Overhaul (32 page)

The Obama administration had never seriously considered just letting GM liquidate. America's second-largest industrial company (after General Electric) was deeply woven into the very fabric of America, with its generations of workers, its networks of suppliers and dealers, its historical resonance and symbolism. GM embodied the intimate connection between the free capital markets and the social and political contract on which they depend. It could not be allowed simply to disappear. Beyond that, our early work had led us to believe that the company's problems were, to a considerable degree, of its own making—and fixable. It was the job of Harry and his team to verify this hypothesis while ensuring that we had a sensible plan to end GM's decades-long pattern of careening from crisis to crisis.

Something approaching hope was not out of the question. Despite its disarray, GM was still the source of more than 12 percent of all the new cars and trucks on earth. Its 243,000 employees were spread across 140 countries; GM and its partners actually built cars in 34 of them. In the United States, the company operated from 207 locations in 35 states—not counting dealerships, which were, of course, all over. Everything about GM was supersized; in the course of our work we would learn that the company was party to more than a half million contracts.

Harry knew what he was up against. His first official act with the task force had been to ask for GM's financial model, a kind of mega-spreadsheet that companies use to monitor and forecast revenues, expenses, profits, and other important business metrics. GM took days to respond. When it did, the model was useless. Unlike a normal model in which a user can change an assumption and see how the effects ripple across the business, GM's spreadsheet was "value pasted"—the numbers had been entered manually and no underlying formulas tied them together. "Why can't they send us something where the links work?" Harry complained to our Rothschild advisers. "We should ask them to stop playing games."

Harry's first visit to GM, on March 11, had given him a jarring sense of the weakness at the top. At a meeting of high-level executives, he asked CFO Ray Young how much cash the company needed to operate day-to-day. "Eleven billion," Young replied.

"That seems astronomically high," Harry said. "How did you get to that number?" Being Harry, he'd already calculated that for an automaker of GM's size, a cash requirement proportionate to those of Ford and Chrysler would be in the $6 billion to $7 billion range.

Young explained that GM was using a formula based on sales volume, and started walking Harry through the calculation. But as he cited the figures, it was plain that they didn't add up to anywhere near $11 billion.

"You realize that's six to seven billion dollars," Harry pointed out.

Young seemed genuinely puzzled. After a long and very awkward pause, he stammered, "I'll have to get back to you." Harry was dumbfounded.

It hadn't always been like this. GM's treasury department had a reputation for brilliance dating back to Alfred P. Sloan. It was Sloan who had pioneered the notion of using tight financial controls to keep track of its far-flung and disparate divisions. Based in New York, in the vaulting white marble GM building across from the Plaza Hotel, the General Motors treasury was also known as the cradle of CEOs. Rick Wagoner and Fritz Henderson started their careers there, as had others. In my early days on Wall Street, I heard much about GM's treasury staff, which was viewed as cutting edge and among the best anywhere. But GM's sagging fortunes thinned the talent in the ranks. Many good people had retired or quit, and others who might have once been recruited had opted for more lucrative, glamorous jobs on Wall Street.

From the beginning, Harry and his team encountered financial systems as decrepit as Detroit itself. As GM's financial position weakened, it had cut back on funding for its finance group. When it bought Ross Perot's Electronic Data Systems, it turned responsibility for running information technology over to EDS. In 1996, it spun out EDS but left it to manage GM's information technology, which resulted in GM not controlling its own central nervous system. Complications arising from that decision meant that the company needed weeks, not days, to figure out its cash. To assemble the corporate balance sheet, executives had to e-mail around the world and then stitch together a patchwork of reports. Not surprisingly, different countries had different systems.

GM's Latin American operations had a better handle on cash and cash forecasts than did other parts of the empire. But even in Latin America, it was unclear where the money actually was deposited. "No one had a list of all of the GM bank accounts worldwide," a GM adviser told us. By their own estimate, treasury executives spent 80 percent of their time gathering data and only 20 percent analyzing it. (Harry never did get the financial model he'd asked for, because it did not exist. Rothschild ended up jury-rigging one to serve the task force's needs.)

GM faced analogous problems with its accounting operations. The company often had to restate its earnings and was the subject of repeated inquiries from the SEC. In March 2006, for example, GM announced that it needed to revise its profit figures for the previous six years, as a result of having used questionable accounting techniques. As recently as January 22, 2009—as I was in the midst of deciding whether to take the auto job—GM agreed to settle SEC civil charges relating to its accounting. That a global company could have so shoddy a bookkeeping system was mind-boggling. Such problems led to poor decisionmaking.

GM was continually driving without headlights and kept behaving as though cash were not an issue. The summer that gas prices soared and all-important SUV and pickup-truck sales slid, it belatedly suspended its $1 per share dividend. But it invested in Michigan real estate, laying out $626 million to buy the RenCen, and $200 million more for office buildings in Pontiac. Depressed by Rust Belt malaise and the growing credit crunch, the prices must have seemed like bargains.

It didn't take long for Harry and Fritz Henderson to collide. The day after President Obama told the nation that GM would be on a sixty-day deadline to reinvent itself, the new CEO called to assure Harry that GM was reworking its turnaround plan and would have something for him by the end of the weekend—five days hence.

"Wait a second," the thirty-seven-year-old Harry said to the CEO of the world's second largest automaker. "We're talking about a
wholesale revision
." He didn't want the GM team to burn precious days producing yet another mediocre plan. This time, nothing short of perfection was acceptable. There was no time to waste on another mediocre plan. Fritz deputized Troy Clarke, the head of GM North America, to deal with Harry and to enlist other top executives to help.

Harry gave Clarke and Gary Cowger, the company's worldwide manufacturing chief, pep talks by phone the following day. "We have a once-in-a-lifetime opportunity to re-create this company," he said. "You've got to not be constrained by historical habits and practices. You have to think about it and say, 'If we were to start this from scratch, what makes sense for this business?'" Harry came away enthusiastic that the GM chieftains understood both his mission and his desire to approach the task as a colleague rather than an adversary. But in truth, the thirty- and forty-year veterans he was talking to were wary at best.

In Harry's mind, rebuilding GM from the ground up meant starting with the "badges" and "nameplates," automobile-speak for individual brands (of which GM had eight in the U.S.) and models (forty-five). He felt GM's mission was pretty straightforward—it needed to sell quality cars at a competitive price, a simple objective that had eluded the Big Three for decades. So he wanted to know how well positioned each vehicle was—its price, profitability, capital requirements, next-generation design, and so on. He imagined each model as having its own business plan; it could be evaluated to see how strong the product was, and if you totaled up all forty-five, you would see how good GM was as a whole.

On that April morning on the thirty-seventh floor of the Renaissance Center, where the new GM began, the trio from Team Auto watched as slides began to flash onto the screen at the far end of the room. Immediately they realized that the presentations were as interesting for what they didn't show as for what they did. Charts of vehicle sales included no historical data, only projections—which consisted, almost without exception, of upward-sloping lines.

Charts of selling prices showed no comparative data, as if there were no such thing as Ford, Honda or Toyota. This was a puzzle. Why would GM present the data in such a useless manner? Whom were they trying to fool? Or did they just not think about historical numbers and comparative data in a systematic way? It seemed incredible that no board members or senior executives had ever demanded such basic rigor to inform their decisionmaking. We never knew for sure, but concluded that it was just another expression of GM's "get along, go along" culture. (To the GMers' credit, when Harry insisted that all analyses include historical and comparative data, they readily complied.)

We knew before setting foot in Detroit that GM had a badge and nameplate problem. It had too many of each without enough clear differentiation in consumers' minds. Sloan's original vision—"a car for every purse and purpose"—had mushroomed into confusion. Sloan had organized an array of five brands that did not compete with one another but rather offered customers alternatives at different price points. As a family moved up the economic ladder, the "ladder of success," it could also ascend through GM's product line, remaining loyal customers at every step.

The first rung was Chevrolet, and so it has remained. GM's massmarket volume leader accounts for more than 70 percent of GM's total sales in the U.S. Pontiac, Oldsmobile, and Buick occupied the next rungs up. The top rung was Cadillac, which Sloan made into a synonym for affluence. The ladder worked brilliantly in the company's heyday, but as GM's dominance eroded and it began to cut costs, it could no longer keep the brands sharply distinct. Instead of complementing one another, they began to jostle and overlap, competing for resources within the company and cannibalizing one another's customers. The addition of specialty brands like Saturn, Hummer, Saab, and GMC complicated the management challenge.

Meanwhile, Toyota was pursuing a different strategy. While it had twenty-nine nameplates (compared to GM's forty-five), it had only two brands. As a result, Toyota could effectively spread its marketing costs over a large number of nameplates within one brand. By offering more nameplates, Toyota was essentially offering more product choices within each brand. This drew more customers into Toyota showrooms and was a key reason why Toyota dealers were much more productive than GM's.

The problem of too few nameplates per brand was exacerbated by GM's financial woes. Each nameplate requires a certain amount of capital to develop, test, produce, and market to customers. To conserve cash, GM started to slow its product replacement cycle. While agile competitors would come out with new versions—called "refreshes" in the industry—every couple of years, GM was taking longer to renew its products. GM brands started looking "empty" and its showrooms stale. Sloan's strategy of "a car for every purse and purpose" had become GM's weakness.

To his credit, Rick Wagoner had recognized that he had too many brands to feed. After becoming CEO in 2000, he eliminated Oldsmobile. And GM had also analyzed eliminating Pontiac, Saturn, and Saab. The proposal made it all the way to Wagoner, Henderson, and marketing chief Bob Lutz, but all set it aside. According to Fritz, killing Oldsmobile had cost more than $2 billion; there would be smaller, but still sizable hits if Pontiac, Saturn, or other struggling brands were jettisoned. In essence, GM didn't have enough money to fully fund these brands or to put them out of their misery—a brutal financial Catch-22.

But when the economic tsunami hit in 2008, selling or killing brands—Saab, Saturn, and Hummer this time, and sharply scaling back Pontiac—became part of GM's viability plan. Harry's question was whether still more should go. GM had blocked out less than an hour for each presenter, but with Harry's grilling, sessions ran as long as two hours. For each brand, he wanted to take nothing for granted but rather to build a business case from the ground up. What was its position in the market? What was its selling proposition? How did it compete? And on and on, as only Harry could do.

Lunch was sandwiches and chips provided by GM, for which the Treasury team paid in cash to comply with ethics rules. As the afternoon wore on, Troy Clarke asked when Harry wanted to see him and Mark LaNeve, GM North America's sales and marketing chief.

"Ten o'clock will be fine," Harry replied.

"Okay, ten tomorrow it is," Clarke replied.

"No, I mean ten tonight," Harry shot back.

When the sessions finally ended late that evening, David, Sadiq, and the BCG team went to dinner at the Coach Insignia, atop the RenCen Marriott. Harry stayed behind, making notes. By the time he left his desk to go to the rooftop restaurant, the elevators had been shut down and he was left to order room service by himself.

The next morning, the team turned to human resources. Harry was pleasantly surprised to learn that in its personnel review process GM held its own with the best in corporate America, such as General Electric. Reviews were 360 degrees, meaning that each individual was evaluated by subordinates and peers as well as by supervisors. But Harry saw what was wrong with this seemingly attractive picture: at GM, there were no real consequences. Poor performers were rarely demoted or fired. "It was feedback but not with accountability," Harry concluded. Welcome to Generous Motors.

This was the antithesis of what Jack Welch had practiced at GE. Welch was legendary for his view that the top 20 percent of employees should be "loved to death" and the bottom 10 percent should be moved out—humanely, but moved out.

GM's cultural problems extended well beyond personnel decisions and the splendid isolation of its top brass. Its decisionmaking was notoriously bureaucratic, slow, and lacking in analytical rigor. A grandly titled Automotive Strategy Board sat atop many layers of management. It convened for two full days every month, yet decisions were rarely reached in one session. Instead, the Strategy Board meetings became grand productions, with pre-meetings for days to prepare for the actual meeting, and charts sent in advance to be vetted, edited, and sent back for final changes. "It was like a meeting of the UN," a longtime GM executive told us.