The son of a steelworker, Nardelli had climbed almost to the top of General Electric, where, like Jac Nasser at Ford, he so admired CEO Jack Welch that Nardelli was nicknamed “Little Jack.” After losing the race to succeed Big Jack in 2000, Nardelli became CEO at Home Depot, where his cost cuts increased profits but also alienated employees and compromised service in the stores. In 2006 Nardelli told Home Depot’s directors to skip the annual stockholders’ meeting, which he decided to limit to thirty minutes anyway, because he deemed the exercise a waste of time. The resulting firestorm of criticism ended in Nardelli’s departure, with an eye-popping $210 million severance package.
It made him America’s poster boy for executive arrogance and excessive pay—“Mr. Golden Parachute,” as the workers at Belvidere called him. Neither stigma, however, carried much baggage on Wall Street, where Cerberus couldn’t resist hiring a CEO trained in hard-boiled GE-style management.
After arriving in August 2007, Nardelli quickly dismissed another 10,000 employees (on top of the previous 13,000), killed slow-selling vehicles, and cut 100,000 cars out of Chrysler’s production schedules to control inventories. He earmarked $500 million of the cost savings to upgrade the tacky interiors of Chrysler’s cars, and he repaid $2.5 billion of Chrysler’s bank debt. He also sought counsel from Jerry York, who told him that fixing Chrysler would be a thousand times harder than he could imagine.
To help with the effort, Nardelli brought in former colleagues from his previous companies. The new purchasing chief from Home Depot explored buying lower-priced components from India and China, only to learn that shipments of car batteries would lose their charge somewhere over the ocean. Meanwhile, consultants trained at GE started putting Chrysler managers through Six Sigma training to diagnose hidden operational problems. The managers groaned because as far as they were concerned, all their problems—lousy cars, burdensome factory work rules, etc.—were glaringly obvious.
The most problematic of Nardelli’s imports, though, was Peter Arnell, a flamboyant brand-development guru who once had convinced Chrysler to hire singer Celine Dion to burnish the company’s image—until her multimillion-dollar appearances flopped. Arnell’s subsequent gigs included PepsiCo, where his twenty-seven-page memo on redesigning the soda can was derided by Newsweek as “so much pseudo-intellectual claptrap—references to the Mona Lisa, the Parthenon, the golden ratio, the relativity of space and time, magnetic fields, ‘perimeter oscillations’ of the Pepsi logo,” and more.
Soon after Nardelli landed at Chrysler, Arnell was back, sticking his neck into design, marketing, and, well, other places. Once during a “walkaround” to evaluate a new design, a Chrysler manager felt an odd presence on his right shoulder. Arnell was resting his chin there, perhaps to examine the car’s perimeter oscillations. His appeal to the no-nonsense Nardelli mystified many at Chrysler, but people who challenged him found themselves rebuked or, in at least one case, fired.
Amid all the internal jockeying for position, the real problem was that Chrysler remained a truck company in a market that was turning back to cars. The company’s big new product for 2008 was the Dodge Ram pickup truck, available with a 5.7-liter Hemi V8 engine that got just thirteen miles a gallon in city driving. It was the wrong product at the wrong time—and with the wrong publicity stunt, as it turned out.
On January 13, 2008, journalists at the Detroit auto show were greeted by the sight of 130 longhorn steers parading through the city’s downtown streets toward the Cobo Hall exhibition center. The herd had been trucked in from Oklahoma—in Chrysler’s latest auto show scene-grabber—to provide a dramatic backdrop to the unveiling of the new truck. Nardelli presided over the show, gamely insisting that, despite the price of gasoline, there were plenty of pickup buyers still out there.
While he was speaking, however, some of the steers started to mount each other, with wide-eyed children watching and television cameras rolling. The film, which quickly appeared on YouTube, produced lots of publicity all right. Unfortunately, it was all about horny longhorns and snickering references to “Brokeback Pickup.” Not long afterward Nardelli confided to Jerry York that he had lied: fixing Chrysler would be a million times harder than he had believed.
In March 2008, a couple months after Chrysler’s cattle fiasco, Ford announced it was selling Jaguar and Land Rover to Tata Motors of India for $2.3 billion, about what Ford had paid to buy Jaguar alone nearly twenty years before. It was a drastic action, but these were desperate times. The sale signaled a shift of the tectonic plates beneath not only the auto industry but also the broader world of political economy.
Jaguar and Land Rover were the official purveyors of luxury cars and SUVs to the landed gentry of England—the “Rule, Britannia” types who had lorded over India as a colony for two hundred years. But by 2008 Tata had become an international business powerhouse. The former colonials had become the buyers and the bosses. It wasn’t quite Cornwallis at Yorktown, but for the global auto industry, it was the world turned upside down.
It also was a sign of the new order at Ford World Headquarters in Dearborn. As an auto industry outsider, like Nardelli, Alan Mulally wasn’t bound emotionally to Jaguar and Land Rover as veteran Ford executives had been. To Mulally the facts were simple and stark: Ford had lost billions on both companies since buying them, not only hurting the company’s bottom line but also sapping resources that could have been used to develop new Fords and Lincolns.
Selling Jaguar and Land Rover was unfortunate but necessary, like tossing a couple of injured people off the rowboat so the other occupants could stay afloat. It was exactly the sort of brand-culling that Wagoner should have been doing at GM but didn’t want to face. Mulally also lightened Ford’s rowboat by continuing to close factories and cut employees. By the end of 2007 Ford’s employment ranks had shrunk to 246,000 people worldwide, 100,000 fewer than at the beginning of the decade.
Unlike Nardelli, however, Mulally didn’t bring a flock of high-profile outsiders into Ford. Instead he chose a course that seemed more plodding and pedestrian but was in fact more effective. Mulally refocused Ford’s executive team on a single goal: revitalizing the flagship Ford “blue oval” brand, as it was called in the company. The key would be to develop new cars in one place and sell them globally—as opposed to Ford’s traditional practice of wasting billions to develop similar cars in each region of the world.
It was a disarmingly simple idea that Wagoner might have emulated to focus on reviving Chevrolet, and it was a return to Ford’s roots. A century earlier the Model T had been Ford’s first “world car,” engineered in one place (America) but built and sold everywhere. But subsequent “world car” efforts had fallen afoul of Ford’s fierce regional rivalries and daunting internal politics.
One glaring example was the subcompact Ford Escort of the 1980s, which was supposed to have been the same car in the United States and in Europe. But it wound up being two different cars that looked identical but had only one part in common, because rival engineering teams on each continent insisted on doing it their way. Such nonsense never would have been tolerated at Honda or Toyota, and Mulally was determined to kill it at Ford too. He ordered that the new Ford Fiesta, a high-mileage subcompact being developed in Europe, be launched in China and the United States as well, virtually unchanged.
Mulally started monitoring the Fiesta and other product-development programs with a weekly BPR meeting, as in business planning review. Unusual issues were referred to an SAR, for special attention review. Attendees at BPRs and SARs often discussed such nitty-gritty issues as HMI—human-machine interface—which was basically the location and feel of the buttons and knobs on the dashboard of each vehicle. It was like a parody of alphabet-soup corporate jargon, but at least everybody was speaking the same language. The new CEO also predicted Ford would return to profitability by 2009.
Mulally was mostly on the right track, but that prediction was something he soon would regret.
In February 2008, while Ford w
as negotiating the Jaguar–Land Rover deal, a smaller but nonetheless compelling drama was unfolding at Bessey Motors in Maine. Gene Benner got a personal visit from Chrysler Financial Corporation, Chrysler’s moneylending arm. Normally such visits were routine and friendly, because Benner was a good customer. But this time was different.
The visitors pointed out that Bessey Motors had begun losing money—which Benner, of course, already knew, but figured he could reverse over time. Then his guests dropped a bombshell: Chrysler Financial had decided to cut off his credit, effective immediately. Benner was shocked. Car dealers can’t operate without credit, which is what allows them to stock inventories of new cars. The sudden cutoff, without any warning, could drive him out of business—and destroy everything he had worked so hard to build.
Benner angrily told his visitors to get out. Maybe Chrysler’s new Wall Street owners, he thought, wouldn’t be better than the Germans after all. He quickly got a new line of credit from a bank, then endured a couple weeks of sleepless nights. The result, after much thought and soul-searching, was a turnaround plan that he described on a single sheet of paper with a simple preamble: “With the economic environment the way it is and with new vehicle demand lagging,” Benner wrote to himself, “I have centered my business plan on the one thing that I can control—EXPENSES.”
He cut his own pay, and then convened his thirty employees over pizza and Pepsi to give them some bad news. He wouldn’t cut their weekly wages, but he would cut bonuses and eliminate contributions to the 401(k) plan. He also raised the deductibles for employee health insurance, reduced advertising spending and inventory levels, and laid off one employee. All told, the moves would save $357,000 a year and cut his break-even point in half, from 400 new cars and 400 used cars each year to just 200 of each.
It was just the sort of quick, decisive action in response to a crisis that Detroit’s automakers should have taken themselves years earlier. But Benner didn’t have to deal with shareholders, boards of directors, corporate compensation committees, unions, or any of that stuff. The only person he had to convince to act was himself. His employees quickly offered their support, despite the hardship it would bring, because they knew their jobs depended on making the business profitable. It was a sharp contrast to the UAW’s grudging recalcitrance in Detroit.
As it happened, Benner had acted just in time.
On March 17 the investment bank Bear Stearns collapsed under a mountain of financial derivatives, subprime loans, and other stuff that most Americans didn’t understand. The government hastily arranged a fire sale to JPMorgan Chase, one of the country’s biggest banks. The resulting headlines about turmoil on Wall Street were undermining consumer confidence, the engine that drives car sales. Meanwhile the price of gasoline on Main Street was going through the roof—surging past $3.50 a gallon by mid-May and heading toward $4. After three decades of periodic crises, Detroit teetered at the tipping point.
On May 18 Mulally convened a rare Sunday meeting of a few senior executives. It wasn’t a BPR or an SAR. It was an all-out emergency. Sales of pickup trucks and SUVs in the first half of the month had plunged far below what Ford had forecast. Without immediate action, Ford would wind up being saddled with a Chrysler-style “sales bank” of unsold, and unsellable, vehicles, which would be disastrous.
Four days later Mulally slashed truck production and canceled his prediction of profitability in 2009. When a reporter asked whether that would hurt his credibility, the usually jovial Mulally uttered a terse “No comment.” Within days Ford decided to dismiss another two thousand salaried managers, 12 percent of its total in the United States and Canada. But at least Ford’s boat was afloat.
GM’s boat, though, was leaking badly. By June 3, when Wagoner convened the company’s annual meeting in Wilmington, Delaware, General Motors had racked up $55 billion in losses since he had announced his plan to transform the company in 2005. But Wagoner wasn’t about to concede that he had made a colossal error by betting the company on trucks and SUVs four years earlier, when even National Geographic was writing about the end of cheap oil.
Instead he told the shareholders that GM had “made significant progress on all fronts.” Then he announced that, despite that progress, the company would close four truck factories, put new emphasis on small cars, and consider selling Hummer—just as Jerry York had suggested more than two years earlier. The Wall Street Journal’s headline read, appropriately: “GM Shifts Its Strategy Into Reverse.”
The CEO’s message was surreal, even in the context of corporate spin control. On the one hand, Wagoner was praising the company’s progress. On the other, he was scrapping the strategy that had produced the “progress.” Even now, though, the new strategy was to be phased in over a few years, and there were lots of caveats about the specifics.
Shareholders rushed to unload their stock. The day after the meeting GM closed at $17.01 a share, its lowest level in twenty-six years. By the end of the month it would drop another 33 percent, to $11.50. On July 2 a Merrill Lynch research report said bankruptcy was “not impossible” for GM, prompting Wagoner to reply that it was still unequivocally “not an option.” In Dallas he told an audience of businessmen: “We’re still kicking. We have no plans whatsoever to ride off into the sunset.”
The events at General Motors, Ford, and Chrysler—unfolding like a boat sinking in slow motion, which nobody seemed able to stop—were an eerie replay of the events of 1973. Back then the American companies had been making big cars and big profits, until the first oil shock hit, gas prices soared, and consumers lurched toward small cars.
Fast-forward thirty-five years to 2008, and the Detroit companies had graduated from big cars to big SUVs. Americans had embraced them for twenty years until the early days of May, when gasoline surged past $4 a gallon and the market turned on a dime. GM, Ford, and Chrysler were responding with plans to shift to small cars, but developing them would take three or four years and billions of dollars. Ford at least had cash to finance the transition, thanks to the money it had borrowed. But not GM and Chrysler.
In mid-July GM announced new layoffs, suspended its dividend, and eliminated medical benefits for retired managers and executives over sixty-five. The company hired a consulting firm to help the retirees navigate the maze of Medicare, something they had never needed. One retired executive called the firm’s toll-free number and spent two hours on hold before hanging up without getting through. It was a rude glimpse of how the other half lived.
Detroit’s second-quarter financial results for 2008 showed the deepening crisis. Ford lost $8.7 billion, its largest quarterly loss ever. Chrysler, being private, didn’t report its results, but they had to be terrible too. General Motors lost $15.5 billion, a stunning $181,000 per minute, twenty-four hours a day, between April 1 and June 30. Some of the the red ink was from operations, some from the latest restructuring charges, but all of it was awful.
George Fisher even used the word appalling. Not to describe the losses, to be sure, but to describe reporters’ insistent questions about whether GM’s board finally might be losing faith in Wagoner. To rebut any such suggestion, the ever-loyal Fisher proclaimed that the board “unanimously” supported the CEO. “This is not just a passive board sitting by,” he added. “The losses are something nobody likes.” Well, that was good to know.
Fisher was always calm, collected, and wedded to the clubby decorum of the boardroom. He admired Wagoner’s respectfulness toward board members, which contrasted with the imperious attitudes of many other CEOs. Fisher was no more likely to lead a boardroom revolt than he would go bungee jumping off the Empire State Building. He had saved Wagoner’s job, after all, when the board seemed poised to fire the CEO two years earlier.
A few other directors weren’t so sure about Wagoner, but they lacked the stomach to buck the go-along, get-along atmosphere of the boardroom. They kept telling themselves that $4-a-gallon gas wasn’t Wagoner’s fault, and that anyway, nobody but Wagoner understood GM well eno
ugh to fix the company.
But by now even some senior GM executives were questioning that assessment, even though, like most people at GM, they just liked Rick Wagoner. They saw him as the perfect paint-by-numbers CEO: smart, serious, mature, and capable of absorbing disparate data and presenting it in a coherent fashion. As for integrity, Wagoner honorably—though certainly not wisely—took his annual bonus awards in stock instead of in cash. The decision cost him millions as GM’s stock declined.
The doubters, however, believed General Motors needed creative daring as opposed to paint-by-numbers planning. While Mulally had quickly disposed of Jaguar and Land Rover, Wagoner had resisted selling loss-plagued Saab and was just now starting to think about, maybe, selling Hummer. The list of failures on Wagoner’s watch was astounding: the Fiat debacle, $70 billion of losses since 2005 (counting the latest quarterly results), and GM’s endlessly eroding market share. And all of it, except for the very latest losses, had preceded $4-a-gallon gas by years. But the executives’ doubts remained private. Public disloyalty would have been career suicide. Besides, it just wasn’t the GM way.
The GM way of loyalty became evident, in poignant fashion, in early August, just days after the company announced the enormous second-quarter loss. It was time for the board to convene its traditional yearly meeting at the company’s proving grounds in Milford, Michigan, an hour outside of Detroit, so the directors could test-drive the latest cars. The event was part board meeting, part hot-rodding (civilized, to be sure), and part family reunion, because retired General Motors executives—the same guys who usually wintered in Naples—were invited.
One attendee was a long-retired senior executive who liked the new cars and also liked what Wagoner said about his plans to fix the company. At around $12 a share, the retiree figured, GM’s stock was a bargain. He bought some, and then headed to his summer retreat in northern Michigan, where he convinced some other retired GM executives to buy some too. Loyalty was a big reason why they had risen to the senior ranks of General Motors, and they weren’t about to lose that trait now.
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