BUSINESS

REVIVING THE GENERAL

JASON KIRBY March 3 2008
BUSINESS

REVIVING THE GENERAL

JASON KIRBY March 3 2008

REVIVING THE GENERAL

BUSINESS

2008 AUTO REPORT

Headlines say GM is nearly dead. But look closely and you'll see signs of a comeback.

JASON KIRBY

Jay Leno knows a thing or two about cars. The late-night talk show host and avid collector boasts a garage full of classic vehicles. So when car dealers from across North America got together in San Francisco earlier this month for an industry conference, he was a natural choice to kick off the event. (That, and it’s wise to have someone on hand to lighten the mood when you’ve got a room full of 7,000 car dealers and an economy that’s hitting the skids.) Leno kept the car jokes to a minimum, but before leaving the stage, he had something to say about one embattled company in particular. “I’ve seen the Cadillac go from an old man’s car to the hip, cool car all the rap groups, all the rock groups, all the kids want when they come on the show,” he said. “I think it’s a real exciting time.” Funny thing is, nobody laughed.

It wasn’t long ago Leno’s remarks would have been the punchline to a cruel joke. Predictions about the imminent demise of General Motors, Cadillac’s parent, reached a fever pitch in recent years. In the eyes of many analysts, the world’s largest automaker was headed for certain bankruptcy, a rusting corporate husk waiting to be split into tiny pieces and sold off. In a speech at the dealer conference, GM CEO Rick Wagoner dismissed such talk as “rumours,” but it was more than that. Bankruptcy wasn’t just seen as a mere possibility. It was considered all but inevitable.

Yet for a company that just announced the biggest annual loss in automotive history, Bob Lutz, GM’s vice-chairman of product development, has a surprisingly positive and convincing story to tell. Yes, the company bled US$39 billion last year. And yes, the General was demoted last month, when GM all but ceded the title of world’s largest carmaker to Toyota. But, as Lutz told Maclean’s in an exclusive interview, there’s reason, not just for hope, but for optimism. “I think the company is now in a position where it’s completely incapable of producing anything but a world-class vehicle,” he says.

Lost in all the noise about red ink and declining market share are signs GM is in the

midst of a dramatic U-turn. First off, the company has taken huge steps to get its soaring costs under control. And for the first time in as long as many analysts can remember, people are actually excited about GM’s lineup of cars and trucks. Often overlooked too is the fact that GM’s struggles are largely confined to North America. In China, and other emerging markets, GM has carved out a thriving and lucrative business. There are still plenty of potholes along the road to recovery, and a recession in the U.S. could undo much of the progress. But in tackling the problems that have plagued it for decades, GM shows all the hallmarks of a company ready to prove

the doomsayers wrong. “I think it took looking down the barrel of a gun for them to finally transform themselves,” says Maryann Keller, an auto analyst who has covered GM for more than 30 years. “They’ve basically had to reinvent themselves.”

When Wagoner stood up at the company’s 2005 annual meeting and laid out his vision, analysts tuned out. Time and again the company had vowed to change, and every time those plans fell flat. As one observer told Fortune magazine in 2006, turning around the war in Iraq would be easier than fixing GM.

No one’s saying it’s been easy, but the signs of progress are unmistakable. Last fall, when

JAY LENO TOLD THE CROWD HE WAS SHOCKED TO SEE CELEBS DRIVING CADILLACS, LIKE THE CTS SEDAN. A FEW YEARS AGO, THAT WOULD’VE BEEN A CRUEL PUNCHLINE.

GM’s unionized workforce went on strike, many feared the worst. It was the first time the company had suffered a strike in 37 years, and there was talk of workers being off the job for weeks. As it turned out, the assembly lines were back up and running within 48 hours, and the two sides reached a contract that has dramatically rewritten the dynamics between the United Auto Workers and the industry. (Chrysler and Ford followed suit with similar deals with the union.)

In one fell swoop GM attacked its biggest burden—a legacy of health care commitments to its 400,000 former employees. The contract transferred US$50 billion worth of health costs to a trust to be run by the UAW starting in 2010. What’s more, the company can hire thousands of new workers at rates start-

ing at US$16 an hour, versus the US$28 hourly wage of its existing workforce. All told, the moves will eventually slash US$5 billion in annual labour costs.

Last week the company said it wants to reduce its U.S. workforce even further. It’s offering buyout packages to all of its 74,000 unionized workers. Roughly 60 per cent of GM employees are eligible for retirement, and UAW president Ron Gettelfinger has said he believes as many as 20,000 will take up the offer. The move still won’t make GM as efficient as its Asian rivals, but at least now it’s competing on the same racetrack.

In some ways, though, repairing GM’s balance sheet is the easy part. The company is well-funded—it has about US$27 billion in cash. And though its loss last year seems staggering, it was mostly an accounting exercise. (The company wrote off US$38 billion worth

of unused tax credits that would only have value if GM expected to turn a profit.) GM won’t be back in the black this year, or possibly even next, since restructuring costs are sure to run into the billions of dollars as GM hands hefty severance cheques to the thousands of workers expected to walk away from its assembly lines. However, with record revenues, the company is in a better position than it has been in a long time.

But as any corporate turnaround wizard knows, there are two parts to restoring a broken business—you must fix the bottom line, while at the same time luring back customers. Fail on that second front, and you won’t have much of a future. Which helps explain the cult of personality surrounding Lutz, the man widely credited with making the com-

pany’s cars objects of lust once again.

In 2001, after Lutz retired from Chrysler (where he was responsible for a string of successes such as the Dodge Viper and retro PT Cruiser), Wagoner tapped him to oversee GM’s product revival. At 75, with a shock of white hair, it would seem he’s delivered in spades. For instance, the Cadillac CTS won Motor Trend’s car of the year, while the restyled Malibu drove away from the Detroit Auto Show with the award for North American car of the year. Most important of all, both vehicles completely sold out without the company having to resort to price discounts. “All the Detroit manufacturers got concessions [from the unions] but on the product side, GM is ahead of the pack,” says George Magliano, an automotive analyst at Global Insight. “They’ve got some real winners out there, and they’re aggressively developing more.”

Meanwhile, Lutz has staked his reputation on the Chevy Volt electric car, due out in late 2010. While Asian manufacturers have become linked in people’s minds with clean energy vehicles, the buzz around the Volt has generated mounds of positive PR for GM. “The vehicle is of monumental importance to GM, but it also points the way to a new automotive future that is much less reliant on petroleum,” says Lutz, from his office in Detroit. If the car’s launch is delayed by a few months, he says, “I’m not going to fall on my sword, but right now the team is pretty convinced they can do it.”

In an era when executives are hypersensitive to criticism that they’re not green enough, or socially responsible enough, “The Lutz,” as he’s sometimes called, is like a man out of

sync with time. Aloud-talking, cigar-chomping former fighter pilot, he’s a throwback to an era when car guys drooled over loud engines and, as Leno joked, “cars were made of steel—you hit your head on the dash, they just hosed it off and sold it to someone else.” At the dealer conference in San Francisco, amid the industrial car wash displays and nubile women in tight black shorts, he was a constant topic of conversation. “Did you hear what Lutz said about the election?” one dealer asked his colleagues. “He’s got ‘electile’ dysfunction. He can’t get excited about any of the candidates.” But if Lutz sometimes makes headlines for his outrageous comments, like last week when he said global warming is a “total crock of s-t,” there’s no denying he can boast a keen eye for what drivers want in a car.

In its heyday GM had a pretty good handle on that, too. Throughout the 1950s, ’60s and early ’70s the company dominated the automotive landscape. It was a time, Lutz says, when designers ran the show and all other departments served their demands. He should know. Lutz began his career at GM in the ’60s, before moving on to BMW. But as the financial eggheads gradually wrestled away control of the business, that all changed. “The designers were taught a lesson, and the arrogance stopped, but so did the good designs,” he says. “What I’ve really done is reconnect the company with its glorious past.”

Lutz’s approach to designing cars is guided by one simple principle—people aren’t rational. They don’t care which vehicle offers the most rear shoulder room, or that extra mile per

WHEN FINANCIAL EGGHEADS TOOK CONTROL OF THE COMPANY, GM STOPPED PRODUCING GREAT DESIGNS. WITH CARS LIKE THE NEW CHEVY MALIBU, THAT’S CHANGING.

gallon of fuel efficiency. They’re motivated by aesthetics, pure and simple. In some ways Lutz is not all that different from Steve Jobs, the mercurial CEO of Apple. Both men realize the value of “cool” in a world where technical performance is increasingly easy to replicate. “I think I have a good handle, and always have had, on what it is about design that triggers certain cognitive responses,” he says. Did we also mention the man has an ego the size of a Humvee?

GM investors know all too well the consequences of churning out poorly designed cars. Over the years, as rivals such as Toyota and Honda grabbed up market share with their higher quality vehicles, Detroit was forced to turn to incentives and gimmicks like employee pricing to attract buyers. And with its factor-

ies churning out more vehicles than it could sell, GM had to unload unwanted cars on to rental agencies for peanuts. It was a vicious cycle. When the rental agencies were done with the cars, they dumped them onto usedcar lots, driving down their value. Why buy a crappy new GM, when you could get a crappy used one dirt cheap?

All of that is changing fast. Thanks to genuine demand for its vehicles, GM has been able to scale back on its incentives, while fewer of the company’s cars are being sold to rental agencies. Last month, when most automakers saw their sales decline, GM reported a 2.1 per cent gain. And when fleet sales are taken out of the equation, GM’s retail sales were up an astonishing 11.2 per

cent. At the same time Toyota has jacked up incentives, while its fleet sales have grown by a third since 2004. In other words, the world’s most admired carmaker made it to top spot in part by doing some of the things that got GM into trouble. The global race to be the world’s largest automaker gets all the headlines. But all GM’s investors really care about is how much profit the company pockets on each vehicle sale, and that figure is rising.

When looking at GM’s turnaround, it’s impossible not to consider Toyota’s performance. The two companies are often portrayed as if sitting opposite each other on a giant see-saw, with Toyota the one on the up and up. Yet GM’s gains have come as the Japanese car giant has stumbled. In 2005 Toyota suffered a record number of recalls, especially

among its U.S.-built trucks. The company has raced to improve its quality, but the fact is last year Toyota recalled more U.S. vehicles than GM did. Another blow came last fall when Consumer Reports said Toyota was showing “cracks in its armor.” The magazine said it would no longer automatically recommend Toyota’s vehicles, as it had in the past.

It would be foolish to read too much into Toyota’s troubles, though. Even with its recent problems, the company is hugely profitable thanks to the premium prices it can still charge. And even though Lutz takes every opportunity to dish dirt on his Asian and German rivals, he knows changing people’s perceptions about GM is a tough sell. Many baby boomers are a lost cause, he admits.

“There’s only one way to overcome that, and that’s to overwhelm,” he says. In other words, GM must keep producing award-winning cars and let word of mouth do the rest.

But the crux of that strategy hinges on the willingness of Americans to keep on buying cars. Just as GM rebounds, a recession could slam the brakes on its turnaround. Keller, the analyst, says if U.S. sales fall below 15 million vehicles, GM, along with its rivals, would be in serious trouble. Last year automakers sold 16.1 million light vehicles, down 2.5 per cent from the year before. Paul Taylor, chief economist at the National Automobile Dealers Association, expects sales will fall below 16 million this year to a decade low, before recovering. If GM has one saving grace, it’s the company’s phenomenal success overseas. It used to be said that as GM goes, so goes America. But that old axiom has taken a knock now that sales outside the U.S. account for the fastest growing chunk of GM’s total revenue. Within a decade, Lutz believes, GM’s biggest source of profits will be Asia. America will still matter to GM, just not as much.

There’s no question GM faces plenty of other hurdles in its recovery. State and federal fuel economy standards could add thousands of dollars to the cost of all new vehicles, which GM may not be able to pass on to its customers. And one of its largest suppliers, Delphi, is in the throes of bankruptcy. Critics suspect these, and other problems, will be too much for the company to handle. One online automotive journal, The Truth About Cars, launched a GM death-watch feature back in 2005, and to this day it’s found no shortage of inspiration for its updates.

But Wagoner’s turnaround plan has already exceeded expectations, even among many of the company’s supporters. Those who man the front lines in the battle to sell cars are starting to see clearer skies in the distance, beyond all the gloom. The last few years have been tough, admits Jim Peruto, who owns a Chevy dealership in Limerick, Pa. He’s had to rely on a second Honda dealership to support his Chevy “habit.” But he loves what he sees coming out of GM’s design department. After watching other turnaround efforts fail, he believes this time things will be different. “There’s a gentle touch, born of humility, that hasn’t been there before,” he says. “If I didn’t feel there was a future, I’d have given up long ago. I’m not giving up.” M