FULL COURT PRESS

The evening's coda for a perfect fall day in southern France is a glimpse at forthcoming products from General Motors Corp.

Rick Wagoner, GM chairman and CEO, walks down the slope of a meticulously manicured golf course toward a fairway dotted with 20 or so vehicles the auto maker plans to put into production in coming years. The products are among the reasons Wagoner says GM's future is as bright as the sunshine that soaks the Provence region's hilltop villages and vineyards an average of 300 days a year.

To him, there is little uncertainty about the local forecast and GM's future success. “It's going to work,” Wagoner tells Ward's. “You look at that lineup — this is going to be big.”

Journalists invited to GM's biannual global product seminar hustle to get a close look at the cars and trucks before darkness settles in. The approaching night serves as a sign: How quickly the sun can fade on a wonderful day near the French Riviera — and on GM's optimism.

Once the undisputed leader, GM now is running shoulder to shoulder with many competitors. Other than the early 1990s when the auto maker nearly went bankrupt, this might be the most critical period in the company's 96-year history.

North America is dealing with brutal health-care and legacy costs, market share continues to slide and Buick, Pontiac and Saturn are on life support. GM Europe will post its fifth consecutive annual loss in 2004.

The formerly sizzling Chinese market — where GM is investing $3 billion in anticipation of the country becoming a major new revenue source — has been chilled by government regulations aimed at preventing the economy from overheating. Profits at GM Latin America/Africa/Middle East still fall far short of projections made 10 years ago.

Meanwhile, GM's most reliable source of earnings in recent years has been its financial unit, General Motors Acceptance Corp., which largely has benefited from the home refinancing boom. In 2003, GMAC accounted for $2.8 billion of GM's $3.8 billion profit.

But GM may be getting its second wind in the auto industry race.

Since Wagoner took over as CEO in 2000 — he added the chairman title in 2003 — the 51-year-old former Duke University basketball player has put the auto maker into a full-court press.

Borrowing from the playbook crafted by predecessor John F. Smith Jr., Wagoner is rallying GM around a new game plan. Gone are the days when GM assumed it would never fall from the auto industry's slippery summit. “We know we don't have the birthright to lead,” Wagoner says.

He is pushing a team approach to fully tap GM's unmatched worldwide resources.

NEW CORPORATE STRUCTURE

Under the “one-company” strategy, previously independent functions around the globe are becoming intertwined.

At GM North America, 11 different engineering organizations have been consolidated into one outfit — reducing costs by 40%. From Shanghai to Sweden, GM engineers and designers are working together.

Future vehicle programs and components truly will be commonized in ways invisible to the consumer so capacity can be better utilized. The next-generation Saab 9-3 and Opel/Vauxhall Vectra midsize cars, for example, could be built at the same assembly plant, unlike the current models.

Seemingly common-sense practices now are being exploited. There is one manufacturing system for all assembly plants, and money is being saved via global purchases of equipment and components, from robots to radios. A previously jumbled brand scheme has been defined.

With its U.S. resurgence under way, Cadillac wants to become GM's global luxury brand. Chevy is expanding its horizons, too, acting as GM's universal “foundation” brand, while Saab and Hummer slip into the near-luxury slot below Cadillac. Marques with local significance, such as Opel and Holden, will be used regionally.

“There is a method to what seems like madness,” Wagoner says. “We're going to take advantage of our history and our unique heritage around the globe.”

A hybrid-vehicle strategy, while sluggishly paced, is underestimated by many industry observers. GM also has early leads over its competitors in fuel-cell vehicle development, and also in China.

The stakes waged with GM's reorganization would scare off a Las Vegas gambler. But unless Wagoner has a good poker face, he looks confident — not concerned. “I wouldn't trade my deck of cards with anyone,” he says.

Succeed, and this will be remembered as the time when GM was saved. Fail, and GM cedes the global sales crown it has worn for decades to the Toyota Motor Corp. juggernaut.

“That's possible,” says David Cole, chairman of the Ann Arbor, MI-based Center for Automotive Research. “It's going to be really interesting to watch.”

The General could be demoted to colonel. “You measure risk by what is the alterative. What else would you do?” says Wagoner.

Now, his sports background kicks in. Wagoner sounds like a coach giving a locker-room speech at halftime.

“We need to play our own game,” he says. “Everybody else is going to do what they do. I think we have an inherent advantage if we play this way and we execute well.”

But the shot Wagoner is about to take is no slam dunk.

GM has missed in previous attempts at streamlining. There was a “super group” concept devised in 1984 by then-Chairman Roger Smith and a North American and International Operations formed in 1992. Long-term problems were not solved, an outdated corporate structure that encouraged autonomous entities survived and the market-share slide continued.

Bob Lutz, a 41-year industry veteran who joined GM in 2001 as vice chairman-product development, says the latest reorganization and product onslaught is different.

“What objective third-party critics are saying now about our latest products is extremely encouraging,” Lutz says. “I'm convinced that the focus on doing world-class products at General Motors is real and stronger today than it has been at anytime since the 1950s and 1960s. I think we're beginning to see momentum.”

GM Europe has momentum, but it's in the wrong direction. In October, three years after GM Europe's Olympia restructuring plan cut costs by more than $1 billion and eliminated 25,000 jobs, GM announced plans to slash its annual structural expenses by €500 million ($623 million), reduce plant capacity and hack another 12,000 positions from its payroll by 2006.

“It's a question of survival in Europe for all of us,” says GM Chief Financial Officer John Devine.

TROUBLE IN EUROPE

What makes GME's problems so stunning is how fast the auto maker has fallen.

GM's Germany-based Adam Opel AG and U.K.-based Vauxhall Ltd. units, combined, claimed European sales leadership from 1992-1997. But GME's product portfolio aged, and the auto maker was caught flat-footed by the rising popularity of diesel engines during the past decade.

By September 2001, GME sales leadership had evaporated and the “Olympia” restructuring plan was hatched. That comeback plan overshot cost-cutting targets, but efforts to grow revenue fell short as industry sales and several European economies rebounded slower than predicted. High regulatory costs and negative pricing pressures also rubbed out Olympia's revenue goals. “Pricing we missed by a mile,” admits Wagoner.

With sights fixed on GME's charge to profitability, GM's one-company plan will wipe out the autonomy of its long-independent Opel, Vauxhall and Sweden-based Saab Automobile units in exchange for a pan-European operation.

It mirrors a setup the auto maker put in place in the U.S. five years ago that ended life as independent operations for GM's then seven major American nameplates. The results of that move have been mixed.

Instituting a similar structure in Europe — where numerous countries are involved — is meeting stiff resistance from unions. After protesting the proposed job cuts by temporarily closing numerous GME production facilities in late October, unions have agreed to negotiate.

Most of the personnel cuts will occur in Germany. More than half of GME employees are located there, and Germany's labor costs are among the highest in the world.

While GME's losses mount, the OEM's market share in Western Europe has held steady the last two years at 10%. Diesel engine offerings have improved, and GME has several strong sales performers, such as the Opel/Vauxhall Astra compact.

More new products are being added to GME's ranks, too. GM will drop the Daewoo brand in Western Europe and spread use of the Chevy nameplate from Eastern Europe across the continent. It also unveiled the Chevy Kalos, a subcompact that will be sourced from GM Daewoo Auto and Technology Co. in South Korea.

Deliveries of the Cadillac STS sedan are just under way, and early sales results of the SRX cross/utility vehicle are encouraging. But company officials admit Cadillac's status in Europe is practically non-existent.

No issue dominates GME's future more than its relationship with Fiat Auto SpA.

Powertrain and purchasing joint ventures between the two have provided savings, but corporate parent Fiat SpA could enact a “put option” it has with GM as early as January and force the Detroit-based OEM to purchase the conglomerate's money-losing auto operation, which also suffers from underutilized capacity in Europe.

GM already owns 20% of Fiat Auto, and the remaining 80% could cost a staggering $1 billion. But the takeover scenario is unlikely. Even if Fiat makes the tough decision to dump Italy's biggest auto company, a court challenge by GM regarding the put option's legality would delay payment.

Regardless of the Fiat outcome, skeptics of GME's latest reorganization are plentiful. GME Chairman Fritz Henderson promises this is the time GME will make its stand.

“(A journalist) said to me the other day: ‘GM Europe has become irrelevant. You say you're going to make money; you fail. You say you're going to increase market share; you fail. When are you going to change this?’ Well, two years from now, we're not going to be talking about GM Europe.”

It is unlikely silence will surround GM's Asia/Pacific and North America units. The regions are high ground on the industry battlefield. The U.S. is the world's biggest market but could be surpassed by China by 2020 or so. Asia/Pacific and North America also are regions where GM is focusing its initial fuel-cell vehicle efforts (see story, p.20).

The auto maker has established an impressive advantage in fuel-cell technology over its competitors with several concepts and experimental vehicles.

“They generally seem to be almost 10 years ahead of commercialization expectations of their competitors,” says U of M's Cole.

POSITION PROMISING, PRECARIOUS

GM's position in North America and Asia/Pacific is promising and precarious. At GM North America, market share is declining for the second straight year after two microscopic increases in 2002-03.

But its lead over its closest competitor, Ford Motor Co., is growing. Nine months into 2004, Ford is trailing GM by 8.6 share points, having lost most of the ground to Chevy and GMC.

Chevy is poised to overtake the Ford marque as the top-selling light-duty vehicle nameplate in the U.S. for the first time since 1986, according to Ward's data. Chevy trailed Ford by more than 700,000 units just five years ago. It will look to increase its lead with 10 new products in the next 20 months.

GMC is rolling, too, on track this year to exceed annual sales of 600,000 trucks for the first time.

GM is the king of the profit-rich SUV and pickup segments — leading Ford by nearly 300,000 units and more than 90,000 units, respectively. Of course, the high-volume truck sales tarnish GM's image among environmentalists concerned about fuel consumption and emissions.

Yet, GM wisely is targeting gas-guzzling pickups and SUVs for its hybrid systems — not already fuel-efficient cars, like Toyota and Honda Motor Co. Ltd. GM introduced earlier this year the industry's first hybrid technology on a fullsize pickup. A hybrid version of the Saturn Vue is due in 2006 followed by fullsize SUVs in 2007.

Ambitious revival projects are aimed at the eroding Buick, Pontiac and Saturn brands. But the task is daunting. The most recent additions to Buick's lineup — the Rainier SUV, LaCrosse midsize sedan and Terraza minivan — hardly seem to be the products that will convince young professionals to bite into a brand long identified with denture-wearers. Saturn must wait until 2007 before its new product additions are complete.

Like GME, overcapacity is an issue for GMNA. It cut 900 jobs at a Pontiac, MI, assembly plant in October, and a plant in Baltimore, MD, is likely to close soon.

“We must absolutely pick up the pace because of the brutally competitive environment in North America,” says GMNA President Gary Cowger.

But nothing threatens GMNA's livelihood more than rising health-care costs and pension expenses. GM spent $4.8 billion in 2003, or $1,400 per vehicle, in the U.S. to provide coverage to 1.1 million people.

“(GM's) current curse is legacy costs,” says Cole.

HEALTH-CARE CURSE

GM's use of incentives — another profit-eater that can top $5,000 per vehicle — is tied to the health-care crisis. Artificially strong sales are needed to keep plants running in order to drive revenue to fund legacy costs.

Coupled with GME's struggles, GMNA's legacy obligations probably bury GM's goal to post $10 annual earnings per share by mid decade.

“The U.S. health-care cost trends are really out of control,” says Wagoner. “This will be the fourth year in a row of 12% to 15% general inflation. I do not think that we can accept a view that the health-care problem will be solved gradually over the next two decades.”

Bankruptcies have rippled across the steel industry, which was saddled with higher legacy costs. What will happen to GM if the U.S. does not embrace massive health-care reform? “Good question,” Devine replies.

GM Asia/Pacific is emerging as a revenue savior by delivering a new source of profits, including $577 million in 2003. GM has quadrupled its manufacturing capacity there since 2002. But most of the developing countries in Asia/Pacific are financial minefields.

“For GM, Asia/Pacific is still a work in progress,” says GMAP President Troy Clarke. “We are realistic about where we want to be. But we are having a significant impact, playing an important role within GM right now. Our goal continues to be steady growth.”

That course is pointing to record sales of 900,000 in 2004 and 9% market share in the region vs. 1% in 1998. Strong sales in China, India and Australia are driving the growth, and GM is working to expand its presence and product offerings in the countries.

GM is years ahead of competitors — with the exception of Volkswagen AG — in China. GM began building Buicks there in 1998 and is aligned with Shanghai Automotive Industry Corp., one of the strongest domestic companies.

The Chevy and Cadillac brands have been added, and GM announced new investments expected to exceed $3 billion over the next three years and double annual production capacity to 1.3 million units, while adding some 15 models.

But GM's headstart in China does not guarantee success in the future. “Leads have been squandered before,” Cole points out.

GM walks a tightrope with SAIC, which also is partnered with VW. After several years of explosive growth, sales have cooled recently — slowing ironically around the time GM announced its investment.

While China's de-acceleration is not expected to affect long-term growth prospects, the gold rush appears to be over. “This is very much a government effort to cool the economy,” Wagoner says.

GM is considering selling Cadillac and Hummer in Australia, where GM's Holden Ltd. subsidiary holds the No.2 sales ranking.

Holden also will contribute in the future with its rear-wheel-drive expertise, taking the lead development role on GM's Zeta platform, which likely will be used to produce the next-generation Pontiac GTO, a Buick sedan and possibly a new Chevy Camaro later in the decade.

GMDAT: WHAT A BARGAIN

GM also can brag that the biggest bargain of the auto industry's merger craze resides within its Asia/Pacific unit. GMDAT, which cost GM $251 million for a 42.1% stake in the company in 2002, is the highest-volume exporter of any GM unit.

It quickly has plugged holes in GM's product lineups in North America with the Chevy Aveo and in Europe with the Chevy Kalos.

But GMDAT has been unprofitable since its formation and is struggling mightily in the South Korean market. The auto maker is improving its offerings in the domestic market and will continue to explore export opportunities, including ramping up delivery of vehicles to the Middle East, which is part of GM's Latin America/Africa/Middle East unit.

GMLAAM was thriving in the early 1990s. Then, the South American economy imploded and GMLAAM's profits were buried by the rubble.

Income returned recently; GMLAAM has posted three consecutive profitable quarters. But the profit for July-September was a rather skimpy $27 million. And South America, Africa and the Middle East all are burdened by economic and political mayhem.

But GMLAAM does have its strengths. The auto maker is No.1 in six South American countries, and a 23% share of the Brazilian market trails leader VW only slightly.

Cadillac, Hummer and Saab may be expanded to South Africa, where GM sells the Chevy, Opel, Suzuki and Isuzu brands.

Leveraging the GMDAT portfolio enabled the introduction of the Chevy Aveo, Optra and Epica cars in the Middle East, where GM hopes to sell 100,000 vehicles by 2005.

With 16 all-new vehicle launches at GMLAAM in 2004, regional President Maureen Kempston Darkes believes bigger profits are approaching, but she urges patience.

“I think it takes time for these markets to grow,” Kempston Darkes notes. “I think you're beginning to see the economies in South America restore themselves.”

Lutz has visions, too. He sees one of the world's most sprawling companies beginning to work cohesively. He sees the company executing faster than it ever has.

He sees GM beginning to re-establish itself as the auto industry's categorical leader and wonders if others should have their eyes checked.

“It might not be visible yet to the public or the general media,” Lutz says. “But I can sense it building.”

He takes a puff of his cigar and exhales with a classic Lutz-ism. “I think we're at the end of the beginning.”