One name that surfaced was Alan Mulally, who at Boeing had presided over precisely the sort of makeover that Ford now needed. An engineer by training, Mulally laced his speech with terms like “Way cool!” and “Aaaabsolutely!” that were as corny as Kansas, from where, in fact, he hailed. After thirty-seven years at Boeing he was running the commercial airplanes division, which he had turned around by cutting the workforce to 50,000 employees from 120,000, and by slashing the time it took to build a big jet by nearly half. Some of his inspiration had come from Ford itself—ironically, from the special-team approach used to develop the original Taurus in the 1980s.
In July, around the time Ford posted a second-quarter loss of $123 million, Bill Ford and Mulally started talking, first by phone and then in person. The courtship continued on Sunday, August 6, when Mulally met with a couple of Ford’s outside directors in Aspen, Colorado.
The directors broached what they thought might be a sensitive question: Would Mulally insist on being both chairman and CEO, or would he accept just the CEO post if Bill Ford wanted to continue as chairman? Mulally, to their pleasant surprise, replied that he would insist that Bill remain as chairman and wouldn’t come to Ford otherwise. Because Bill was a Ford, Mulally explained, he could represent the company and work with the family in a way that no non-Ford could do.
The directors were sold, and so was Bill Ford. But the next few weeks brought only radio silence from Mulally, who was having second thoughts. He had a secure career and deep emotional ties to Boeing after nearly four decades there. In late August Mulally called Bill Ford, who was visiting his parents at their Long Island estate, on his cell phone. Reception was so bad that Bill had to bike to a public beach a mile away to take the call. And there he heard from Mulally that the answer was no. Faced with continuing as CEO of a company that was deeply troubled, Bill Ford was deflated.
What happened next, however, was a surprise. Mulally found himself deflated too. He was sixty-one years old, and if he wanted to run a company himself, this would be his last chance. So he reconsidered his refusal and resumed his discussions with Ford. On Friday, September 1, in a conference room at Chicago’s Midway Airport, Mulally inked his new contract as president and CEO of Ford Motor. For years the Boeing executive had adorned his signature with a little airplane drawn next to his name. This time he did not.
The next week, when the announcement was made, Detroiters were shocked that Bill Ford basically had fired himself, drawing an unavoidable contrast to Wagoner’s insistence on staying put. “I have a lot of myself invested in this company,” Ford explained, “but not my ego.” Any humiliation from admitting that he wasn’t the right man for the job might have been cushioned by the fact that, as a Ford, he would remain chairman. Still, stepping aside required a portion of courage and self-awareness seldom seen in the corner offices of American companies. Changing the CEO would prove to be the move that saved Ford Motor, while sticking with the CEO would be the decision that doomed GM.
Three months after Mulally’s arrival, Ford borrowed $23.6 billion from banks to finance its turnaround effort. For the first time ever, the company had to pledge assets as collateral—including patents, real estate, factories, and even the blue-oval Ford logo, perhaps the most recognized trademark in the world. Executives characterized the deal as a giant “home improvement loan,” and it quickly became clear why the money was necessary. Ford lost $12.6 billion in 2006—a horrific number that exceeded even GM’s record loss from the year before. Mulally had arrived just in time.
During 2006, General Motors and Ford had racked up most of the big headlines, unfortunately for them, but toward the end of the year Chrysler began to play catch-up. In October, when DaimlerChryrsler released its financial results for the third quarter, the Chrysler division lost $1.5 billion—its first quarterly deficit after three straight years of profits.
It was a remarkable reversal of fortune for a company whose apparent emergence from the corporate repair shop had vaulted Dieter Zetsche into the top job at DaimlerChrysler. But the recovery had proved ephemeral. Sales of the flagship 300C sedan, with its gas-chugging 340-horsepower engine, had evaporated when gas prices resumed their post-Katrina climb, and Chrysler had responded by making a monumental error. Instead of cutting production in the summer of 2006, the company kept building cars that hadn’t been ordered by dealers—and then trying to cajole or coerce the dealers into taking them.
Dealers often resent the practice, which they call “channel stuffing,” but they usually try to go along. Gene Benner ordered extra cars, even though his sales were slowing, when Chrysler offered him wholesale discounts of $1,000 a vehicle. He figured the discount would defray the cost of carrying the extra inventory until he could sell it. But he soon learned that other dealers who had waited until Chrysler got more desperate were being offered discounts of $3,000 to $4,000 per car, putting him at a disadvantage.
Benner was angry, along with like-minded dealers who had tried to help the company from the get-go, and the result was all-out rebellion. Dealers refused to order more cars, and Chrysler resorted to parking 100,000 unsold vehicles in overflow lots near its factories—airport parking lots, fairgrounds, and any other empty surfaces the company could rent. It was a rerun of the “sales bank” that almost had killed Chrysler back in 1979.
The Jobs Bank, meanwhile, also was getting lots of use. Because of it Gene Young was making good money in the factory at Belvidere, despite Chrysler’s woes. He stayed on the job while Chrysler was building cars that it couldn’t sell, and whenever his shift was shut down, he was bounced back into the Jobs Bank, building no cars but making 95 percent of his take-home pay. He and other workers were insulated from the struggles of DaimlerChrysler, or so it seemed.
With Chrysler back in the red, Zetsche placed a call to Ron Gettelfinger at the UAW. The union had agreed to reduce healthcare costs at General Motors and Ford, Zetsche noted, and now Chrysler needed similar help. This wasn’t exactly what Gettelfinger wanted to hear. The latest union concessions, at Ford, had passed the union’s rank and file with a razor-thin majority, and the UAW president wasn’t eager to risk defeat at the polls.
Even though Chrysler itself was losing money, Gettelfinger told Zetsche, the parent company, DaimlerChrysler, remained profitable overall, so the union couldn’t agree to cut benefits. Zetsche was flabbergasted. He stormed out of his office and said, “What do we have to do? Lose $10 billion to get a level playing field?” A few weeks later Zetsche quietly directed his people to start exploring the sale of Chrysler.
The trick would be to find a buyer. When 2006 ended Toyota surged ahead of Chrysler in U.S. sales for the first time—with 2.5 million vehicles to Chrysler’s 2.1 million. The Big Three were no longer the biggest three in their home market. Automotive News, which had coined the term Big Three eighty years earlier, started calling the companies the “Detroit Three” instead.
ELEVEN
CHAPTER 11?
At the beginning of 2007 General Motors, Ford, and Chrysler were like big rowboats careening down the Niagara River, heading toward the falls and the terrifying plunge toward bankruptcy. They couldn’t see the precipice. Indeed, hardly anyone could foresee the financial crisis that would hit America twenty months later, with devastating effects on Detroit. But the companies could sense danger, like an ominous but unseen roar in the distance. So they kept throwing extra baggage overboard by laying off employees and closing factories to lighten their loads. Still, the water kept washing over the sides faster than they could bail. They could only watch their Japanese, Korean, and German competitors (except for troubled DaimlerChrysler) with envy. The foreign companies had better boats, more cooperative deckhands, and abler pilots. They were far upriver, perhaps facing a few rapids, but well out of danger.
Detroit’s car companies had one last chance—just one—to reach safe harbor. But getting there would require choosing the right path, shedding still more weight, and rowing with all the might they could muster. Ford
had taken aboard a new pilot to steer a fresh course, and Chrysler was about to do the same. Not so General Motors, which viewed its boat as too big to sink and was determined to stay the course. In the end, just one of the three rowboats would make it, while the other two would tumble over the edge and into the depths below.
When the hundredth Detroit auto show opened to the press on January 8, 2007, there was little outward sign that General Motors was in danger. Automotive journalists voted the Chevrolet Silverado pickup the Truck of the Year, and they named the Saturn Aura sedan Car of the Year, prompting fist pumps from Saturn executives worthy of Tiger Woods at the Masters. But the best news for the company was the acclaim for a prototype car called the Chevy Volt. It was a “next-generation” hybrid that would leapfrog the Toyota Prius because, Rick Wagoner explained, the battery could be recharged from an ordinary electric outlet and might get more than a hundred miles a gallon, at least twice as much as the Prius.
Bob Lutz, the executive in charge of the Volt, couldn’t resist quipping: “A GM electric vehicle is an inconvenient truth.” So much for Al Gore’s movie, and another one called Who Killed the Electric Car?, about GM killing its EV1 electric vehicle a decade earlier. When the film’s director saw the Volt, he said: “My next project may be called Who Resurrected the Electric Car?” Never mind that sitting just a few feet away from the Volt was another new Chevrolet that was rather less eco-friendly and was already on the market—the 638-horsepower Corvette ZR1. (Gas mileage: Don’t ask.)
As a business proposition, as opposed to an environmental statement, the Volt bore some inconvenient truths of its own. The battery technology was unproven, the car wouldn’t be launched for at least three more years, and the price tag would be around $37,000, some 50 percent higher than the Prius. GM was counting on buyers getting tax rebates from the government to broaden the Volt’s appeal beyond well-heeled granola-lovers, but the car still was likely to produce more publicity than profits. And after nearly $13 billion of losses over the prior two years, GM badly needed profits.
On that score, after unveiling the Volt, Wagoner retreated to a private General Motors booth on the show floor to confront Mike Jackson, CEO of the AutoNation chain of car dealerships. “You are causing me more trouble with my board than any man alive,” Wagoner snapped, turning red with pent-up anger. Jackson had stepped out of line, Wagoner continued, by publicly criticizing GM for trying to boost profits by building too many cars and foisting them on reluctant dealers. Jackson would do best to cut the public complaints, Wagoner added, and to air any problems in private.
It was the sort of dressing-down from the chairman of General Motors that would have frightened any dealer thirty years earlier, when Wagoner started his career with GM. But this was 2007, not 1977, and Mike Jackson wasn’t just any old car dealer. AutoNation was the nation’s largest publicly owned automotive megadealer, with shares traded on the New York Stock Exchange and some three hundred dealerships nationwide. Jackson wasn’t about to back down to guys from “the factory,” as the car companies were called.
“I’m being a lot nicer than I could be, Rick,” Jackson shot back. “What you’re doing is bordering on earnings manipulation in a public company. Your people are shipping us cars we haven’t ordered, sending us the bills, and then refusing to take the cars back.” Wagoner himself surely hadn’t directed this, Jackson acknowledged. But with GM dealers choking on more than a million unsold cars and trucks on their lots that January, the pressure on the company’s salespeople to push more cars onto dealers was intense. Jackson was fed up. “You’re a public company, I’m a public company, and we can’t do this,” he told Wagoner. “Stop stuffing my stores!”
Mike Jackson passionately denounced “channel stuffing,” which he viewed as a perverse treadmill. The companies built too many cars to keep their factories running. Dealers balked at buying them. The companies pressured them with sticks (cutting their allotments of the hottest models) and carrots (wholesale discounts of up to $4,000 per car). The deep discounts, on top of the rebates to buyers, killed profits and devalued the reputation of Chevrolet, Dodge, Ford, and other once-venerable brands. So sales would drop further, discounts would get bigger, and losses would grow. The cycle, in Jackson’s view, was putting the Big Three—well, the Detroit Three, now that Chrysler’s sales trailed Toyota’s—on the road to bankruptcy.
Bankruptcy? That couldn’t really happen, could it? Especially not to General Motors, which had built America’s industrial might, helped win its wars, and shaped every aspect of its culture from sexual mores to popular music to shopping habits. In early 2007 it seemed as far-fetched as, well, an African American president of the United States. Detroit’s executives got annoyed at the mere mention of the word. “I don’t care which junior analyst on Wall Street or two years out of Harvard B-school says, ‘General Motors is inevitably headed for bankruptcy,’” Lutz had declared. “That’s a crock. It’s not going to happen.”
To most Detroit executives, it didn’t matter that every major U.S. airline had made at least one trip to bankruptcy court to take a big corporate shower, washing away layers of debt and union contracts to emerge with a cleaner cost base. Cars weren’t like airline tickets. They were a typical family’s second-largest purchase, after their house. People expected to own their cars for years and would want warranty service and, possibly, spare parts throughout that time. Surely Americans wouldn’t buy cars from a company that might not be around to provide all that. The last big car company to declare bankruptcy was Studebaker in 1966, and nobody was buying Studebakers anymore.
Besides, Wagoner maintained, GM was on the mend. “Our entire GM team rose up to meet the collective challenges we face,” he wrote to his shareholders in the spring of 2007. “Our performance was validation that we have the right strategy, and it’s working.” As evidence, Wagoner cited GM’s narrower loss for 2006—$2 billion, compared to the prior year’s loss of $10.6 billion. The company would have been profitable, he added, without special restructuring charges for layoffs and plant closings.
Of course, another way of looking at the same numbers was that, entering the seventh year of Wagoner’s chairmanship, General Motors had posted yet another loss in yet another year of near-record car sales, and it had incurred so many special charges that they didn’t seem special anymore.
Wagoner’s public optimism wasn’t echoed by Dieter Zetsche. In 2005, before he had left Auburn Hills to become CEO of Daimler-Chrysler, Zetsche had vowed he would “always be a Chrysler guy.” But when he returned to Auburn Hills in February 2007 for a meeting of the DaimlerChrysler supervisory board, it was getting hard to be a Chrysler guy. Once again the American company was mired in multi-billion-dollar losses. More than 70 percent of Chrysler’s sales consisted of SUVs, pickup trucks, and minivans, which Americans were turning away from as hybrid cars supplanted SUVs as the new sign of cool.
Chrysler’s small cars, meanwhile, had harsh rides and cheap-looking interiors because of cost cuts ordered by Zetsche himself. But the company couldn’t make money on the cars anyway because its cost structure included some $18 billion in unfunded pension and healthcare obligations. The restiveness among DaimlerChrysler shareholders that had cost Jürgen Schrempp his job was spreading, and unless Zetsche did something about Chrysler, his own job would be at risk. The meeting of the supervisory board he convened on February 13 would last nearly all day. The next day would go down in Chrysler’s history as the “St. Valentine’s Day Massacre.”
The company announced a sweeping new restructuring plan, called “Project X,” to cut 13,000 employees—out of its total of 83,000—and close a couple more factories. The goal was to shed enough ballast to make Chrysler profitable by 2008, although the internal projections called for minuscule profits, at best, even then. At a press conference that day, when Zetsche was asked whether he might sell Chrysler, he replied: “In this regard we do not exclude any option to find the best solution.” He might as well have climbed to the top of the b
ig headquarters tower that displayed the Chrysler Pentastar logo and hung out a giant For Sale sign. DaimlerChrysler stock jumped 8 percent when his words crossed the wires and finished the week up 14 percent. The shareholders were voting, in a landslide, for selling Chrysler, and Zetsche could read the returns. He was so eager to be rid of the American company that he was ready to give it away.
General Motors couldn’t resist taking a sniff. Wagoner and his executives thought they could whack out huge chunks of Chrysler’s costs by eliminating its legal, financial, and administrative staffs and by cutting duplicate products. The latter was a step GM should have taken within its own operations, but Wagoner couldn’t bring himself to do that. When he brought the Chrysler idea to GM’s board, however, the directors asked why a money-losing company with eight brands and difficult dealings with the UAW would buy another money-losing company with three more brands (Chrysler, Dodge, and Jeep) and still more difficulties with the UAW. Common sense prevailed, for once, and GM backed away.
Interest in Chrysler also came from foreign car companies, ironically including Nissan—which DaimlerChrysler, under Jürgen Schrempp, had considered buying a decade earlier. But the union issues and Chrysler’s billions of unfunded liabilities for retiree healthcare proved too scary. Kirk Kerkorian, who had made a fortune on Chrysler once before, weighed in as well, offering the UAW partial ownership of the company to satisfy part of the unfunded liabilities. But Ron Gettelfinger said no thanks. The UAW would rather milk Chrysler than own it—though two years later, the union wouldn’t have a choice.
That left private equity firms, the new powers on the American corporate landscape. They raised pools of money from investors, leveraged the money by borrowing heavily from banks, and used the funds to pay bargain prices for troubled companies. Then they installed new management, ruthlessly cut costs, turned losses into earnings, and sold out for huge profits to “strategic buyers”—typically, public companies looking for a quick way to boost their own earnings.
Crash Course Page 23