive wages, nor pay pensions and medical benefits to people who would spend more years in retirement than they spent working. “Behind all this financial drama are the lives and livelihoods of thousands of our loyal and dedicated workers,” Miller told the journalists. “These are honest, hard-working human beings who played by the rules and cannot be blamed for pursuing the American dream by taking a job at GM or Delphi. They expected us to live up to our promises, but we have been caught by fast-changing global economics.”
Delphi, he added, was the canary in Detroit’s coal mine. “Beyond Delphi, things are going to get messy for the Big Three. The current labor agreements expire in 2007, and it will be a historical collision point for all these social and economic forces that are at work.” Delphi’s Chapter 11 filing “significantly increases,” Miller added, the chance that General Motors itself would wind up in bankruptcy.
Miller had stood up for his position in a public way that the Big Three always had avoided—a reticence that had prevented honest discussion of the issues that had threatened Detroit for decades. Gettelfinger was not happy. “Our people are irate about the approach that has been taken,” he fired back. “They resent very, very much that Mr. Miller has taken his case to the public.” Well, of course they did. Under Detroit’s traditional rules of engagement, public criticism of the UAW was corporate suicide.
Though the union was angry with Miller, it quietly hired Wall Street bankers to assess whether GM’s position was really as weak as the company claimed. The bankers replied that it was even worse. On October 17, the same day that GM posted another massive quarterly loss of $1.6 billion, the UAW agreed to modest healthcare cost reductions. Medical benefits for active workers would remain free, but union retirees would start paying monthly health insurance premiums and deductibles for doctor visits, just like other Americans.
The annual savings to General Motors would be just $1 billion—less than the company had lost in the latest quarter alone—and they wouldn’t begin for another year. But Wagoner portrayed the union’s concession as a vindication of his policy of patient negotiation, and he was careful to reassure the union that he wouldn’t press too far, too fast. “Our plans do not include anything radical like eliminating the Jobs Bank,” he said. “We’d like to do that, but I don’t think that’s a realistic assumption.” At the time GM was paying $800 million a year to workers in the Jobs Bank—enough to develop new engines or transmissions or to build a modern new factory.
In 2005 the weaknesses in GM’s crumbling foundation had been fully exposed. In describing the disastrous year, Wagoner was philosophical. “It started out bad,” he said, “and it got worse.” Actually, much worse was yet to come.
One car company CEO had his head on the block in 2005, but his name wasn’t Rick Wagoner. It was Jürgen Schrempp. By then DaimlerChrysler’s total stock market value stood at just $47 billion, down from the combined value of nearly $85 billion that Daimler-Benz and Chrysler had enjoyed as separate companies before the merger. In late March the company announced the recall of 1.3 million Mercedes cars, the largest recall in history—by a long shot—for Germany’s legendary nameplate. A few weeks later the Mercedes division reported a first-quarter loss of more than $1 billion, its first such loss in a decade.
It was easy to understand, then, why many of the eight thousand shareholders who gathered in Berlin on April 6 for the company’s annual meeting were disenchanted. “Shareholders’ patience is exhausted,” a German investment manager griped at the meeting. Schrempp, never a man to admit a mistake, replied that Chrysler’s recovery under Daimler management had proved the wisdom of the merger. The fund manager shot back: “Do you have to shoot yourself in the foot first to apply first aid?”
The very un-German public criticism went on for hours. Even the famously tone-deaf Schrempp got the message that, despite the two years left on his management contract, it might be time for him to go. Key members of the company’s supervisory board—akin to a board of directors in the United States—were concluding the same thing. In the last week of July, after a tumultuous decade at the top, Schrempp agreed to retire at the end of the year.
His successor, ironically, would be the man whom Schrempp had dispatched to Detroit to fix Chrysler, Dieter Zetsche. On Thursday night, July 28, the day after he got the good news, Zetsche flew from Stuttgart back to Detroit on a company Gulfstream V. The next morning, at Chrysler’s headquarters in suburban Auburn Hills, hundreds of employees gathered in the atrium to applaud the man who had earned the trust and respect of many by reviving Chrysler’s fortunes. Some employees even fought back tears when Zetsche promised that, despite his promotion, “I am, and always will be, a Chrysler man.”
Chrysler would register a slight gain in market share in 2005, the only Detroit company to post an increase. The hated Jürgen Schrempp was out. Chrysler seemed to be recovering, not to its pre-Daimler glory, but enough that the future looked promising once again.
Rick Wagoner might have been philosophical at the end of 2005, but Jerry York and Kirk Kerkorian weren’t. GM’s stock was trading under $19 a share, which meant that Kerkorian had lost some 30 percent of his $1.7 billion investment. The company’s total market value was just over $11 billion, even though GM had $19 billion of cash in its coffers—a sure sign that investors expected the cash drain, running at $2 billion each quarter, to continue.
Bankruptcy rumors surfaced, prompting Wagoner to send an e-mail to employees denying them. Yet the UAW Jobs Bank, with its $800-million-a-year outlay to idled workers, remained an off-limits topic with the union. On a smaller scale, the company was spending hundreds of thousands of dollars to sponsor college football’s GMAC Bowl featuri
ng Toledo versus Texas-El Paso—with all the ratings potential of, say, the Bulgarian weightlifting finals. To Kerkorian and York, GM wasn’t acting like a company whose very survival, along with a healthy chunk of Kerkorian’s money, was at stake. It was time to step up the pressure.
On January 10, 2006, York addressed the Society of Automotive Analysts in Detroit, beginning in a low-key, aw-shucks tone. “Now my wife and I, we moved back to Detroit a year and a half ago, and I didn’t have a clue that I was once again going to become immersed in the auto industry,” he said. “I’m sitting there in my home office a year ago, and I see General Motors heading south, below 40 bucks a share, so I started doing a little digging. One day the phone rings. I pick it up and Kirk Kerkorian is on the line. He says, ‘Jerry, have you seen what’s going on with GM stock?’ And I said, ‘Kirk, I almost called you yesterday.’ ”
Thus, York recounted, he began a six-week “deep dive” analysis of GM, which he summarized in a fourteen-page memo to the billionaire. General Motors was in a heap of trouble, he wrote, but it also had enough cash to fund a turnaround effort. The key would be management’s willingness to act urgently by eliminating dozens of near-duplicate models, dumping unneeded brands, making realistic sales assumptions, and negotiating a better union contract.
He described the tough measures that had produced the turnarounds at Chrysler and IBM in the 1990s, and then presented a sobering statistic about GM. The company was burning through $24 million of cash each and every day. At that rate General Motors actually would run out of cash in one thousand days, or about three years. (In the end York would be astonishingly close to the mark.)
In light of this, he asked, “Why does GM still own Saab? It’s been a pretty consistent money loser, so why not just get rid of it?” He also recommended selling Hummer and cutting the $2-a-share annual dividend by 50 percent to conserve cash—even though that would cost Kerkorian $56 million a year. York added that GM should cut the pay of board members ($200,000 a year), senior executives, and other managers down the line to create shared sacrifice, and it should ask the UAW to cut the company’s healthcare costs further. “This situation calls for the company going into crisis mode,” he said, “and adopting a degree of urgency that recognizes if things don’t break right, the unthinkable could happen.”
He concluded: “The cynics, of course, will say it can’t be done, that there is no solution here given the 70-year history of mistrust in management-labor relations. But for my part, I believe we can prove them wrong. Can’t all of us who are involved in this just grab hold of that steering wheel and get this industry headed down that right path in the road?”
It was an emotional appeal that people hadn’t expected from the no-nonsense York, but it hit home. When corralled by reporters after the speech, Fritz Henderson, GM’s new chief financial officer, said he agreed with much of what York had to say, and that he personally already had entered “crisis mode.”
It was, for sure, the right mode. On January 26 GM reported an $8.6 billion loss for 2005, including $4.8 billion in red ink for the fourth quarter alone. A week later GM’s directors cut the dividend in half, cut executive pay, and eliminated bonuses for Wagoner and other managers, just as York had suggested. They also went further and elected York to the board.
York’s first board event was the monthly director’s dinner on Sunday, March 5, at GM headquarters in Detroit’s fortresslike Renaissance Center—which had been built, ironically, by Henry Ford II. York sat at a table with Wagoner, Bob Lutz, and George Fisher, the company’s lead outside director. Fisher was inherently sympathetic with an underperforming CEO because he himself had been one—twice.
During his tenure at Motorola the company had been outflanked by competitors in the cell phone market. Then Fisher moved to Kodak, which he led to laggard status in the digital photography revolution. Fisher’s corporate governance philosophy, as he often said amiably but adamantly, was to support management, period.
But he didn’t argue over dinner when York observed that GM looked like a “good bank,” consisting of Cadillac, Chevrolet, and the international operations, and a “bad bank,” comprising pretty much everything else. And he agreed to York’s suggestion that Wagoner update GM’s strategic plan to take a realistic look at future market share. The next day’s meeting was a little less comfortable, with York asking polite but pointed questions.
The real jolt came ten days later. On Thursday, March 16, GM disclosed that its actual loss for 2005 wasn’t $8.6 billion, as first reported, but a whopping $10.6 billion. Further, GM had delayed filing its annual report with the SEC because ResCap’s mortgage transactions had raised questions from the auditors. To top it off, GM announced it was restating its earnings for a five-year stretch, between 2000 and early 2005, because of a whole series of additional accounting missteps that previously had gone undetected—and now were being investigated by the SEC.
The disclosures were incredible for a company that forty years earlier had been the gold standard for corporate accounting, and it left GM’s directors stunned. Losing money and market share was one thing. But faulty financial reports and SEC probes raised the specter of lawsuits, fines, and even potential personal liability for the members of the board.
The next day the board convened a special conference call to demand how all this could have happened. Fritz Henderson said he didn’t have all the answers yet but would get them quickly. Rick Wagoner said little. He had dialed into the call from Asia, where he was visiting GM’s local operations. The bad news had caught him totally unawares—not a good thing for a CEO. Inevitably, board members began questioning Wagoner’s performance.
Events then began to move quickly. On March 26 the board held a special meeting in New York to discuss Wagoner’s proposal to sell 51 percent of GMAC. The buyer would be Cerberus, a little-known New York firm that had outflanked the big boys of private equity—notably Kohlberg, Kravis & Roberts—to emerge as the preferred bidder for one of the largest financial institutions in the United States. Wagoner had harbored doubts about Cerberus, but they were assuaged by assurances from Citigroup, the nation’s biggest bank.
The deal would kill two birds with one stone, Wagoner told the board. Selling control to Cerberus would open the way for GMAC to be freed from the junk-bond ratings of GM itself, which was making it expensive for GMAC to raise funds. What’s more, the deal would replenish GM’s shrinking cash coffers with a $13 billion payment from Cerberus that GM could use to finance its turnaround effort.
A couple of directors asked whether GM should simply sell GMAC’s mortgage business and keep full control of the core business of automobile financing. But Wagoner said the move would yield GM just $2 billion to $3 billion. That wouldn’t help much with a turnaround that was looking increasingly expensive, he explained, because the strategy update York had requested showed GM’s market share would drop from 26 to 20 percent during the next five years. That was a scary number.
One director who didn’t gulp, however, was George Fisher, Wagoner’s chief supporter, because he wasn’t there. He had recused himself from the GMAC discussion because of possible business conflicts. The others took advantage of Fisher’s absence to call an executive session to discuss a subject that was getting hard to avoid: whether Wagoner should be replaced. There was some talk of naming Fritz Henderson CEO, with York as executive chairman, at which point York left the room. The directors concluded that they needed another executive session of the full board and asked Fisher to schedule it for Sunday, April 9, in New York.
Fisher fervently believed Wagoner shouldn’t be blamed for GM’s problems. The CEO’s hands were bound, he reasoned, by a recalcitrant union, punitive dealer-franchise laws, and other chains. There was some truth in that, of course. But other CEOs, notably Carlos Ghosn, had rejected the conventional wisdom about what couldn’t be done.
Not so Wagoner. GM had refined the art of avoiding the tough, fundamental changes—such as confronting the union and killing more br
ands—that actually would make a difference. With those steps automatically deemed off-limits, the company always settled for half-measures or worse. Somewhere along the way Wagoner’s explanations had morphed into excuses. GM was like a football player frantically running from sideline to sideline but never moving up the field toward the goal line.
But Fisher was a blind believer in boardroom loyalty—meaning loyalty to management, as opposed to the shareholders whom the directors were elected to represent. It’s a common, though rarely acknowledged, attitude on corporate boards, especially when board members get red-carpet treatment and, in the case of GM’s directors, a new car to drive every few months. But Fisher’s dogged loyalty in the face of GM’s decline would prove exceptional by any standard.
He viewed the request for an executive session as the road to rebellion, a potential replay of the boardroom coup that had ousted Bob Stempel as GM’s chairman thirteen years earlier. And Fisher resolved to stop the rebellion in its tracks.
The board, he told fellow directors, had conducted Wagoner’s annual performance review just five months earlier, so there was no reason to depart from procedure and go through that exercise again. When several board members insisted that the recent jarring events warranted another look, he bowed to their wishes. But he also gave Wagoner a heads-up on the special meeting.
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