Overhaul

by Steven Rattner

  The session, which was supposed to run for an hour, pushed closer to two. Finally the focus turned to Fritz—whom, after all, the task force had chosen as CEO.

  "Does he have a chance at success?" Whitacre asked Harry point-blank. Another director echoed, "How positive are you that Fritz can bring about all that change that is needed?"

  Harry told the board that at first he'd assumed GM would need a CEO from outside. "But eventually I realized that Fritz gets it. He has shown a capacity for change." He related the anecdote of Fritz's struggle in March to answer a question about GM's culture, and how finally he'd said, "It's the only culture I know." To Harry, this showed Fritz could recognize and be honest about his shortcomings, even in a big group setting.

  Neville Isdell, a former Coca-Cola CEO who had been the last to join the old board, asked what were Fritz's odds. Bloom volunteered that Team Auto saw him as a 60–40 proposition, with some thinking he had a 60 percent chance of success and others putting it at 40 percent. Harry tried to soften things by putting his own odds of Fritz's survival at 60 percent. Even so, the directors seemed stunned. On their first day on the job they were being told they would as likely as not have to fire the CEO.

  As the meeting ended and the board rose to leave, Whitacre quietly asked Sadiq for a copy of the presentation. Meanwhile, Isdell came around the table and told Harry, "You guys did a great job." In the coming weeks, many directors would tell me that they both appreciated the candor of the briefing and were dismayed by much of what they heard. None took issue with the core message.

  It was not lost on Fritz that the new board was hearing from Team Auto before it heard from GM, but that had been Whitacre's wish. The next day, the board assembled at the Milford Proving Ground, northwest of Detroit, for a chance to see GM's vehicles and drive them on the test track. This helped lighten the mood. Recent models had been winning good reviews, and old board members got a kick out of hearing new members make comments like, "Wow, I didn't know Buick made a car like this."

  "See, I told you it wasn't all bad," Kent Kresa told a newcomer. "There are some good things here."

  Fritz had sent Whitacre an agenda for the board meeting. It would be a milestone of sorts as the first board meeting under Ed Whitacre and the first of the new GM. At the top of the agenda Fritz had put "Chairman's Review," figuring that Ed would welcome the opportunity to note the occasion and say a few words about his expectations and the state of the company. Then the board would turn its attention to the issues at hand.

  But as the meeting began, Whitacre had no remarks. He just looked at Fritz and asked, "You want to make some introductory comments?"

  The CEO froze, saying nothing for several seconds. Finally he said, "Welcome to the new GM." Then he simply got the meeting started, telling the board, "We have a lot of things to cover," and turning over the floor to—of all people—Ray Young.

  As discussion unfolded, Fritz was kicking himself. He'd let slip an opportunity to lay out his vision and strategy for GM. He could always provide that vision in later meetings and speeches, but never again would there be a chance to set the course of the company at the start of the first meeting of the new GM board of directors.

  By mid-afternoon, the agenda was finished and Fritz stepped out so the board could continue in executive session, a routine good-governance procedure. It quickly emerged that while older board members like Kresa hadn't been looking for an opening speech, new members had been. Dan Akerson said that when his firm, Carlyle, bought a company, it expected the CEO to set out his goals and vision and also impose a plan setting benchmarks for the first hundred days. The comments resonated with other directors, current and former chief executives to whom Fritz had come across as more a chief operating officer than a CEO.

  Fritz's misgivings were confirmed after the meeting adjourned. Isdell pulled him aside and said, "You missed your moment." A little later, Whitacre sat down with him privately to discuss the board's initial determinations. He told Fritz the board would give him 120 to 150 days, then assess his performance as CEO. Fritz pointed out that that wasn't a lot of time. And what exactly, he asked, would he be graded on?

  "Change," said Whitacre.

  "How will you measure change?" Fritz asked.

  Whitacre's answer seemed vague.

  "I'm cooked," Fritz thought. He was disappointed but not totally surprised. He'd been wondering if Whitacre had become interested in the CEO's job for himself—he wouldn't be the first CEO to retire only to realize after a few years of golf that retirement wasn't for him. Fritz recalled how in their first meeting back in June, Whitacre had remarked, "I've never been a nonexecutive chairman. I don't know if I will be good at it."

  Fritz's suspicions were understandable, but if he'd asked my advice, I'd have disagreed. I'd had too tough a time recruiting Whitacre to believe that he came into the job with any aspirations beyond seeing Fritz and GM succeed. Subsequent events would prove me correct.

  While Whitacre and Fritz struggled to forge a working relationship, the chairman hit it off right away with Steve Girsky. The two couldn't have been more different: one a tall, taciturn Texan with a George Bush-like affection for his ranch, and the other a chatty New Yorker, a former star automotive analyst who'd spent years as one of the best interviews an auto journalist could have. This unlikely duo shared the view that GM's biggest enemy was itself. And they had complementary strengths. Whitacre had decades of experience managing people and running organizations. Girsky knew the industry cold and was willing to share his knowledge with Whitacre. Before long, people were calling him "Whitacre's automotive brain."

  Twenty-nine miles to the northwest, at Chrysler headquarters, Sergio was unambiguously in command. He'd swept into Auburn Hills with his black sweaters, his iPod, and his packs of Muratti Ambassador cigarettes, and even while Chrysler was still in bankruptcy, he had begun interviewing top executives to figure out who would stay and who would go.

  Chrysler's downward spiral had left its veterans cynical and embittered; many top managers had reported to six CEOs or presidents over the past decade. But Sergio turned out to be more laid back and less rah-rah than they'd expected. He showed none of the bad temper we'd witnessed, and instead talked quietly about who he was, his work ethic, and what he had done to fix Fiat. He was open to questions.

  And he surprised the executives by letting many keep their jobs. For the most part, Chrysler people remained in charge of Chrysler operations, although power-train design and manufacturing was taken over by Italian experts, as were finance and communications. Sergio also imported Fiat people to teach his vaunted "World-Class Manufacturing" program.

  On June 10, the day Chrysler emerged from bankruptcy, Sergio gave a speech to some three thousand salaried workers at headquarters. He knew it was a pretty disheartened group. As a senior manager put it, "Four months of Leno jokes wears you down." The consensus among many employees, and not resisted by Sergio's team, was that Cerberus had treated the automaker as a poor sibling to the potentially more lucrative Chrysler Financial.

  Sergio told the workers he knew they'd been through a "sometimes embarrassing and difficult process" and "a great deal of hardship and uncertainty." Then he added, "It's not often in business or in life that you receive a second chance."

  After laying out the challenges facing Chrysler, offset with soaring words about how the Fiat alliance would enable both companies to prosper, he pivoted abruptly at the end of his ten-page speech to introduce the African concept of ubuntu. A philosophy made globally famous by Archbishop Desmond Tutu, ubuntu roughly translates as "a person is a person because of other people."

  Sergio told the employees, "When you function in such an environment, your identity, what you are as a person, is based on the fact that you are seen and acknowledged by others as a person. It is reflected in the way in which people greet each other. The equivalent to 'hello' is the expression sawubona, which literally means 'I see you.' The response is sikhona, 'I am here.' The sequence of the
exchange is important: until you are seen, you do not exist."

  He then told his new workforce, "From my end, as your leader, I can simply tell you that: I see you. I am glad you are here."

  Early on, Sergio made two bold moves. First he gave Chrysler managers $700 million and three months to attack the quality problems and cheap interiors of the current product line. An internal study had shown that customers rated thirty-two of Chrysler's cars or trucks as "mediocre to bad." Complaints ranged from rattles, stiff brakes, and sloppy steering to the dreaded condemnation "it feels cheap." A Boston Consulting Group study showed that only 11 percent of consumers would even consider buying a Chrysler. The Dodge brand of trucks scored a little better, but still far behind rivals like Ford.

  Sergio's aim was to eke out a couple more years of life from Chrysler's aging product lines, until 2012 and 2013 when new car and truck designs, many using Fiat platforms, would arrive. Those hundreds of millions of dollars bought a lot of improvements. Consumer Reports had singled out Chrysler and Dodge minivans for an inability to handle well in an emergency, hardly an appealing attribute in a suburban kid-mover. The minivans got newly designed suspensions. The Chrysler 300 and Dodge Stratus—sedans so bad they'd been lampooned on Saturday Night Live—got new V6 engines with a six-speed transmission option, plus new suspensions and tires to improve the ride. Nor was all Sergio's spending on products. He pumped tens of millions into fixing up cafeterias and restrooms in Chrysler plants as well as doing other long-deferred maintenance and repairs, all of which helped boost morale.

  His second bold decision was to let retail sales fall to a "natural" level by slashing the incentives to which Chrysler had become addicted. "Buy a Chrysler—get a check" had been the joke for years. By early 2009, the company was slapping $4,400 or more in incentives on every car or truck it sold, compared with about $1,600 on average for Honda and Toyota.

  Cutting incentives was a gutsy move that reflected Sergio's instinctive management style. No amount of analysis could predict how fast or how far sales would fall before they stabilized. Yet month after month he notched the incentives down. Despite the $3 billion of Cash for Clunkers money that flowed into consumers' hands, stimulating sales for most automakers, Chrysler's numbers plunged.

  By November, when Sergio and his managers held a seven-hour briefing for several hundred dealers, journalists, and Wall Street analysts to present Chrysler's five-year plan, sales were down a scary 39 percent from their depressed 2008 levels. "The new Chrysler is parsimonious—cheap," Sergio said, explaining why he'd sworn off the incentives game. Behind his bravado he was probably nervous, yet he believed brand reputation was everything—he often pointed to Apple as the ideal. Years of discounting had cheapened all of Chrysler's brands, and he thought that incentives, unless checked, would ultimately destroy the company.

  Watching from Washington, Ron Bloom had become increasingly uneasy. We had told Larry that the $8 billion of new money would carry Chrysler for at least eighteen months, and possibly forever. But sales were now bumping up against our worst-case scenarios, and we all knew how fast cash can disappear when an automaker's sales fall. Ron stepped up his pace of calls and e-mails to Sergio. Finally Sergio's response was direct: "What can I tell you? It will be a shitty year." This was his way of asking Ron to be patient while Chrysler kicked the incentives habit.

  That did not reassure Ron. What did calm him was the company's third-quarter results. Sergio wasn't kidding about being cheap: the company had $5.7 billion in cash at the end of the third quarter of 2009, $1.7 billion more than it had at the start of the year. Despite the sales collapse, Sergio had imposed cost-cutting measures that enabled Chrysler to build up its cash. That surprised all of us. If nothing else, we had believed that Cerberus and Nardelli had been brutally focused on costs. Yet, even as he was pumping money into fixing the product, Sergio had found places to cut.

  And unlike the first months of Shiny New GM, Sergio's board was happy with him from the start. We had appointed Bob Kidder, a former CEO of both Duracell and Borden, as chairman. Kidder had attended the University of Michigan and lived in Columbus, Ohio; for him, helping save a major industrial company was a labor of love. He was as undemonstrative as Sergio was flamboyant, a combination that clicked, even though Kidder spent several days a week in Auburn Hills, up in the old executive offices on the fifteenth floor of the tower.

  GM's numbers were far better than Chrysler's. In its first quarter of existence, Shiny New GM sold $28 billion worth of vehicles, $4.5 billion ahead of our forecast. Top management worked fast to implement the streamlining and cost-cutting called for in our plans. The company's cash position was better than predicted too, so much so that when the White House wanted some money back to improve its political standing, GM proudly announced it would start repaying its U.S. and Canadian loans.

  Yet that fall, with each passing day, the board grew less patient with Fritz. One early source of trouble was the sale of money-losing Opel. The buyer that had won the favor of the German government after tortuous, months-long bidding was Magna International, a Canada-based auto-parts maker with about $24 billion in annual sales. Sberbank, Russia's largest bank, which was 60 percent government-owned, was to be a significant equity investor.

  "Sale" was something of a misnomer. Magna was essentially proposing to take the $34-billion-a-year Opel off GM's hands with the help of $6 billion in German government financing. GM would retain a minority stake, while the rest of the equity would be split among Sberbank, Magna, and Opel's employees.

  GM would have preferred another bidder, the private equity firm Ripplewood, in large part because the deal would have included an option to buy Opel back—many at the company were concerned about the loss of a European presence and the lack of a midsize-car-design capability. But the German government, which had a long-standing antipathy toward private equity, insisted on Magna. Chancellor Angela Merkel, in the midst of her reelection campaign, believed the Magna deal would save jobs.

  Fritz, not wanting to further prolong the ordeal, convened the board via conference call in mid-August, asking them to approve the preliminary terms. The docile board of the old GM would have blessed the deal instantly. The new board, however, resisted.

  Bonderman and Akerson, the private equity duo, argued against the proposal. As professional deal guys, they hated the terms, which had been framed back in the spring when business was at its nadir. To them, a deal is not a deal until a binding agreement is signed. They felt GM should renegotiate, and if that was impossible, maybe GM should hold on to Opel and sell it in two years and get more for it as the global economy improved. Girsky was also against the sale, for strategic reasons. He argued that for GM to be a global automaker it needed a presence in Europe. And he was certain that GM needed Opel to develop midsize cars for the United States and elsewhere.

  It would not be the last time that Bonderman, Akerson, and Girsky teamed up to challenge a management proposal. GM executives came to nickname them "the three amigos." But almost all the directors were skittish about the Magna deal. Kresa said that GM should consider keeping Opel now that the U.S. economy was improving. Isdell agreed that a global company needed a large European operation. Another member of the old guard, Phil Laskawy, mostly kept silent, willing to go with whatever the majority decided, but chimed in that it was a poor deal for GM. The consensus was that this was too important a decision to make via conference call.

  Fritz was forced to wait until the September board meeting. There, Opel was high on the agenda, and after more discussion, he won the directors' reluctant approval for the preliminary terms. But it was clear to everyone that this was far from a done deal. The European autoworkers had yet to agree, for one thing, and the European Union also had to approve.

  The rest of the meeting did not go any better for Fritz. As the directors worked their way through the day's agenda, they came upon a request to finance the development of a new engine called the Ecotec. To GM, this highly efficient four-cy
linder design represented a critical improvement. It was slated to become the largest-volume engine in GM's lineup, to be used in small cars, midsize sedans like the Malibu, and crossover vehicles like the Chevy Equinox. Every GM brand except for Cadillac would feature it, and it would occupy three or four engine plants employing thousands of workers. Fritz and his team saw the proposal as routine; at $1.2 billion, in the old days it barely would have qualified for board-level attention. It occupied a single page deep inside the board book, $650 million for Phase I and $550 million for Phase II, with a resolution of approval attached.

  Team Auto, of course, had bounced back many such requests for lack of substance and analysis, but the lesson had not sunk in. "What would you do if you got this at Carlyle?" Bonderman asked Akerson, who snorted in response. Other new directors were also perplexed. It didn't help management's cause that John Smith, the stubborn, imperious group vice president, was overseeing both the Ecotec and the troubled Opel deal. Smith bristled when one of the board's newcomers suggested that the proposal should include an analysis showing critical metrics such as return on investment. Car companies need new engines to boost fuel economy and meet U.S. standards, he answered impatiently. They don't calculate what they will get from the investment, another executive added.

  This didn't sit well with Bonderman. "Back where I come from, we first have to justify why we need a new engine," he shot back. "Then you would give us a series of materials justifying how much it would cost and why. Let's make it easy. Assume you need an engine. What's the rate of return?"

  The executives were now baffled and upset. In their minds, cars need engines, and when an automaker develops a new one like the Ecotec, no one knows for sure which vehicles it will go into. They also did not believe—with some justification—that a rate of return on a single element of a car can be accurately calculated.