Candidate for Toughest Job

It is debatable who has the toughest job in Detroit these days.

Some say Ron Gettelfinger, president of the United Auto Workers union; or Robert “Steve” Miller, chairman and CEO of bankrupt supplier Delphi Corp.; or Ford Motor Co. Chairman and CEO Bill Ford Jr.

A fourth candidate with a solid shot at the title is Rick Wagoner.

As chairman and CEO of General Motors Corp., Wagoner presides over an enterprise long on the decline.

In 2005, alone, GM has been losing U.S. market share; selling its stake in partner auto makers; struggling to maintain steady flow of parts from its top supplier, now bankrupt; unable to kick the incentives habit; and, most recently, preparing for massive job eliminations and production cutbacks.

Few in the industry expect the world's No.1 auto maker to remain so by the end of the decade.

Through it all, the former Duke University basketball player, who seems to thrive in the face of challenge, is attempting to remain calm and provide steady leadership.

Wagoner is surprisingly upbeat during an exclusive interview with Ward's two days after announcing a comprehensive restructuring that will scale back GM's capacity to produce cars and trucks in the U.S. from 5 million units to 4.2 million.

Wagoner even manages to find a sense of humor. When asked for his projection for GM's market share in 2006, he deadpans, “We plan to have one.”

He adds: “We don't forecast market share because when we do, we're wrong. We're going to sell every one (vehicle) we can.”

Through October, GM's light-vehicle market share in the U.S. was 26.5%. The auto maker has been losing U.S. market share since 1962.

On Nov. 21, Wagoner delivered the message that Detroit and GM employees had been dreading: Over three years, the world's No.1 auto maker will close three vehicle assembly plants, two powertrain facilities and two stamping plants, slashing hourly employment by 30,000 workers.

The restructuring, coupled with a recent deal with the UAW to address health-care costs, will save the auto maker $6 billion annually by the end of 2006.

Much of GM's savings, however, will not come from labor costs because of the Jobs Bank, a security blanket negotiated in 1984 that guarantees full pay and benefits for UAW members in the event of a Big Three plant closure.

Adding 30,000 people to the Jobs Bank does little to solve GM's cost problems, so the auto maker is hoping to achieve significant headcount reductions through natural attrition and a special early retirement plan that is “cost-effective for us, attractive for them.”

A retirement program could free up jobs for people in the Jobs Bank. “People in the Jobs Bank can then flow to productive jobs, which most of those people want to do anyway,” Wagoner says.

He declines to confirm reports suggesting GM has more than 5,000 people in the Jobs Bank, at a cost of about $800 million per year.

Without quoting specifics, Wagoner says the Jobs Bank in the long run has not been as financially onerous as industry observers suspect. “It has not been a dramatic cost issue for us for a lot of the last five years,” he says. “It becomes a big cost issue when we have down cycles, which is unfortunately when you absolutely can't afford it.”

Whether Detroit can sustain the Jobs Bank is an issue sure to complicate the Big Three's UAW negotiations in 2007.

Wagoner says Detroit can sustain the Jobs Bank, but only if few people are in it and “if we can match capacity with demand and take advantage of natural attrition.” GM's track record on the first two objectives has been abysmal.

“If we continue to shrink forever and we don't have retirements, which enables those people to flow to productive jobs, then it becomes a bigger and bigger drag,” Wagoner says.

Still, GM agreed to the formation of the Jobs Bank more than 20 years ago, and Wagoner says the auto maker must live up to its obligations. “If we want to change it, we need to work with the UAW,” he says.

Meanwhile, the UAW is ready to fight for the program it worked so hard to negotiate years ago.

Keeping open a channel of communication with the UAW is a top priority for Wagoner, illustrated by the union and auto maker agreeing to a new health-care package designed to cut GM's expenses by about $15 billion for retirees and $3 billion for active employees.

The auto maker is expected to spend about $5.6 billion for health care in 2005. GM announced the new plan Oct. 17, the same day it posted a $1.1 billion loss for the third quarter.

It took seven months for GM and the UAW to reach the terms, which require higher co-pay levels for medical benefits.

Wagoner says of the health-care deal, “It's a pretty significant occurrence, and I think a very difficult but responsive action on the UAW's part to something that was clearly impeding the ability of the company to be successful and provide jobs today and in the future.

“I'm going to keep discussing issues like that with them. If we can get solutions better, fine. If we can't, we'll do what we have to do. It's better to try to work with them.”

Speculation has been rife that Wagoner, perhaps too publicly associated with GM's recent struggles, might be forced out of the top job by a corporate board looking for a new direction and eager to generate a little enthusiasm on Wall Street.

But Wagoner vows to see the recovery through. “I've given no thought to anything other than turning the business around,” he says.

He says he has gotten “terrific support from the employees within GM,” as well as from dealers and even the board. “I'm not saying they're happy about results.”

Wagoner dismisses the suggestion that GM could file for Chapter 11 bankruptcy. “Only if we don't play our hand in the right way is there even a risk that we'll do it.”

The last time GM went through such a massive restructuring was in the early 1990s. This time it's different, says Wagoner, because GM's North American product lineup is in better shape.

Wagoner says GM's restructuring back then did “a really great job” reducing costs, but three years later “we were lean in new product, and lost some momentum there.”

By contrast, Wagoner points with pride to products that have launched in the past six months and are finding success: the Hummer H3; Pontiac Solstice; Chevrolet Impala, HHR and Corvette Z06; Cadillac DTS; and Buick Lucerne.

“There's something inherently different going on now,” he says, referring to industry critics who have been uncharacteristically upbeat in reviews of recent GM products.

“They don't all like every product — that's a fact. But the tone on the view of the products is very solid,” Wagoner says. “You just see consensus emerging that, ‘these are serious cars and trucks.’”

Wagoner is bullish on the future lineup, particularly Saturn's and the next Cadillac CTS, but he recognizes GM's brands need more provocative styling. “Let's try to go a little harder on the design,” he says.

The strategy worked for Nissan Motor Co. Ltd., which put a daring face on products such as the Maxima sedan and Murano cross/utility vehicle in executing a quick turnaround that made CEO Carlos Ghosn a corporate hero.

Product may drive GM's rebuilding, but the auto maker must focus on the bottom line for the immediate future.

That includes exploring the possible sale of a controlling interest in General Motors Acceptance Corp., which has provided the bulk of GM's profits in recent years but is struggling with high lending expenses due to the auto maker's poor credit ratings.

“We think a strategic partner with a controlling interest could help us achieve a higher sustainable investment-grade credit rating,” says Wagoner.

Some analysts suggest such a sale could net GM about $15 billion.

Severing ties with at least some overseas auto makers suggests GM is serious about charting a steady course for recovery in the crucial home market.

Retail pricing is a significant challenge, however, as GM remains in an incentives spiral that has proven enormously difficult to escape. Employee pricing discounts for consumers from June to September was hugely successful until the inventory and the deals ran out in October, sending that month's sales plummeting 23%.

Wagoner says employee pricing was the most effective model year-end clearance program the company had ever seen, but there are no plans to resurrect it.

Instead, the company is pursuing a new “Total Value Promise” strategy, which aims to reduce incentives in exchange for a lower base price.

“We learned something important — that people really do hunger for more simplicity in automotive pricing,” he says.

Wagoner may have the toughest job in Detroit, but he expects it will still be his when the cost-cutting dust settles at GM.
— with David E. Zoia