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GM's CEO blew his big chance
Rick Wagoner failed to deliver a turnaround plan that'll make a real difference.
By Robert Walberg
Tuesday was CEO Rick Wagoner's big moment, his chance to quiet skeptics and chart a bold course for General Motors (GM, news, msgs) in its efforts to recapture market share and return to profitability. He failed miserably. Instead of offering shareholders at the company's annual meeting a clear vision of how he would revitalize GM, he offered up an unclear, uninspiring and unconvincing collection of Wall Street speak.
We were asked to believe that by cutting 25,000 U.S. manufacturing jobs through 2008; closing additional plants; spending more on marketing; improving brand identity; and containing health care costs; GM's North American business would return to profitability.
That's it. No admission that the business is broken and needs a major overhaul, such as fewer product lines. No bold initiative such as using some of the $20 billion or so in cash to make a major acquisition that might diversify the product line, leaving the company less susceptible to the cyclicality of the auto industry. No management shake-up. In sum, no imagination, no bold leadership, no credibility.
Even Kirk Kerkorian, whose tender offer to increase his holdings to nearly 9% of GM expires Tuesday, might just decide to walk away from this mess. If not, you can bet that after Tuesday's lame performance by Wagoner that Kerkorian will use his increased ownership to pressure management to make more aggressive changes.
The reality of the situation
Newspaperman Jimmy Breslin would've marveled at all the blue smoke and mirrors in Wagoner's speech. Take, for example, the sobering call for an additional reduction in the workforce. That might make some folks on Wall Street happy, but the reality of the situation is that the headcount reduction is similar to what GM has been doing for years.
As Goldman Sachs indicated after the speech, General Motors North America has been closing plants and losing employees for years. In fact, targeted headcount reductions and natural attrition led to a decline in employment of 26,000 employees from end of 2001 to the end of 2004. In other words, Tuesday's announcement is nothing more than the same old stuff.
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Now let's look more closely at the big $2.5 billion in projected annual savings that all these plant closings and job reductions are supposed to bring about. First off, this number probably refers to gross, not net, savings. For example, there are benefits costs associated with staff reductions that most likely aren't reflected in this estimate. Second, unless the plant closings and job reductions come at a pace faster than suggested Tuesday, the total savings, whatever they are, won't occur until 2008.
Just a reminder to Wagoner in case he forgot, but GM lost $1.3 billion last quarter alone. The company probably will lose about $3 billion to $4 billion this year. If we generously say the company realizes the full benefit of the $2.5 billion in savings and its new brands and marketing campaign boost sales, we're still talking about GM breaking even at best and that won't occur for another couple of years.
Letting shareholders down
Now let's take a closer look at the product plans. After all, GM is in the business of making cars and if it ever hopes to return its business to profitability it must do a better job of meeting consumer demands. Unfortunately, management let shareholders down again. Instead of announcing the end to the struggling Pontiac and/or Buick brands, management simply noted that it'll continue to streamline brands and enhance its marketing efforts. GM can take out all the ads it wants and spend billions to do so, but unless it begins to make sexier cars/trucks with the type of attractive, functional interiors offered by the competition, it's not going to stop the steady share erosion that has defined the Wagoner era.
To its credit, the company does have a host of redesigns planned for the next couple of years. However, it's stunning in today's environment of higher fuel costs and stricter emissions standards to realize that GM is pouring much of its additional research and development dollars into its pickup, large SUV and crossover vehicles.
In fact, GM is betting heavily that a newly redesigned GMC Yukon, Chevy Tahoe and Cadillac Escalade will breathe life back into its large SUV category, a group that has seen sales plummet by 25% over the year's first five months. The company better hope that gas prices start falling or else it's going to be forced to discount again.
The company is also betting big on an aggressive move into the now popular crossover car market. Unfortunately, management was slow to acknowledge the demand for these vehicles and its offerings must now compete in a saturated market. Instead of chasing this market, wouldn't the company have been better off a couple years ago being at the forefront of the hybrid market? Instead, it's now racing to catch up there as well.
One area of creativity
Discounting is about the only place that GM has shown any creativity lately. The company recently announced a plan to offer car buyers the same discounts that its employees get. This might revitalize sales over the short term, but it does so at the expense of profits, a move GM can't afford to keep making.
While a slew of new products can't hurt, it's difficult to imagine the company reversing the downward market share trend that has persisted for nearly 30 years. The competition is too intense and the company's product lines too disperse. And, as management noted, with health care costs tacking on nearly $1,500 per vehicle, GM has a tough time competing with foreign carmakers on price.
Though Wagoner knows that he has to get a handle on the rising health care costs if the company is to return to profitability, Tuesday's promise to do so rings hollow because unions aren't eager to make concessions just before a slew of new products hits the market, which could temporarily boost sales. At best, management can hope to renegotiate health care coverage in 2007 when the current UAW contract expires. But that doesn't bring much immediate hope to a company losing billions by the quarter.
Break down Tuesday's speech by Wagoner and what you get is a broken down company run by a management team bankrupt of fresh ideas. Not an exciting picture for shareholders or employees, both of whom must be losing patience with management.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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