Overhaul (34 page)

The thirty-seventh-floor conference room became the office for the three auto task force members during their trips to Detroit. Unfortunately, it lacked Internet service, and when they asked about this, they were told that the necessary approval process for visitors was too cumbersome to navigate. Harry couldn't believe it. He represented GM's largest creditor and soon-to-be owner, yet the company wouldn't or couldn't connect him to the web so he could do his work. In the end, he and David bought wireless cards with their own money.

The tension between Team Auto and GM quickly mounted. Harry was pushing for fast answers—trying to determine in a few weeks how best to fix GM. But the automaker wasn't built for speed—its systems didn't produce information quickly, nor were its executives used to newcomers challenging them with theories and ideas they'd never heard broached before.

Harry's bluntness didn't mesh well with the GM way. Frank questions like "Why would you ever do that?" or "How exactly does that work?" would elicit replies like, "Well, we've always done it that way." The old-timers at GM resented Harry and his young team. They felt that the Treasury guys lacked industry knowledge and were sometimes asking the impossible. And they sensed that Treasury was starting from the assumption that the GM executives "were a pack of morons," as one onlooker put it. Yet there was little open conflict. That was not the GM way.

Some of the most stubborn opposition came from chief planner John Smith. A forty-one-year GM veteran and group vice president, Smith was a Missourian who had gone to Harvard and come up through the GM treasury. He controlled the company's sales and market-share statistics and assumptions—the ultimate levers of power at GM, because these numbers shaped multibillion-dollar decisions on everything from the manufacturing footprint to parts purchasing to cash on the hood. Smith would often reject data requests from the task force, saying, "We know what we need to do." BCG came in for its share of resentment as well, nicknamed by one GM official "consultants gone wild."

For their part, my task force colleagues thought that having Smith in such a critical job—which included responsibility for certain deals—typified all that was wrong with GM's personnel decisions. He was a man of modest ability who mostly sought to maintain the status quo. Later, members of the new board would privately dismiss him too.

While the tension between Smith and GM's new minders was most palpable, veterans like Lutz, Clarke, and Cowger, all former Wagoner lieutenants, felt that GM had made great progress before the financial crisis at turning itself around. They believed they had done yeoman's work keeping the company afloat despite its crushing liabilities and handicaps. To hear Harry and his even younger aides imply that the company was slow, inept, and out-of-date was insulting, to put it mildly. "Who does this little prick think he is?" they would sometimes mutter after a meeting with Harry.

But not everyone connected with GM responded this way. Longtime advisers from firms such as Morgan Stanley, Alix Partners, and Evercore generally nodded in agreement with Team Auto's requests and prescriptions, which often echoed their own past recommendations to their reluctant client.

Despite his early clash with Harry, Fritz Henderson (who of course owed us his promotion) was receptive to the task force. "Listen to these guys and fully vet their ideas," he would tell his executives, sometimes reminding them, "They have the money." So GM did finally respond to Harry's insatiable appetite for information—the sales and marketing staff alone produced thousands of pages of documents, on everything from the dealer network to residual values.

The debate about brands was painful nonetheless. When a consensus was quickly reached to eliminate Pontiac altogether, that left GM in North America with four brands—Chevrolet, GMC, Buick, and Cadillac. Were further reductions needed? Harry approached the question with an open mind, asking for two-brand and three-brand strategies as alternatives, and assigning BCG to collaborate with GM on the analyses. This didn't work out so well. After days of frustration, the consultants announced that they thought GM was tilting its numbers to favor the four-brand status quo.

To the GMers, the very identity of the company was at stake—how much more of its heritage must GM sacrifice to earn the right to survive? Tensions rose higher in mid-April when Harry asked GM to consider absorbing Jeep, Dodge Ram, and Chrysler minivans. In high-level meetings, GM executives would sometimes abruptly leave to talk among themselves outside the conference room, leaving Team Auto to wonder what was going on.

The two-brand option was the first to fall by the wayside after analysis showed that the GMC name was too valuable to jettison. GMC trucks are essentially the same as Chevy trucks, yet they fetch several thousand dollars more per vehicle. Whether to keep Buick was a much tougher call. To GM's thinking, Buick was needed as an intermediate step for buyers trading up from a Chevrolet and not yet ready for a Cadillac. But our team had trouble seeing this borne out by market statistics, and Buick had a very thin product line.

GM also invoked Buick's enormous popularity and prestige in China. There, unaccountably, it had become the car of choice for top-ranking technocrats and successful entrepreneurs. But that argument didn't convince Harry either. "I don't think Chinese consumers care whether Buick sells in the U.S. And if they did, it would be a bad thing for our China sales," he declared, noting how weak Buick's North American sales had been recently.

The stickiest aspect of Buick for us involved dealers. Modern car dealers typically carry multiple brands, and within the GM universe this meant there was a whole cadre of franchisees selling Buick, Pontiac, and GMC. Taking away Buick on top of Pontiac would leave these dealers with only GMC. We couldn't compensate them by adding Chevrolet to their mix because that would cannibalize their GMC truck sales. Nor could we offer them Cadillac; with its upmarket positioning, the fit wouldn't be good.

In the end, Harry reluctantly agreed to let Buick live, and GM was able to keep the four-brand strategy it wanted. A saving grace was that Buick was planning to introduce two new models in the near future that held great promise, holding out hope that the brand could be at least partially revived. But Harry attached a condition that surprised GM executives: he insisted that dealers' franchise agreements be modified so that if Buick was later shut down, the contracts could be terminated at a manageable cost. Characteristically, the GM executives hadn't thought of this eventuality. They were more interested in the rosy upside possibilities of keeping Buick than in protecting GM in the event it continued to decline. Harry's investment background had trained him to think about managing the downside just as much as the upside.

When Harry was in Washington, he would come into my office and perch on one of the government-issue wooden chairs opposite my desk. We'd catch up on the progress of his due diligence and take a few minutes to talk about the bigger challenges of restructuring GM. Pulsing with energy, Harry generally leaned forward when he was sitting, and spoke in a rapid, soft tone. We both understood that while a quick trip through bankruptcy could repair GM's balance sheet, unless we somehow fixed the culture, the company would slide back toward the abyss.

Harry hated the mediocrity he was finding. He told me how at one review session, Mary Sipes, the chief product planner for GM North America, said she was happy with plans for a particular model because her team had dubbed it "credible."

"Shouldn't the standard we're shooting for be 'compelling,' not 'credible'?" Harry asked. Above all, GM needed an attitude transplant. Its people were so used to losing, to watching market share erode and seeing their vehicles outclassed and outsold, that mediocrity became a self-fulfilling prophecy. Harry was fond of a Vince Lombardi quote: "Winning is a habit. Unfortunately, so is losing." Changing GM's psychology became a key goal for the team.

Typical of the cultural challenge was a lack of focus on shareholder value. In all our time interacting with GM executives, we never heard any of them utter that all-important term. Chatting after one lengthy session on the thirty-seventh floor, Troy Clarke told Harry that earlier that day, Ray Young had given the senior leadership a quick tutorial on equity value and "total enterprise value." Troy said he'd been fascinated to learn that if they cut annual operating expenses by $8 billion, they would add approximately $36 billion to GM's worth! He was so pleased by this discovery that he did not notice that Harry was aghast. How could the head of GM North America not understand how value is created for shareholders? The sad truth was that no one at GM thought like an owner.

Reminders of GM's lack of financial discipline were always crossing my desk. The Bush loan agreements required the company to ask for the Treasury Department's approval of any nonroutine expenditure of more than $100 million. Requests from GM's treasury usually arrived in the form of a PowerPoint deck, a handful of pages with no backup analysis or other justification. It was GM's arrogance and sense of entitlement at their worst. The company expected us to take its word for each submission and rubber-stamp the funding, which would of course have to come out of taxpayers' pockets. Close advisers to GM had noted a similar fecklessness for years. At board meetings, $1 billion often seemed the smallest significant amount. Proposals to spend, say, $500 million on this project or $300 million on that would show up on slides as $0.5 or $0.3. Presented that way, a half-billion-dollar expenditure could seem hardly worthy of discussion.

The most frequent beneficiary of GM's lax spending was Delphi, the troubled $18-billion-a-year parts maker that GM had spun off ten years before. Delphi had been languishing in bankruptcy since October 2005, but remained GM's sole supplier of such critical components as steering assemblies. By exploiting that dependency, Delphi had succeeded in extracting huge concessions from GM—a total of $12.5 billion since the spinoff.

In early March, we faced our first Delphi request. GM wanted to pay the parts maker $150 million for operating funds to tide it over for a single month! That ask was coupled with another involving a complicated proposed transaction to buy back the steering business from Delphi, also explained in a single page of PowerPoint. All told, GM would be providing more than $350 million, money it would probably never get back. Yet so certain were GM and Delphi of our acquiescence that Delphi had already issued a press release announcing the agreement.

When Harry asked the GM team how the $350 million would serve Delphi, he was told that it would cover Delphi's operating losses for a period of time, probably two months.

"Then what?" Harry asked. He was told that Delphi would likely be back at that point, its bankruptcy unresolved and asking for more money. "How long has this been going on?" he asked.

"A long time."

Harry wanted to meet with Delphi's management to try to reach a resolution that would bring the company out of bankruptcy, end the threat to GM's supply and production, and minimize the use of taxpayer cash. At a hastily called meeting with GM and Delphi representatives, he looked across the table at a senior Delphi executive who was demanding a massive cash infusion from GM and asked, "Why is this a good deal for GM? Why would we ever want to do this?"

"Because if you don't, we'll shut you down," the Delphi official replied.

Harry had been through enough negotiations to know that you can't give in to threats. "We're not going to do it," he said.

When Harry reported on the meeting, I immediately agreed. A phrase from history flashed into my mind, America's repudiation in 1799 of extortion demands by the Barbary pirates: "Millions for defense, but not one cent for tribute!" This had led to a two-year undeclared war.

As Team Auto delved into Delphi, we discovered one of the most convoluted financial messes any of us had ever seen. The prolonged bankruptcy had produced a capital structure with layer upon layer of debt. Effective control of the business rested with a group of hedge funds, some of which had bought in when Delphi looked like a bargain. They were frustrated with management for not making any fundamental changes to Delphi during its long bankruptcy and were anxious to recover their capital in any way they could. Delphi was also mired in long-running discussions with the Pension Benefit Guaranty Corporation, the independent federal agency that insures private pensions, about its grievously underfunded pension plan.

Privately we told GM that we were going to hit the pause button on Delphi until we figured it out. Though Delphi was important to GM, the sheer volume of outstanding work dictated that we had to prioritize. Ray Young and his associates were not happy; they didn't like being second-guessed and were more scared of Delphi's threats than we were. In their "spare time," Matt and Harry began to sort through the rat's nest. They soon learned that Delphi was exaggerating its need for cash. It was sitting on sufficient rainy-day capital in a sequestered account that the hedge funds refused to release. GM and the hedge funds tried to bridge their differences, but negotiations broke down.

While engaged in this maneuvering, we also undertook contingency planning in the event of an actual Delphi shutdown.

"How long could you keep the factories running if they cut you off?" Harry asked Troy Clarke, GM's North America chief.

"We couldn't," Clarke said.

Incredibly, GM had never tried to stockpile critical components in the event of a Delphi shutdown, nor had it done any meaningful work to create alternative sources of supply. Harry was stymied until later that day, when he and Clarke began a discussion of GM's upcoming production plans, which included a summer shutdown that is routine for automakers. The normal shutdown was four weeks, but this year GM wanted to make it longer to reduce the bloated supply of cars on dealers' lots.

"Wait!" said Harry. "If you shut down, doesn't that eliminate the impact of Delphi's threat? Suppose we make the shutdown even longer?"