December 01, 2008

A Proposal to Save General Motors

Many people want to save General Motors (GM), but no one seems willing to do what is required to make it competitive.

GM is like an aging heart-failure patient, suffering from decades of physical abuse and nearing the end.  The medical team has two difficult choices: keep the patient alive on life support, or perform radical surgery with a heart transplant.

A $25 billion bailout for GM, Ford (F), and Chrysler is akin to putting them on life support to stay alive until the money runs out. But it won´t make them competitive. 

GM´s problems have developed over the last 50 years under a series of financially-oriented CEOs.  Instead of staring down the unions and risking a strike, they agreed to expensive employee and retiree health-care programs, generous pensions, a jobs bank, and inflexible work rules that rendered GM non-competitive.

As serious as these problems are, GM´s bigget issue is that it isn´t making cars the American people want to buy, unless enticed with huge discounts and 0% financing.  Over the last four decades GM management watched its share of the U.S. market decline from 53% to 20%. Management repeatedly cut costs, but never deeply enough to get competitive. 

Meanwhile, GM lobbyists opposed most fuel-efficiency standard and safety improvements, from miles/gallon improvements to seat belts to catalytic converters to air bags. Yet when GM started losing share, its management lobbied Washington for limiting imports of foreign autos through increased tariffs, only to waste its opportunities by increasing prices and profits instead of investing in competitive products. 

In fairness to current CEO Richard Waggoner, he inherited these problems from his predecessors. He is taking incremental steps to improve, but isn’t thinking boldly enough about the drastic actions required to fix them. 

The debate in Washington has been framed in stark terms – bail out General Motors or let the company go bankrupt.  The Michigan delegation claims the latter option is untenable to the nation – and I agree that it is – but a quick fix that doesn´t make GM competitive is equally unappealing .

There is better option, but first the executives, unions, and politicians need to face these realities:

  1. With high employee costs and inflexible work rules, GM is not competitive with the North American factories of the Japanese and German producers.
  2. GM cannot afford the overhead for seven brands, many of them “look-alikes,” and the advertising, dealers, and service networks to sustain them.
  3. GM´s products need a massive overhaul to become competitive in fuel efficiency, air pollution, engineering excellence, consumer features, and styling.
  4. GM needs new leadership and a new culture.

Here´s my radical proposal for a heart transplant to save General Motors:

  1. Divide GM into two companies, the first composed of Chevrolet (including trucks), Buick, and Cadillac. 
  2. Install new management, move the headquarters to a new location, and create an empowering culture for all employees.  
  3. Negotiate new employee agreements with wages and benefits competitive to those of foreign producers´ U.S. factories (around $44 per hour compared to GM’s current level of $73),  including health plans and pensions comparable to its foreign competitors.
  4. Retain only GM´s most productive American and foreign factories-those that operate at greater than 80% of capacity.
  5. Embark on an aggressive new-product development program to make its autos fully competitive in engineering, features, and styling within five years.
  6. Commit to fleet average of 38 MPG by 2016 and 48 MPG by 2020, competitive with European standards, with a mix of hybrids, electric cars, lighter vehicles, and efficiency improvements.
  7. Re-charter the dealer network for these three brands with fewer, healthier dealers.
  8. Establish a viable capital structure enabling this company to operate with sound cash balances and a reasonable debt-to-equity structure.

The second company would retain the remaining brands, employee agreements, factories, and dealers.  Management would proceed to liquidate the company, on terms that reasonably protect employee rights, dealer rights, and creditor rights, comparable to what a bankruptcy court might offer.  When this process exceeds GM´s residual balance sheet, the federal government would fund the balance on a one-time basis.

Who could pull off this radical plan?  For starters, the President should appoint an “auto czar” to guide these changes.  For CEO of the first company, an experienced auto executive should be recruited from outside Detroit, someone like Carlos Ghosn, CEO of Renault. The current GM management would lead the second company.

Such radical surgery would be difficult and expensive in the short-term, but it is the only way to make American automobiles competitive for the future. Creating a viable company is a far better solution than letting GM go bankrupt, or facing the slow death of going on “life support” from American taxpayers.