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Book Excerpt: Why GM Matters

Veteran writer argues in favor of saving the troubled giant.

by on Feb.10, 2009

New book argues in favor of Big Three bailout

New book argues in favor of Big Three bailout

For three-quarters of a century, it was king-of-the-hill, not only the world’s largest automaker, but arguably the most powerful and influential. But the steady decline of General Motors was capped, last year, when the automaker not only was dethroned by Japanese rival Toyota Motor Co., but as it was forced to go to Washington, begging for the cash it needed to survive.

In the weeks to come, GM will need to complete a far-reaching plan to ensure the company’s viability, a strategy that must then be approved by overseers still to be appointed by the Obama Administration. A go-ahead will generate the additional loans the automaker claims it still needs. Getting the thumbs-down, however…well, GM officials insist that won’t happen.

Yet there are plenty of folks, in Washington and elsewhere, who believe the game is already over, and that GM and its cross-town rival, Chrysler, should simply be allowed to fail. Veteran business journalist William Holstein is not one of them. And in his new book, WHY GM MATTERS: Inside the Race to Transform an American Icon, Holstein paints a very different picture of GM than has been portrayed on Capitol Hill and in most of the media. Here’s an excerpt from his new book, published by Bloomsbury USA…


In 1953, General Motors President Charles E. Wilson testified before Congress and spoke the words that for decades defined his company’s place at the center of American commerce and, indeed, defined its national identity. It was a time of unparalleled optimism in America. World War II was over, thanks in part to GM’s contribution to America’s superior war manufacturing effort (and to Wilson’s leadership of the War Production Board, which put him in charge of procuring all matériel for the military). Cadillacs sported tail fins like those of rocket ships. The American love affair with cars was exploding in movies and music, but was also being woven into the very fabric of society. With the new mobility afforded by autos, suburbs started sprouting up and an interstate highway system was born. Americans were literally building their lives around the automobile.

Wilson was in Congress that day because President Dwight D. Eisenhower had asked him to become his secretary of defense. The request shocked the country. GM was incredibly powerful at the time, as the Detroit Free Press noted; its employees outnumbered the populations of Delaware and Nevada combined. Didn’t placing him in a senior government position represent a danger to the country?

Asked by a hostile Senate Armed Services Committee whether he faced a conflict of interest between GM and the United States, Wilson made the resonant statement that is often taken out of context: “For years, I thought what was good for our country was good for General Motors and vice versa. The difference did not exist. Our company is too big. It goes with the welfare of the country.”

A little more than half a century later, under radically different circumstances, General Motors chief executive officer Rick Wagoner appeared again before Congress. Toyota Motor, which had been derided as a pathetic maker of “Toyopets” when it first entered the U.S. market four years after Wilson’s testimony, had pulled neck and neck with GM as the world’s largest automaker and appeared poised to dethrone GM. The American economy was in crisis as it started to dig itself out from under a mountain of debt. GM’s sales of sport-utility vehicles and pickup trucks, the segments of the market where it had
made most of its profit, were in deep trouble. After spiking above $4 a gallon, gasoline was still selling for more than $2, despite wild swings in the price of oil. Even though the price of gasoline had gone down, consumers appeared to have concluded that it would soon go back up.

The indicators were undeniably grim. GM’s stock hit an all- time low of around $3 a share, down from recent highs above $40. The company’s share of the U.S. vehicle market, at 22.4 percent, was down from almost 51 percent at the height of the company’s power in 1962. Nineteen thousand unionized workers were taking buyouts, and the company was closing factories that made larger vehicles, while rapidly gearing up
production of newer, more fuel- efficient models. The company was burning cash from its reserves every month, and capital markets were reluctant to lend it fresh money. Newspapers hammered away at GM, assuming that it would have to either merge with the troubled Chrysler or declare Chapter 11 bankruptcy. In the New York Times, Bill Vlasic wrote,“Mr.Wagoner, 55, faces the prospect of cutting a deal for Chrysler or perhaps another automaker— or possibly going down in history as the executive who presided over GM’s demise.” An overstatement, but shocking nonetheless.

So when Wagoner went to the U.S. Senate Banking Committee in November 2008 to argue for a federal bridge loan of $25 billion for the Big Three, the contrast with Charlie Wilson’s appearance could not have been starker. Rather than commanding a position of strength, Wagoner was on the defensive, warning that the government needed to take action to “save the U.S. economy from a catastrophic collapse.” If GM did not receive the loans it was requesting— what the company’s critics called a bailout—“the societal costs would be catastrophic,” Wagoner warned. “Three million jobs lost within the first year, U.S. personal income reduced by $150 billion, and a government tax loss of more than $156 billion over three years, not to mention the broader blow to consumer and business confidence.”

Wagoner’s testimony was met with hostility from senators such as Richard C. Shelby (a Republican from Alabama). With Congress deadlocked on the issue, the Bush administration in its final days threw a temporary lifeline to GM in the form of loan guarantees. But a lasting solution would be possible only after the inauguration of President-elect Barack Obama, the former Illinois senator, who was more sympathetic
to the manufacturing sector. In what became the first real test of his leadership, even before he was sworn in, Obama called the U.S. auto industry the “backbone” of the nation’s economy. Some sort of federal help was in the offing.

But in stark contrast with 1953, the prevailing conviction among many American opinion leaders, including the senators who grilled Wagoner and the heads of Ford, Chrysler, and the United Auto Workers, was that GM doesn’t matter at all. Because GM had lost so much ground to Toyota and other Japanese manufacturers, decision makers in New York and Washington seemed to have concluded that a Toyota job in Texas was the same as a GM job in Michigan.

Many average Americans also seemed to have turned against GM, judging not only from their purchasing patterns but also from the burst of letters from readers in major business publications. “While the GM corporate types were hauling their truckloads full of salary, stock options and bonuses to their banks, realtors and brokers year after year, Japan’s automakers were quietly feeling our nation’s pulse, watching world events unfold, adjusting their corporate strategies and building our automotive future,” wrote Mark Nickels of Manitowoc, Wisconsin, to the Wall Street Journal in early 2008. “What does GM stand for? Visionless pathetic leadership, master blame gamers, out of touch with
American consumers, laggards— I could go on.”

Or as a blogger, williambanzai7, put it on BusinessWeek online in June 2008, “This company is a giant quagmire of mismanagement, intractability, intellectual laziness and competitive stupidity. I don’t know anyone who would buy one of their gas guzzlers, and I predict that after a long drawn out pro cess of denial, this hulk will be extinct. Labor, if you want to build cars, tell your members to go work for Toyota.”

Some of the criticism was on target. For decades GM was slow to respond to external pressures and seemed completely out of touch with its customers. In the blogosphere, GM was portrayed as being part of the problem of deep economic insecurity, not as part of the solution.

But does globalization mean that a company in the Far East is the same as a company in the Midwest— and that it is acceptable to allow GM to slide into oblivion because Toyota is ready to fill the vacuum? The answer is no. What globalization means is that the United States has opened its market to major competition from foreign companies
that wish to do business here— which forces American companies to become stronger and offer more choices to consumers. The right response to globalization is for industry, government, and society in general to create a climate in which America retains vibrant leadership in key industrial and technological sectors. Automobile manufacturing is
certainly one of those sectors. Wagoner’s effort to transform GM into a leaner, profitable competitor is thus a test case of how American manufacturing is to fare in a new global order.

No industrial nation in the world, with the exception of Britain, would even debate the importance of owning a large portion of its own automotive industry rather than allowing others to dominate it; indeed, Japan, Germany, France, South Korea, China, India, and others are making the development and expansion of their auto industries major priorities. Why? Because they recognize that the industry is a crucial generator of national wealth and, more, a guarantor of self- determination. As the collapse of the financial- services sector reminds us, the way to build wealth in the long term is by building things— and by accruing the knowledge that comes from the pro cess of building them.

Simply put, if America is to remain a First World nation, with the sort of standard of living that it implies, it must maintain an American-owned auto industry. The skills that are necessary to design and engineer vehicles, along with the vast mea sure of parts and technology that GM buys from other American companies, including those in Silicon
Valley, help create wealth and innovation that flow far beyond the confines of the automotive business. These skills and new technologies are at the heart of maintaining America’s ability to compete in the world.

Thus the battle to transform and indeed save General Motors in 2009 and 2010 is arguably the largest, most dramatic, and most difficult corporate turnaround effort in American economic history, on par with what Louis V. Gerstner Jr. accomplished at IBM or what Jack Welch did at General Electric. Some insiders call it the equivalent of rewiring a Boeing 747— in flight. Wagoner does not believe he has been attempting
a “turnaround,” in which the company would simply bounce back to what it once was. He has used the word “transformation”; in his thinking, for GM to survive, it has to be a dramatically different company.

Although GM boasted $178 billion in automotive sales in 2007, the company now is an underdog in many ways against the mighty Toyota, which has enough cash on hand to simply buy GM outright, if the American po liti cal environment was to allow it. The acid tests for Wagoner, now that he has almost certainly secured financial support from
Washington, are whether he can return the company to profitability in North America and can improve the negative perception that entire generations of Americans have toward his company’s products. Charlie Wilson would find it ironic indeed that GM’s worst problems today are in its home market.

Inevitably, Wagoner’s personality and style have been central to his efforts toward the transformation. Wagoner, six feet four, is a former Duke University basketball player, and the language of sports permeates his conversations. He calls himself a “player-coach,” someone who is on the floor with his team, rather than someone who merely sits on the sidelines.

Wagoner has already moved to dramatically reduce GM’s retiree health care and pension expenses, which had traditionally given his vehicles a $1,500 cost disadvantage. Starting in 2000, he closed eight U.S. assembly plants and one in Canada. Incredibly, from the start of 2006 to mid- 2008, about 53,000 workers, roughly half GM’s hourly workforce,
had agreed to leave the company, accepting early- retirement packages. Other workers earning a fraction of their salaries will be hired as tier 2 employees, bringing GM’s cost structure much closer to that of Toyota. To raise extra cash, he has spun off assets such as General Motors Acceptance Corporation and Delphi, GM’s largest parts supplier.

While Wagoner has taken these painful steps that dominate the headlines, he has also been pushing a complete reinvention of GM. Perhaps his most significant bet is on the extended range electric vehicle, the Chevrolet Volt, due to go into production in November 2010, which would reestablish GM’s technological leadership and repair its image. Under Wagoner, GM has transformed the way it assembles vehicles, copying wholeheartedly from Toyota’s lean manufacturing techniques. It has revitalized its design studios, after years of dormancy. It is opening up the valves of its research and development efforts. And GM is thoroughly globalizing business on every front— design, engineering, purchasing, manufacturing, and other functions— to finally take advantage of its size and scale.

The wrenching— some would say brutal—cost- cutting, combined with huge bets on the future, give new meaning to the phrase creative destruction. One of Wagoner’s problems is that his destruction has been much more visible to the outside world than what he is trying to create. In the debate that raged about GM’s future, most critics argued that
Wagoner and management had essentially sat on their hands for years. But the reality is that they had been striving mightily to transform GM into a company that could survive in a new era.

Wagoner is very much a product of GM’s traditional culture, but he does not display the arrogance that some of his predecessors have. When I asked him in 2005 how it felt to be closing factories and losing money, he said, “Is it more fun to play in a game that you won by forty points or to play in one that your backs were up against the wall and
you really had to use all of your capabilities and assets and your teammates’ capabilities and get the game moving in the right direction? The latter is clearly more satisfying when you get it done.”

So the debate about GM can be boiled down to a few simple questions: Should anybody care if GM survives? Do Rick Wagoner and his eventual successor understand what’s at stake? Do they have the character and intelligence to repair the damage that decades of mismanagement have inflicted upon a hundred- year- old company? Is it too late?

Will the sheer weight of GM’s baggage— the costs of pensions and medical benefits for retirees, plus the deep troubles at its finance subsidiary GMAC and its biggest parts supplier, Delphi— prevent it from transforming itself? And will deep economic woes in the U.S. market torpedo the GM transformation effort, no matter how effective Wagoner
and his team can be?

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