GM is already saving itself

Americans have bailout fatigue after the greatest bait-and-switch scam in history was pulled on them with the Wall Street bailout.  But the economic crisis and plummeting demand for cars are affecting the Big 3, too, and their current crisis might not have happened if it weren't for Wall Street's crisis.  Refusing to give Detroit a loan now is like kicking a man when he's down.

Rescuing GM As It Tries To Rescue Itself

By Jonathan Rauch

December 13, 2008  |  NationalJournal.com

 

"We wouldn't be here if it weren't for GM," said Sen. Bob Corker, R-Tenn., at hearings last week on the automotive bailout. Sorry, make that the automotive bridge loan -- as Detroit prefers to call it.

 

Corker was right. Chrysler is too small to be worth bailing out on its own. Ford Motor thinks it can survive the coming year without aid. But General Motors accounts for more than one-fifth of the U.S. car market, and it announced in early December that it was within weeks of bankruptcy.

 

Does a bridge make sense? That depends on what you're trying to span. Many Democrats would settle for a short-term bridge to a healthier economy, on the theory that rescuing Detroit now will be easier and cheaper than picking up the pieces later. Many Republicans, by contrast, want a long-term bridge to a viable GM, on the theory that taxpayers' money will otherwise have gone to waste.

 

The latter view would have been more justifiable a year ago than today. What if, as some credible economists believe, the economy is on the brink of a deflationary tailspin? In that case, now would be a particularly bad moment to consign GM to the scrap heap.

 

Maybe GM could enter bankruptcy protection under Chapter 11, restructure, and emerge stronger. But maybe not. If customers and creditors fled, bankruptcy protection might quickly bring about GM's collapse. "I think it is very risky," says Maryann Keller, a respected automotive analyst. A few years ago, in a stronger economy, the industry might have absorbed a body blow, but if GM were liquidated today, Keller says, it would take down much of the supplier base. Then the failure "spreads out all over the place."

 

The ranks of line executives and engineers are thick with members of the Obama generation, who barely remember when GM was fat and happy.

 

Last year, auto sales came in at about 16 million units, which was already low. This year's sales are running at closer to 10 million, which is a collapse, not a decline. Unless millions of Americans have suddenly decided to exchange cars for bicycles, sooner or later demand will return to something more like normal. At that point, GM might stabilize, or the economy might be able to absorb its loss. Even if all a bailout did was buy time, an extra year or two might be cheap at the price.

 

Still, for purposes of argument, grant the premise that buying time isn't enough. Assume that a bailout needs to buy long-term viability, not just short-term relief. What bailout critics are really asking boils down to this: Is there a business case for GM? They suspect that the answer is no.

 

I am no automotive expert, but I did spend a good portion of the past year immersed in General Motors. I was reporting a story for The Atlantic, a sister publication of National Journal, on the Chevy Volt, GM's ambitious effort to roll out a plug-in electric car by the end of 2010. Much of my exposure was to the engineering side of the company, and only a slice of it at that; but along the way I talked to senior executives and learned quite a bit about the company's culture and position. What I saw surprised me.

 

GM is a century old this year. It is large, bureaucratic, and encumbered by a variety of brands, dealers, labor contracts, and bad habits that no company would want to start out with today. Ironically, its problems were forecast with eerie accuracy 45 years ago by no less an authority than Alfred P. Sloan Jr., GM's greatest CEO. In My Years With General Motors, Sloan wrote:

 

"Success, however, may bring self-satisfaction.... The spirit of venture is lost in the inertia of the mind against change. When such influences develop, growth may be arrested or a decline may set in, caused by the failure to recognize advancing technology or altered consumer needs, or perhaps by competition that is more virile and aggressive.... This is the greatest challenge to be met by the leader of an industry. It is a challenge to be met by the General Motors of the future."

 

Few major companies survive a hundred years, much less manage to reinvent themselves as centenarians. Skeptics may be right to predict that GM will fail. But I think GM has a shot.

 

To be viable, GM needs four things: competitive cars, a competitive business culture, a viable balance sheet, and a viable business plan. The first is the sine qua non. GM's seeming inability to build good cars profitably for most of three decades has mauled its reputation.

 

In the car business, however, reputations lag reality. Today, GM's factories are only about 6 percent less efficient than Toyota's, according to Oliver Wyman, a consulting firm, and the remaining gap will shrink as new labor agreements kick in. The company's cars are winning awards and critical plaudits. The 2008 Chevy Malibu, a hit with both buyers and analysts, represents a breakthrough: a midsize sedan that can go toe-to-toe with Toyota's ubiquitous Camry without flinching. Whether GM can consistently replicate the Malibu and other recent successes remains to be seen, but the vehicles in the pipeline look promising.

 

GM has practically begged for a strong federal overseer with the power to force unions, dealers, and creditors to accept further retrenchment.

 

GM's culture was for decades synonymous with ingrown complacency. The divisions competed with each other, instead of with the best of the competition. One engineer told me how "blown away" he and others at Cadillac were by the arrival of the first Toyota Lexus 20 years ago: "There was nothing in that car that was new technology. It was just good execution of existing technology." In other words, GM could have designed as good a car but didn't.

 

What I found this year was a far cry from complacency. The ranks of line executives and engineers are thick with members of the Obama generation, who barely remember when GM was fat and happy. They are hungry to change the beleaguered company and prove its critics wrong. They are also piercingly critical of the old GM, candid to the point of eagerness in owning up to and analyzing the company's mistakes and faults. The decades of denial are over.

 

To succeed they will need a healthy balance sheet. Here, the problems are with legacy costs: uncompetitive pensions and benefits, rigid labor contracts, too many brands and dealers, and so on. The good news is that the company has succeeded at reducing its structural costs. It has shed more than 40 percent of its jobs and about 1,000 dealers since 2004; negotiated fully competitive wage scales for new hires; extinguished the Oldsmobile brand; and transferred retirement and health costs to its unions. The bad news is that those changes were sufficient only if everything went right economically.

 

In its rescue proposal to Congress, GM practically begged for a strong federal overseer with the power to force unions, dealers, and creditors to accept further retrenchment. GM wants the stick of a bankruptcy-like arrangement without the stigma of the real thing. In principle, a federal bailout could give GM a hard push into the future by wrenching its balance sheet into alignment with reality.

 

Whether that would ultimately work depends on whether you think that GM has a plausible business plan. The answer depends on which GM you're talking about.

 

One General Motors, of course, is the hidebound metal-bashing giant of yore. This GM is parochially American in its style and outlook, midtech in its engineering and design capabilities, wedded to the internal combustion engine, and multinational and multidivisional but incapable of exploiting global economies of scale. This GM would do things like import thoroughbred designs from its European Opel division for sale in the U.S., only to let the Detroit bureaucracy rework them into overpriced dogs.

 

The other GM is quite different. It is genuinely global, with executive talent that comfortably traverses borders (the Volt project manager and head battery engineer are both German, for instance) and with cars that are designed in Australia, Germany, and South Korea for cross-market manufacture and sale. It is aggressively positioning itself to lead the industry's expected breakout into electrification. Surprisingly, GM's executives see electric drive not as a threat but as an opportunity. They think the company's technological depth, global reach, and long experience with electric cars (dating back 20 years) give GM a competitive advantage for a task as daunting and costly as the reinvention of the automobile.

 

The business plan, then, is to gradually replace the multinational internal combustion company with a global electric drive company, leaping from midtech to high-tech and turning GM's sprawling size to advantage. This, and not just short-term solvency, was presumably what Rick Wagoner, the chairman and CEO, had in mind when he told Congress last week that GM's rescue plan "creates a blueprint for a new General Motors."

 

Whether a bailout can save GM depends, then, on which GM you think you're bailing out, the calcified shell of the old GM or the new-economy company struggling to emerge. Given the record, counting on GM to succeed would be rash. But consigning it to fail might be even more so.