DETROIT – They came to hear what Jerome B. York thinks aboutCorp., and he did not disappoint.
In a lengthy, highly structured, state-of-the-union-type speech to the Society of Automotive Analysts here (the transcript of which runs 14 pages single spaced), York laid out chapter and verse on what is wrong and right with GM and what it needs to do to turn around its fortunes.
York, who serves as an advisor to Tracinda Corp. and stakeholder Kirk Kerkorian on his GM holdings, says the auto maker needs to cut salaries for its executives, directors and labor force; slash shareholder dividends; and spell out more concrete financial and performance targets.
He also says the company has to narrow its focus to the core elements that will drive a turnaround and do a better job communicating its direction and goals to its workforce and stockholders alike.
Tracinda's Jerry York
GM must take a “clean sheet approach” in restructuring its operations, he says, suggesting cross-functional, cross-geographic teams be formed to explore ways to reduce costs with “no sacred cows allowed.”
The auto maker also “needs to simplify the business,” he says. “There are only so many hours in a day. The focus needs to be on the important levers that can really move the needle.”
York says Kerkorian, who reduced his stake by 12,000,000 shares at the end of 2005 for tax purposes, is prepared to re-purchase those shares plus another 12,000,000, if GM will detail more specific performance targets. The additional 12,000,000 shares would require regulatory approval, he says. (See related story: Tracinda Reduces GM Stake)
Although York compliments GM on the designs of some of its upcoming products and says he liked the move to consolidate the GMC, Pontiac and Buick showrooms, he questions the viability of the Saab and Hummer brands, and whether GM should pull out of its equity relationship withMotor Corp. and partnership with Motors Ltd.
Recalling his turnaround experience atCorp. in the late 1980s and IBM Corp. in the mid-1990s, York specifically calls on GM to:
- Cut salaries of management in a share-the-pain strategy meant to eke out additional givebacks – beyond previously gained health-care cost cuts – from the United Auto Workers union. He suggests a 10% cut for top executives. “The percent reduction would get smaller and smaller as you go down the (ranks),” he says.
- Slash pay for the 10 members of the board of directors, now at $200,000 annually. As with the executive pay cuts, it wouldn't save a lot of money, “but it would set the tone,” he says.
- Cut in half the $2 annual shareholder dividend.
- Negotiate a small pay reduction with the union – Chrysler got 1% back from the UAW in the 1980s, he says.
York says GM's current restructuring plan, rolled out by Wagoner in November, is a drastic effort that “deserves more credit (on Wall Street) than it's received. It is a very significant first step.” (See related story: GM Cutback Toll Includes 30,000 Jobs, 10 Plants)
He calls the new fullsize SUVs now hitting the market “terrific,” and he says he also is impressed with what he has seen of the next-generation Malibu and upcoming Saturn Aura midsize car. (See related story: Saturn Hopes Aura Causes Sensation)
But he says GM should consider whether it needs all its brands. Mark LaNeve, vice president-North America Vehicle Sales, Service and Marketing, “has the toughest job at GM, tougher than (Chairman and CEO) Rick Wagoner,” he says. “It's a daunting task managing all those brands.”
GM's Chevrolet, Cadillac, Saturn and Pontiac-Buick-GMC networks could absorb all of GM's capacity once it completes its restructuring, York says.
Hummer is profitable, he says, but needs to prove it can lead its buyers into other GM brands. Otherwise, it is an unnecessary distraction, he says.
“Why does GM still own Saab?” he adds. “It is less than 140,000 units per year on a worldwide basis, (and) it has pretty much been a money loser.
“What is the rationale for selling 15,000vehicles per year in the U.S.?”
York says Kerkorian is not interested in pulling cash out of GM.
“Nothing could be further from the truth,” he says. “GM is a voracious consumer of cash. It needs to hoard every penny of cash to fund its restructuring.”
GM's automotive operations are “burning through $24 million per day,” he says, suggesting a sale of half equity inAcceptance Corp., plus divestiture of other assets such as Saab Automobile and Hummer, would push GM's liquidity to $30 billion – enough to keep the auto maker operating another three years at current market conditions.
“Some might take comfort in that 1,000-day cushion,” York says. “I don't. I do believe the time has come to go into crisis mode.”
York calls on Wagoner to lay out 3-year financial and performance targets for GM similar to what Carlos Ghosn did after taking over the top operating job atMotor Co. Ltd.
“The objectives can even be high level likeused,” he says. “Return to profitability in Year X. Achieve a certain margin in Year Z.”
GM Vice Chairman and Chief Financial Officer Frederick “Fritz” Henderson, in the audience at the SAA luncheon, reacted coolly to York's speech.
“I see his point (about GM's brand proliferation),” he says. “But Saab is on the forefront of a growing segment of the industry.
“Some of the elements of his speech we are in the process of doing,” Henderson adds. “(And) we're determined to do something more.”
Asked whether GM would seek mid-contract wage reductions with the UAW, Henderson says recently negotiated health-care cost cuts and talks surrounding GM and supplierCorp.'s restructurings mean the two sides “have a full agenda right now.”
Just prior to the speech, Wagoner tries to head off any controversy, telling Ward's “there's a lot of commonality” between York's thinking and that of other shareholders, adding he doesn't have a “sense of disputes or disagreements.”
Meanwhile, York says there have been no additional discussions about a seat on the GM board for Tracinda. Talks were held late last year but broke off without an agreement in December. (See related story: GM, Tracinda Board Talks Come Up Empty)
York says he is confident GM can be turned around.
“If we didn't believe we can do it, I wouldn't be standing here today,” he says.
– with Alisa Priddle