Give credit to General Motors Corp. CEO G. Richard "Rick" Wagoner Jr. for a lot of the giant carmaker's improvements. After decades of decline, GM (GM) has halted its seemingly relentless free fall in U.S. market share. Picking up where retiring Chairman John "Jack" Smith Jr. left off, Wagoner has pushed GM to continue to get its plants more efficient and improve the quality of its cars. It boasted a $3.9 billion operating profit last year.
Wagoner is the first to admit that a lot of heavy lifting still needs to be done. GM carries a massive burden in its 450,000 retirees, to whom the company owes pension payments and health-care coverage. Its pension fund is underfunded by $19.3 billion, and GM pays $5 billion a year for the health care of its workers and retirees.
Also, some of its car brands are seen as old or cheap by many consumers. And GM's international operations are a mess. GM-Europe continues to lose money. Deals like GM's 20% stake in Italy's Fiat Auto (FIA) and its investment in Japan's Isuzu Motors (ISUZY) have resulted in more headaches than benefits.
At home, GM is posting strong results, but 2003 looks like a tough year, with industry sales expected to slip and profit-eating incentives rising. BusinessWeek Detroit Correspondent David Welch sat for a chat with Wagoner at the Detroit auto show in early January. In a 30-minute interview, Wagoner insisted that despite a tough economy and some entrenched problems, GM still has reason for optimism. Edited excerpts from the conversation follow:
Q: GM continues to make money and improvements, but Wall Street is fixated on the pension and health-care costs. Does that get frustrating?
A: There's an element of frustration. The attitude of the markets is, "Show me." I've become philosophical about it. If we run the business well, we'll generate cash, and show growth opportunities and long-term robust stock performance. The pension fund is a challenge we have, but it's fixable.
Q: What about the health-care issues?
A: The health-care issue is highlighted in traditional industries like automotive, railroad, etc. It's a microcosm of a U.S. economic issue. Eventually, that's going to have to be mitigated. We're going to run a pretty lean, aggressive business. In a perverse way, we're using what is a significant balance-sheet challenge to really get our business operating in fighting trim.
Q: Without those costs, does GM look more like Toyota (TM)?
A: I'm comfortable with our ability to compete with Toyota. They're a great company. But they aren't infallible. We've got a great set of strengths that in some cases they're trying to match us. I'm very comfortable with our ability to compete with them in the marketplace and achieve the same financial results that they do.
Q: In 10 years or so, your number of retirees begins to decline. You'll be paying for fewer of them. What does GM look like in 10 years?
A: It's a morbid conversation.... These are very long-tailed liabilities. I would have to say, in my career horizon, even in the best of circumstances, we'll still be dealing with these issues. If the equity markets come back, we could get a bunch of cash and settle the pension issues. But we thought that a few years ago and learned a lesson.
Q: You have a lot of performance numbers for each of your executives to meet. Is that your big stick for steering the company?
A: It's very important that we have a consistent set of metrics that we use to run the company. All businesses are about people. We have a remarkably consistent view of how the business should be run. I don't want to leave this impression that I say, "here are your objectives, I'll see you in January. If you make them, great. If not, you're fired."
The best way to run the business is by consensus [of top executives]. Sometimes the vote is 14-1, and if the "one" is the right way, we go with the one.
Q: Is the one yours?
A: Right. The one is mine, but I'm very sensitive about doing that. Most of the decisions we make are made if you poll the room and everyone says, "Yeah, that's the way to go."
Q: Why did you hire former Chrysler Corp. (DCX) car guru Bob Lutz? Did you perceive a weakness in personality in GM's product-development works? Did you need someone who would get people to follow him to make the right decisions for new cars?
A: Lutz has brought not just a great capability but a spark, which has been terrific in igniting passion that was there. I have a lot of confidence in the people we had on the product side of the business, but it was clear we needed a spark.
Q: No one ever accused GM of having bad designers. We accused you of not using them.
A: That is a little simplistic. It's not a question of using them, it's a question of what argument will carry the day. If you think you need to move hard in quality and productivity, sometimes you make a call on a product that might sacrifice on [styling] in order to improve processing time or have better execution. Bob has brought in a provocative argument that maybe you can get both.
Q: GM has gained market share by using 0% financing and other fat incentives. But isn't this strategy a gamble that, even when the economy recovers and even when the so-called Lutz cars come to market, you have buyers hooked on the deal and can't get them off?
A: I suspect it's a risk. But doing nothing and letting volume go down was a bigger risk. We made twice as much profit as we said we would in 2002. We generated a lot of cash. This does not sound like a bad strategy. I think incentives will ease off when the economy strengthens. It would be very much helped by hot products. Everyone has benefited from this.
Q: Some of your competitors don't think so.
A: I particularly chuckle at some of our counterparts whose headquarters are in Germany who have been persistently haranguing this. Let's check the robustness of their home market. Maybe they ought to do something to stimulate demand.
Q: When I look at your alliance strategy with auto companies overseas, and I see almost $3 billion in write-offs for investments in Isuzu and Fiat. The possibility of having to buy the rest of Fiat is a drag on your stock. Even some of the vehicles you've made with your alliance partners haven't worked out. How is this strategy not a failure?
A: These alliances are built around opportunities to grow outside the U.S. These things sometimes take longer than we hoped. With Isuzu, as a major shareholder, we were too light of hand. They have struggled like many Japanese businesses have.
The basic reasons for doing the Fiat deal are working well. We're getting purchasing synergies and diesel engines for GM-Europe that we wouldn't have had. Europe is becoming like the U.S. with more competition and price pressure growing by the day. The issue is getting costs down. You have to have scale.
Q: But wouldn't you get out of the Fiat deal if you could?
A: I don't want to answer that.
Q: Some people give Lutz and recently hired CFO John Devine credit for fixing a lot of what was wrong at GM. What do you think of that?
A: Jack Smith saved the company. Keep in mind that a lot of what's happening today is because of people like [GM-North America President] Gary Cowger and [purchasing chief] Bo Anderson. Gains in quality and productivity come from years of hard work. The guys running GM are a lot of the same people.