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GM Squanders What Tax Payers Gave It

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Let me say at the outset that the GM bailout was far, far better handled than the bankster bailouts. And as a Michigan resident whose family still has ties to the auto business, I am tremendously grateful for that bailout.

That said, this is why I have not declared mission accomplished, in spite of the successful IPO last year.

You see, no one will be able to weigh the success or failure of the GM bailout for another year or so–until such time as the cars developed entirely under the leadership team picked by a bunch of people who knew nothing about the auto industry start rolling off the lines. As I noted last year, the success of the IPO was significantly premised on a number of business decisions made by Rick Wagoner and others fired during the bailout. Wagoner deserves the credit for his emphasis on China (and places like Brazil), which is the biggest source of GM’s profit these days and was widely touted as the reason it made a good stock buy. And Bob Lutz deserves the credit for GM’s improved product line.

So we won’t know whether the bailout succeeded until we see whether the guys now in charge can make decisions that are as smart as those made by the guys fired in the bailout.

Yet, as MSNBC lays out, thus far, it looks like the finance guys Steven Rattner brought in to run a car company have, predictably, made some really stupid decisions.

[GM CEO Daniel] Akerson recently told the Wall Street Journal that a GM car was just like the can of Diet Coke he was drinking during the interview.

“It’s a consumer product,” he said. “GM has to start acting like a consumer-driven, not engineering-driven, company. We sell a consumer product — our can just costs $30,000.”

Industry insiders with a memory of the 1990s immediately blasted this view as a return to [GM]’s failed [early 1990s] strategy to commoditize a product for which a strong emotional connection is important to drive sales and to cultivate brand loyalty.

“The only difference between GM then and GM now is that this is a company that has only recently emerged from the abyss of bankruptcy, one that can ill-afford a single misstep brought upon by misguided leadership, even though it has the most competitive lineup (of vehicles) it has had in decades,” [auto writer Peter] Delorenzo said.

It’s one thing to try to sell sugar water with nothing more than emotional attachment. But so long as there are well-engineered vehicles like Hondas on the road, you can’t dismiss the importance of engineering in designing cars.

In addition, Akerson (like Ed Whitacre before him) is trying to cut the time to market for GM’s cars.

Now Akerson says speed and cost are the aspects on which he will concentrate, telling the Journal that “during World War II, GM produced tanks and equipment within four years. Why should it take four years to put a car out?”

There have, historically, been two models for cutting the time to market for cars. There’s the model Chrysler used in the late 1990s, which led to the introduction of things like the PT Cruiser that were cute but which weren’t really good cars; that’s one of the things that led to a serious decline in Chrysler’s quality. Then there’s Toyota’s quality driven approach, which has served as the standard for Ford and GM in recent years as they have accelerated their own development time frame.

But as Toyota’s recent troubles show, not even Toyota can make cars in as short a time frame as they do and ensure their quality. What makes Akerson think GM can do what Toyota can’t?

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Happy GM Day.

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Wall Street and the Administration are hailing the GM IPO and claiming victory.

General Motors Co GM.UL pulled off the biggest initial public offering in U.S. history on Wednesday, raising $20.1 billion after pricing shares at the top of the proposed range in response to huge investor demand.

GM sold 478 million common shares at $33 each, raising $15.77 billion, as well as $4.35 billion in preferred shares, more than the initially planned $4 billion.

Including an option that would allow underwriters to sell more shares, expected to be exercised in coming days, GM looks set to raise $23.1 billion, making it the biggest initial public offering ever.

The strong response to the stock sale reflects a groundswell of investor confidence that GM is moving beyond its unpopular, taxpayer-funded bankruptcy in June 2009 with sharply lower costs and higher profit potential.

Now, don’t get me wrong. I will always remain grateful that Obama bailed out the auto industry, and I am a direct beneficiary of that policy. And I do think many of the decisions and actions Team Auto took last year–most notably the fast track bankruptcy–were the right decisions, incredibly well executed. And I think the cars currently in GM showrooms are good cars.

But this IPO is no great reflection, one way or another, on the success of the bailout.

Indeed, it may be something far worse. It may be a propaganda stunt that will allow the banksters–the ones in charge of the bailout, as well as the current private equity CEO, as well as the firm which consulted on the IPO whose Chairman is auditioning to take on a top advisory role in the Administration, as well as the big banks involved in the IPO whose TBTF status the Administration has fiercely protected–to claim victory. And of course, every single one of those banksters has a huge incentive to create a stunt that will allow the Administration to claim victory. But that won’t say much about or do much to ensure GM’s long-term value.

Mind you, I hope that’s not true. I hope the universe of possible car buyers believe that GM’s cars reflect a value of $33/share or more (the banksters think they’ll be able to drive up the share price in the coming days). More importantly, I hope GM sustains recent improvements in their product line even as the new top executives–particularly the ones who had nothing to do with the currently improved products who have changed the process and people that produced those cars–remain in charge.

But we won’t know the answer to that question for another 2 years or so. And we won’t know whether GM will improve its brand image enough to make cars more profitable for some time yet, either.

And, too, I hope those banksters driving up the price of GM’s stock keep that stock for the long term. I hope this doesn’t resemble a 90s style, pump and dump, IPO. But we won’t know that for a little while either.

What we know is that the bankster-CEO pointed to lower costs (which the bailout did make possible) and GM’s strong position in China (which the purportedly failed Rick Wagoner implemented long before the bailout but which didn’t, by itself, do much for GM’s value before the bailout) in his pitch for the IPO.

In a road show for investors spearheaded by GM Chief Executive Dan Akerson and Chief Financial Officer Chris Liddell, the automaker has emphasized both its sharply lower costs and its exposure to key growth markets like China.

But it’s not clear he said much about the cars. The cars that, one way or another, will ultimately determine the success or failure of the bailout.

In other words, what this IPO seems to reflect is the successful sale of a new balance sheet tied to a market mix that, before the bailout, Wall Street was none too impressed by. It seems to reflect the enduring belief on the part of the banksters that the only value worth measuring is that determined by Wall Street, and not that value measured by the ultimate consumers of a product.

The GM products shepherded through by Rick Wagoner and Bob Lutz are selling well at stores. The GM balance sheet shepherded through by Steven Rattner is selling well on Wall Street.

But what remains to be seen is whether the cars produced in two years by the development process implemented by Ed Whitacre and Dan Akerson will sustain and increase the value of cars in showrooms to match the $33/share value pitched by the banksters.

Good luck and happy GM day.

Rattner, Wagoner, and How to Run a Car Company

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I’m going to have a few follow-up posts about Steven Rattner’s Overhaul generally and Saturday’s book salon on it. But for the moment, I wanted to add something to two excellent reviews of it by Malcom Gladwell and Felix Salmon. Together, they both distinguish between the product GM makes and the debt it had. Here’s Salmon:

That Rattner’s team managed not one but two insanely complex bankruptcies in a hitherto unimaginably short timeframe is a real and noteworthy achievement of the Obama administration. Rattner is right about that. But Gladwell’s got a good point too. This kind of biz-school restructuring is easy to show off about. What’s hard is making millions of cars which are so good that the picky US consumer will buy them rather than the incredibly well-made competition — and making a profit by doing so. Eliminating GM’s monstrous debt burden by sending it through bankruptcy was a necessary step in getting there. But it’s not at heart what managing a company like GM is or should be about.

And here’s Gladwell making a point bmaz and I argued, that Rick Wagoner, whatever his faults, had done significant work to fix GM before the overhaul.

Wagoner was not a perfect manager, by any means. Unlike Alan Mulally, the C.E.O. at Ford, he failed to build up cash reserves in anticipation of the economic downturn, which might have kept his company out of bankruptcy. He can be faulted for riding the S.U.V. wave too long, and for being too slow to develop a credible small-car alternative. But, especially given the mess that Wagoner inherited when he took over, in 2000—and the inherent difficulty of running a company that had to pay pension and medical benefits to half a million retirees—he accomplished a tremendous amount during his eight-year tenure. He cut the workforce from three hundred and ninety thousand to two hundred and seventeen thousand. He built a hugely profitable business in China almost from scratch: a G.M. joint venture is the leading automaker in what is now the world’s largest automobile market. In 1995, it took forty-six man-hours to build the typical G.M. car, versus twenty-nine hours for the typical Toyota. Under Wagoner’s watch, the productivity gap closed almost entirely.

Most important, Wagoner—along with his counterparts at Ford and Chrysler—was responsible for a historic agreement with the United Auto Workers. Under that contract, which was concluded in 2007, new hires at G.M. receive between fourteen and seventeen dollars an hour—instead of the twenty-eight to thirty-three dollars an hour that preëxisting employees get—and give up all rights to the traditional retiree benefit package. The 2007 deal also transferred all responsibility for paying for the health care of G.M.’s retirees to a special fund, administered by the U.A.W. It is hard to overstate the importance of that second provision. G.M. has five hundred and seventeen thousand retirees. Between 1993 and 2007, the company paid out a hundred and three billion dollars to those former workers—a burden unimaginable to its foreign competitors. In the 2007 deal, G.M. agreed to make a series of lump-sum payments to the U.A.W. over ten years, worth some thirty-two billion dollars—at which point the company would be free of its outsized retiree health-care burden. It is estimated that, within a few years, G.M.’s labor costs—which were once almost fifty per cent higher than the domestic operations of Toyota, Nissan, and Honda—will be lower than its competitors’.

In the same period, G.M.’s product line was transformed. In 1989, to give one example, Chevrolet’s main midsize sedan had something like twice as many reported defects as its competitors at Honda and Toyota, according to the J. D. Power “initial quality” metrics. Those differences no longer exist. The first major new car built on Wagoner’s watch—the midsize Chevy Malibu—scores equal to or better than the Honda Accord and Toyota Camry. G.M. earned more than a billion dollars in profits in the last quarter because American consumers have started to buy the cars that Wagoner brought to market—the Buick Regal and LaCrosse, the Envoy, the Cadillac CTS, the Chevy Malibu and Cruze, and others. They represent the most competitive lineup that G.M. has fielded since the nineteen-sixties. (Both the CTS and the Malibu have been named to Car and Driver’s annual “10 Best Cars” list.)

What Wagoner meant in his testimony before the Senate, in other words, was something like this: “At G.M., we are finally producing world-class cars. We have brought our costs, quality, and productivity into line with those of our competitors. We have finally disposed of the crippling burden of our legacy retiree costs. We have expanded into the world’s fastest-growing markets more effectively than any other company in the United States. But the effort required to bring about that transformation has left our balance sheet thin—and, at the very moment that we need a couple of years of normal economic activity to refill our coffers, auto sales have fallen off a cliff. Do you mind giving us a hand until things get back to normal?” [my emphasis)

Now, FWIW, I’m agnostic about keeping Wagoner on as CEO. Gladwell makes the same points bmaz and I were making. But I am utterly sympathetic to the notion that any CEO getting a bailout should be fired as part of the deal. The best solution, IMO, would have been to keep Fritz Henderson on as CEO. That’s partly based on my impression–developed during my visit to GM’s Tech Center just a few weeks after Fritz took over as CEO–that he had begun to implement the same kind of cultural change that I saw very quickly at Ford after Alan Mulally took over.

But neither Salmon’s nor Gladwell’s review mention two key details that I think are important to this debate. The first is Rattner’s description of learning about the dire straits of the auto finance companies on April 1, 2009.

I entered the byzantine world of the fincos the very next day, April Fool’s Day, as it happened. We faced off in a Treasury Department conference room against an imposing lineup of businesspeople: the top management from Chrysler Financial, GMAC, and Chrysler, plus Steve Feinberg and the guys from Cerberus. They all knew more about automotive finance than we did. We were trying to fly solo without having taken flying lessons, and I hoped we wouldn’t crash and burn.

Pretty quickly I discovered that the fincos posed a bigger problem than I’d imagined. Auto finance companise are a lot like banks, but there is one crucial distinction: Banks rely on deposits form consumers and businesses for most of the money they use for loans. Finance companies have no such depositors unless they happen to own a bank: instead they must depend on larger borrowings from banks and investors for the cash that they lend to car buyers (known as the retail trade) and auto daelers (known as the wholesale or floor-plan borrowers).

I began to understand how the collapse of the financial markets had created havoc for automakers. As a result of the credit crunch, both GMAC and Chrysler Financial had seen their ability to borrow form banks severely curtailed. Read more →

Bob Lutz Hangs Up On Ed Whitacre’s GM

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The inevitable has been announced; Bob Lutz is leaving Ed Whitacre’s new General Motors. From the New York Times:

Vice Chairman Bob Lutz will retire from the automaker effective May 1, people briefed on the plans said on Wednesday.

Lutz, 78, had been serving as a senior adviser to GM Chairman and Chief Executive Ed Whitacre after shelving retirement plans to take charge of the automaker’s marketing after it emerged from bankruptcy in July 2009.
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The announcement comes a day after GM shook up its sales and marketing operations in its home market for the third time in five months.

Lutz was charged with overhauling GM’s marketing efforts under former CEO Fritz Henderson, but he appeared to have been sidelined by Whitacre, a former AT&T executive brought in by the Obama administration.

In late February, Whitacre named Stephen Girsky, a former investment banker, as special adviser and vice chairman in charge of corporate strategy, a move that raised questions about the tenure and role of Lutz.

And it really was inevitable. Last December when Fritz Henderson was unceremoniously dumped in a midnight putsch by Ed Whitacre, the former corporate phone boy from AT&T, we had some things to say here. Marcy, noting Whitacre’s professed desire to ram products to market quicker – to do everything quicker – observed:

Now maybe it would be possible to bring out new products more quickly. Maybe there is merit to disrupting the very complex model year and product cycle schedules that every car company relies on to manage new product introductions.

But I worry that this push to introduce products more quickly will come at a price–the price of doing it right, both from an engineering perspective (you don’t want the Cruze to come out with all sorts of recalls, after all) and from a marketing perspective (if you introduce a product but don’t have the marketing budget to support it, it’s not going to do much good).

And I commented that the Whitacre putsch had other consequences too:

There is one other consideration. With Fritz gone, the only marketable face GM has left to the actual auto people is Bob Lutz, and he will bolt in a heartbeat if he thinks the wrong car decisions are being made. Lutz is very comfortable with the big money wheeler dealers, but he is, first and foremost, a car guy all the way. And he does not need the money or grief. If they were to lose Lutz in any short order in addition to Henderson, they will have a potential real mess.

Well it turns out the thoughts may have been prescient. And make no mistake, Lutz is in fine health and as active and ornery as ever; he is leaving because Read more →