Board's dramatic '06 vote gave support to Wagoner's repair plan
Massive turnaround effort continues — and the stakes couldn't be higher
Photo credit: REUTERS
He got both — and the chance to move forward on the turnaround plan that is still a work in progress.
To understand the background of that board meeting, let's step back to October 2005. That was when GM's leadership realized just how dire the company's condition was. GM would finish the year with a loss of $10.6 billion. Executives had to come up with a comprehensive turnaround plan.
Wagoner announced GM would close 12 plants and cut at least 30,000 jobs, but he knew more changes were needed. GM had to address high costs, particularly in wages and benefits.
"In the old days in the auto business when things get tough, OK, everybody cut head count by 5 percent, stop magazine subscriptions, don't travel and no dinners out," Wagoner said in an interview with Automotive News.
"We couldn't let those actions substitute for, hey, we have a fundamental issue here of an uncompetitive cost structure related to the fact that we've been around a long time."
The two years that followed would be one of the most stressful periods in GM's history as the automaker overhauled its business structure, changed its marketing strategy and negotiated a landmark contract with the UAW. It all happened while Wagoner fended off harsh media criticism calling for his job and quietly beat down billionaire investor Kirk Kerkorian.
In late 2005, Wagoner and his staff identified components that GM must address:
Reduce health care costs for workers and retirees.
Increase spending on product development.
Structure the business to make more money on cars and become less dependent on trucks.
In late 2005, GM announced that the launch of its redesigned full-sized SUVs, scheduled for the following spring, would be moved forward by several months in an effort to boost revenue. Product chief Bob Lutz also rushed to market the Saturn Aura sedan, which won the 2006 North American Car of the Year award.
On the marketing side, GM had to increase the residual value of its cars. So executives lowered sticker prices so they were closer to actual transaction prices, cut incentives, reduced sales to daily rental fleets and grouped brands into retail channels, such as Buick-Pontiac-GMC.
"Coming out of '05, we first set a plan to reduce our cost. I think we started out at $5 billion and then went up," recalls COO Fritz Henderson, who was CFO at the time. "Finally, we realized $9 billion of cost savings between '05 and '07 in North America, including the corporate staffs."
A key piece of the puzzle would come in October 2007, when the UAW ratified a contract in which it agreed to administer retiree health care benefits under a trust, the Voluntary Employee Beneficiary Association. That will take retiree health care obligations off GM's books.
GM also got other concessions, such as a two-tier wage system under which new workers will earn less than current employees.
The Kerkorian factor
While GM addressed its finances, another potential problem surfaced. Kerkorian, 89 years old at that time, had been slowly increasing his ownership stake in GM. Kerkorian eventually bought 9.9 percent of GM stock. That prompted the automaker to offer a board seat to Kerkorian's representative, Jerry York, in December 2005.
"It was a period of craziness," recalls Lutz. "Then Paul Ingrassia of The Wall Street Journal wrote that (editorial) calling for GM to fire Rick immediately. It became clear that the situation would only go away if the board provided a strong statement of support for Rick. I know Rick was suffering horribly during that period, but he's so unflappable that you never saw a thing."
That led to the board's vote of confidence for Wagoner in April 2006. But insiders say the vote was not unanimous. Had Wagoner not gotten that vote, those close to him said, he was prepared to resign. Wagoner recalls the episode today:
"At the time it was sensitive, and we were going through tough issues, and I thought it was important to make sure we had everybody aligned. So let's just say I appreciated the support, and I will not speculate on what would have happened."
York was eager to speed GM's turnaround progress. On June 30, 2006, GM held an emergency board meeting to consider a proposal by Kerkorian and York. The proposal asked GM to consider an alliance with Renault-Nissan.
In October of that year, GM's research concluded an alliance would favor Renault-Nissan. So GM called off any further alliance talk. York soon resigned from GM's board, saying in a letter that GM board members were not inclined to question management.
GM remains deep in the red as it struggles, with the rest of the industry, to cope with high gasoline prices and a sluggish economy. Henderson says GM has set its eye on stabilization rather than growth in North America and Europe. "We can drive a huge amount of earnings and revenue growth internationally in the emerging markets," Henderson says. "But we need our developed markets to be stable, sustainable, and develop both earnings and cash flow. That is my singular goal."
You can reach Jamie LaReau at firstname.lastname@example.org. -- Follow Jamie on