Steven Rattner, former chief of the Obama auto task force, says new leaders at General Motors Co. are fixing the automaker's dysfunctional culture.
He spells out the task force's efforts to save GM and Chrysler Group in a new book, Overhaul: An Insider's Account of the Obama Administration's Emergency Rescue of the Auto Industry.
He was interviewed last weeksept 14 by Rick Johnson, Charles Child and David Barkholz.
What did you find surprising, both good and bad, about the industry?
On the good side, the industry had made more progress than I would have appreciated in product, quality, manufacturing efficiency and things like that. The U.S. industry has suffered from a lagging perception problem. Improvements they had made had not yet seeped into the public consciousness.
On the negative side, I was disappointed, particularly in the case of General Motors, with the quality of management, with the speed of decision-making and the effectiveness of management operations. So we ended up making significant changes there.
Why did Fritz Henderson lose his job?
I liked Fritz and was part of the group that made the decision to make him CEO. The decision for him to step aside was not made by me. But the board felt, though Fritz was a material step up from his predecessor, the same elements — speed of decision-making, personnel decisions — were not happening as quickly or effectively as the board wanted.
What do you think about the CEO churn at GM that we've seen over the past two years?
Nobody who knows anything about management can think that having four CEOs in less than two years is a good thing for any company. Nobody thinks this is ideal. There are perfectly legitimate reasons why each of those management changes occurred. At this point I think we should look forward rather than backward about whether the right team is in place and what GM's prospects are. But it's not optimum to have this much management change over such a short period of time.
Already Ed Whitacre has resigned and Dan Akerson is in charge. Should that time have been used more fruitfully to find a CEO?
I would agree that that sequence of events was not ideal. When Fritz left, the board did begin a search and retained a headhunter that did not feel that the quality of candidates it could attract at that time was of the right level for GM.
There was the question of whether people would be willing to move to Detroit. There was the, perhaps, bigger problem of executive compensation restrictions, which I believe are to some degree short-sighted. But that was not my decision. And there was the fact that the board set the bar very high. It did not seem to want to take a risk on someone who had never been a CEO before.
[Ford CEO Alan] Mulally, of course, had never been a CEO before. Bill Ford made a very courageous and, in retrospect, extraordinarily wise decision to take a chance on him. But he had never been CEO of a public or major company.
So the board concluded it did not want to settle for someone they didn't have full confidence in. My sense is, with the IPO, that things got a little muddled. And Ed found himself in a position of having to commit for longer than he wanted. I love Ed Whitacre to death. I was a little disappointed in that decision because it has had led to another round of management changes. It's not an optimal situation, but I think Dan Akerson is great.
Is Mark Reuss, president of GM North America, the heir apparent from what you've seen so far?
He is certainly one of the leading candidates. My sense is that it's everybody's goal [for the CEO], if at all possible, to come from inside General Motors. When you look at who's prominent, there are two or three people who are potentially candidates and Mark Reuss is close to the top of the list, given his role of running North America as the most-important operating unit of the company.
Once you got inside General Motors, how bad was the company culture? Had you ever seen anything like it?
I was on Wall Street for 26 years and I'm hard pressed to think of anything quite like it. I was completely unprepared for what I saw once I got inside of General Motors. I certainly had read about GM. I assumed there was some level of journalistic hype. And, in fact, it was worse than anything I had imagined. I have never seen a company of that scale or importance with those kinds of cultural problems.
What was the essence of the cultural problems at GM?
Bill Ford gave a speech in 2006 or 2007 that [Ford is] an insular company in an insular industry in an insular town. I was really shocked at the extent of it. Until this latest round of changes, GM had an incredibly small number of people who had not been there their entire careers. It was a culture of meeting after meeting and process. It was a very friendly culture and a very collegial culture — too much so in that nobody ever wanted to break the glass and say this is wrong. It all happened in a very opaque way instead of a transparent way.
How irresponsible was it for GM and the board to have to come to the government basically out of money — a company that size out of cash?
That was incredibly irresponsible. Rick Wagoner called up [Secretary of the Treasury Henry] Paulsen in the early part of October  and said, I have to come see you, and walked in and said we're going to run out of money the day before election day. And if you don't do something, we're going to have to declare bankruptcy.
In the fall, when all outside advisers told Wagoner that you have to be at least ready for bankruptcy and understand your options, he just kept saying no, no, no. That ended up costing the taxpayers a lot of money.
When the Bush administration looked at GM in the November and December time frame, GM couldn't have gone through the bankruptcy process at that point because it had done none of the preparation and none of the work. So the government had no choice but to put the $12.4 billion into the company at the end of December to tide it over because the company wasn't prepared to do anything else. And to me, that was completely irresponsible behavior.
How much progress has GM made with its culture problem?
I think it has made enormous progress. One thing I've realized over the years of watching companies, advising companies and investing in companies, it doesn't take that much change to have a major change. You can identify many companies where a change of a CEO and one or two other people led to a dramatic change in the company's fortunes. Alan Mulally is certainly an excellent example of that.
In picking Ed Whitacre, and Dan Akerson in a similar vein, we very much wanted someone who was a decider, who was a no-B.S. guy. We didn't want a guy who was interested in sitting in meetings or looking at PowerPoints name of software is Microsoft PowerPoint, chas and endless process. That was a deliberate decision on our part. And that was the exact right skill set for what was needed.
Whitacre changed a lot of people. He changed some of the jobs twice when he wasn't happy with whom he had. He promoted and empowered some insiders who brought in outsiders. He, most importantly, sent the message that this is no longer a bureaucratic battleship churning its way through the waters. It has to become more lean and mean. And Dan Akerson is completely in Whitacre's mold and mentality.
You were particularly hard on finance and accounting at GM. You look at the IPO registration and they're still warning of accounting effectiveness. It's taken awhile to clean up.
I was particularly critical because it's an area that I know something about and feel qualified to offer an opinion. We spent a lot of time with finance. As I wrote in the book, it was one of the worst I'd ever seen. Some of that has to do with personnel. Some of that has to do with some legacy issues, particularly the decision to outsource much of their accounting and IT data systems when the spinoff occurred [of Electronic Data Systems in 1996]. And that's a lot of the problem. The new CFO [Chris Liddell] has been there about a year, so it's not shocking that they can't assure the world that they've solved all these problems. This is a massive overhaul that's not going to be done in one year or two years.
But it was stunning to walk in there and realize that the company needed massively more cash to operate than the size of company would suggest because they didn't know where the cash was. That they couldn't tell us on any given day within $500 million how much cash the company had. That's an amazing thing.
Would you buy a big block of GM's IPO?
It's always a function of price to some degree. But, more fundamentally, I'm quite optimistic about the company. One of the pleasant takeaways: I couldn't see why GM and Chrysler could not be fully competitive and fully profitable. There's no substitute for the automobile. I'm very confident the SAAR will get back to a normalized level and, with the restructuring that we implemented, I can't see why GM can't be fully competitive. The last two quarters have been quite good at still a very depressed SAAR level.
We're at a point in the automotive cycle that the SAAR is only going to go up. I think it'll get back up to 15 million in a couple of years. There are a lot of fixed assets in this business, and a couple million more units on the SAAR can be very profitable for a well run company.
Were you taken aback by the kind of pressure that dealers could bring to bear on the process?
I wasn't surprised at their desire to bring pressure, but I was surprised at their ability to be successful in bringing it. When GM eliminated Oldsmobile and Ford eliminated dealers, I think they paid the average dealer some high six-figure number for their franchise. Maybe close to $1 million. If you're a dealer and you have that asset, you fight for that.
I get why the dealers didn't want to be told to take down their signs and shut their doors. But what shocked me is that we're in a country with almost 10 percent unemployed, with huge budget deficits and a wealth of problems, and of all the things that Congress decides to spend time on, they decide to spend time on the dealers. It was really disappointing to me when Congress passed that legislation (dealer arbitration laws in December).
We were told that the government should stay out of micro-managing these companies. We never made a single decision about a plant or a dealer or anything — and lo and behold, Congress is hypocritical and plunges back in and passes a silly piece of legislation, which will only end up costing the taxpayers money.
To the extent that these two companies are forced to keep dealers that don't make economic sense to the company, all it will do is reduce the value of the automakers themselves. Essentially, Congress is taking money out of the taxpayers' pockets and giving it to the dealers.
Has your view changed about the wisdom of requiring the automakers to reduce their dealer bodies?
We're not expert enough about the auto industry to know how many dealers the auto companies ought to have. That was not our initiative. [Executives Rick Wagoner and Fritz Henderson in February] explained that they had too many dealers. And explained about the state franchise laws and what happened with Oldsmobile. And took us through the history and said we wish we could get rid of more dealers, but we have our hands tied here.
Ultimately, when we collectively developed the final business plan, the decision on how many dealers they should have was basically driven by the companies. We would have no way of knowing how many dealers they should have. We simply put our muscle behind them in getting it done because we agreed with them.
The numbers are the numbers. When you look at Toyota and Honda, how many dealers they have and how many cars they sell per dealer, it's a completely different equation. You don't see Toyota and Honda running around saying they want to open more dealers because they like the GM and Chrysler models. So I think it's pretty obvious that they have too many dealers.
Did Chrysler management also want to cut dealers?
Yes. Chrysler sold considerably fewer cars per store than GM did.
Did Sergio Marchionne have any role in a plan to reduce dealerships?
I don't specifically remember what Sergio said about what. But the Chrysler business plan that we underwrote was developed in very close consultation with him and his team. So, I don't have any particular reason to believe that Sergio thinks we made some terrible mistake on the dealers.
You criticize GM accounting people for not showing enough rigor in looking at the numbers. So what is your empirical evidence about savings from closing dealers?
As you well know, one of the points made against us is that the dealers pay the car companies and therefore it doesn't cost anything to have more dealers. If you have more dealers, you make more money.
We did a lot of due diligence around this. We visited a lot of dealers. We studied a lot of evidence about how the different automakers compete. We looked at individual cities and how many dealers of what manufacturer were located in the city. On the weekends, we would actually drive around and look at dealers.
Ultimately, the conclusion we reached, which was no different than any other auto expert I had spoken to had, when you have too many dealers, even though you don't necessarily pay them anything directly, you have marketing expense around those dealers. They tend to have smaller, shabbier stores because they are not selling enough cars to justify larger ones. And they are simply less competitive. I would drive up the street and see a big, gleaming Honda store next to some shabby little Chrysler store and it would just seem obvious to me.
Marchionne comes off in your book as a volatile mastermind. What were your impressions of him?
I think you summarized it very well. One of the most important things in investing, which is what I used to do in private equity, is to back a management team that you believe in. As we spent time with Sergio, for all his interesting personality quirks, we came away believing that this is a guy that we would put our own money behind in Chrysler or anything else he wanted to do that made sense.
He's smart. He's incredibly driven. I've never in all my years met anybody as driven as he is. And he's very effective. He's the antithesis of everything we just discussed about GM in terms of speed of decision-making, process and business acumen. He did a great job with Fiat. And we believe he is one of the two or three great auto executives in the world.
Marchionne still grouses that Chrysler is paying big interest on the federal loans it received, while the government took GM equity for the money it put into GM. Legitimate beef?
He has a legitimate beef in the sense that we learned something from the Chrysler experience when we got to GM. We decided to put almost all of our money as equity. We didn't have much of a choice because, ironically, GM was in much worse shape than Chrysler in terms of how much capital it needed. We could not put $50 billion of debt on GM and still have it standing up. Chrysler didn't need as much capital and most of the money could go in as debt. But Sergio is right. It does make it a little tougher for him.
You implied UAW chief Ron Gettelfinger had more leverage than he used in negotiating the union's stake in the surviving companies?
With GM, that's fair. With Chrysler, we made clear that we were willing to let the company liquidate, and that was a very powerful negotiating tool. In the case of GM, it was considerably more complicated.
If Gettelfinger had held his ground, would the GM VEBA gotten its money in cash instead of equity?
I can't imagine that the president would have wanted to do that. But having said that, it would have been a difficult situation. It's simply not a viable option to replace the UAW workers with people off the street. The cash bleed from a strike or shutdown would have been enormous. I don't really know why Ron agreed to it. But some people have said to me that Ron really wanted to do the right thing and see GM survive and thrive. And if that was his reasoning, I commend him because it was the statesman-like thing to do. If he hadn't done that, it would have been a disaster for everybody, not just for the government but for the UAW also.
How would you rank the management of the Detroit 3 now?
I believe all three of the Detroit 3 have A-plus management teams right now. If there's anything to make people who care about this industry feel optimistic, it's that for the first time in a very long time, these companies have what I call backable CEOs. People I would put my money or my investors' money behind because they are superstars.
What are you driving these days?
I think I'll duck that one.