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Will Wagoner Walk Away?

Renault product and strategic planning chief Patrick Pelata sounds the way a boxer looks in the 15th round, when he knows he's down on points. Fists start flying in every direction. Heads are butted. And the boxer starts looking for a knockout punch.

That's the only explanation for Pelata opening his thoughts on Monday to reporters attending the Paris Auto Show. He talked about about how much he thinks General Motors (GM) is mistaken in not approaching an alliance with Renault and Nissan (NSANY) with more urgency and optimism.

Pelata, as has been reported by several media outlets, told reporters he had warned GM Vice-Chairman and Chief Financial Officer Frederick "Fritz" Henderson, with whom he has met regarding a GM-Renault-Nissan tie-up, that if GM delays solving its performance issues, "it's just going to get worse."

Pelata also reportedly said, somewhat hysterically, "What are they going to do about Toyota…What are we going to do, and what is GM going to do? Are we just going to say they're going to be winners?"

GM and Renault-Nissan are coming near the end of a 90-day review period, a span of time Pelata criticized for being too short. The widely held expectation is that the deadline will come and go without a deal aligning the three companies. GM simply doesn't want a deal with Renault-Nissan, having been dragged to the altar with the French-Japanese company by dissident shareholder billionaire Kirk Kerkorian and his adviser Jerome York, who sits on GM's board.

WEIGHING OFFERS. Indeed, perhaps GM's alternative to quell critics that it isn't moving fast enough to reform and restructure will be to strike more joint-venture deals with Toyota (TM) with which it already operates a few projects. A Toyota source told BusinessWeek in July that the company was "gaming" joint venture offers for GM in the event that it was seeking such deals as an alternative to signing on with Renault and Nissan for a wide-ranging alliance.

There is little doubt that tying up with Renault and Nissan could possibly benefit GM in the long run. Renault says it has presented "1,000" ways the three companies could save money in the future on purchasing and vehicle development. But, of course, it's all in the execution. Success in intercorporate alliances is always in the execution, not in the paper planning.

GM has reason to be shy. It turned alliances with Isuzu, Fiat (FIA), and Fuji Heavy Industries (Subaru) that looked fine on paper into expensive wild goose chases.

FUJI AND FIAT. With Fuji, for example, GM bought 20% of the Japanese company thinking it could and would develop a common vehicle architecture that utilized Fuji's excellent all-wheel-drive technology. In the end, the two companies couldn't and wouldn't agree on common engineering specifications for common vehicles. GM sold its stake at a loss, and Toyota bought into Fuji.

With Fiat, GM crowed about the billions it would save in common purchasing and diesel engines. So, GM bought an equity stake in the Italian company that became worth about as much as Enron stock certificates are today. Isuzu has long supplied diesel engines to GM, as well as a few vehicles. But it has had to write down its investment in the troubled Japanese company. Only a forensic accountant with a sense of humor could know if GM actually came out ahead in its Isuzu investment. And GM has unwound most of its investment in Suzuki.

GM, right or wrong, is planning on sticking to the course laid out by CEO G. Richard Wagoner Jr., who, again, rightly or wrongly, wants to see if he can stabilize GM's market share and restore its profitability. In truth, what GM has accomplished in the last 12 months is impressive for a lumbering giant. Consider the following moves dating back to last October:

-A GM-UAW Retiree Health Care Agreement, which is estimated to reduce GM's annual health-care expense by about $3 billion on a pre-tax basis, or $2.5 billion net. Cash flow savings of about $1 billion a year.

-GM announces it will double the number of "crossover vehicle" entries to 14 by 2009.

-Manufacturing capacity actions: Reduction of 1 million units of capacity, 12 facilities to be idled, target of 30,000 jobs by 2008 to achieve at least 100% utilization. Increases structural cost reduction target to $7 billion.

-Announces all-time sales records in three of its four global regions; sells 9.2 million vehicles globally, its second highest ever; GM ranks No. 1 among automakers in China.

-Chevy Camaro wins best concept car award at the North American International Auto Show in Detroit.

-GM reduces its dividend by 50%, reduces Board and senior executive compensation, and reduces salaried staff. GM revises U.S. salaried retiree health-care benefits, capping its contribution to $4.88 billion, saving $900 million a year. Freezes U.S. salaried employee pension plan to save $1.6 billion in 2006, replacing it with a fair, lower-cost plan. GM offers an accelerated attrition program for hourly employees. 34,000 employees agree to buyout.

-GM reports second quarter adjusted net income of $1.2 billion or $2.03 per share, and a record $54.4 billion in revenue. GM increases target for structural-cost reductions to $9 billion on a running-rate basis by year's end, with $5 billion in savings expected for calendar year 2006. Meanwhile, GM says it has raised annual capital spending on new products by $1.5 billion over the last two years.

-Average transaction prices are up, and incentives are down about $1,200 a vehicle so far this year. Most competitors' incentives have increased in 2006.

-GM's warranty costs are way down, and it is saving around $1 billion a year from improved quality and early detection of problems. The improvements pave the way for GM to offer a 100,000 mile warranty, the best in the auto industry.

LINGERING DOUBTS. That's a lot of progress in less than 12 months in making serious and major structural changes to GM that gets it in line with the reality of its fallen market share. But, still, there are those, Kerkorian, York and Renault's Pelata included, who think the company can't and won't move fast enough to meet the challenge of Toyota, which is earning in excess of $10 billion a year on lower revenue than GM, under Wagoner.

But it is unclear what the payoff is for GM in fixing its gaze on maintaining its status as the world's largest automaker. When Toyota passes Ford (F) and GM in worldwide sales and market share, there will be headlines for a time. But what is far more important for GM is that it resize its company to generate profits that it can plow back into the making of cars and trucks that customers want.

And new cars now emerging from GM, under product boss Robert A. "Bob" Lutz, show that GM has learned its lessons of bad product development. Vehicles like Saturn Sky, Pontiac Solstice, Buick Lucerne, Chevy HHR, and Suburban are segment toppers in terms of quality and performance. A loftier goal for GM is to get its house in order, let Toyota pass it in market share if it comes to that, and then try and retake Toyota in profitability if not share.

FUTURE TASKS. For all the flowers being thrown at Renault-Nissan CEO Carlos Ghosn for turning around Nissan, he still has work to do to make sure Nissan's recovery is sustainable. And now he has to streamline Renault, which is under great pressure in its core European market as Asian brands continue to take advantage of European Union rules that knocked down national policies that gave home-team automakers great price advantages while letting down customers on quality. (see, 9/25/06, "Grading Ghosn").

As any long time GM watcher knows, it is not about to sign a far-reaching alliance agreement with a company whose chief negotiator mouths off to the media about how doltish GM is being in the talks. If that's the way he feels, it doesn't bode well for the three companies working well together in the future anyway. And, as everyone knows, these mega deals may be signed on paper, but they succeed or fail in the execution, which would depend on three very large companies on three different continents with three different corporate cultures synching their priorities, people and planning. Good luck!

Wagoner, in the end, will have a lot to answer for if his restructuring plan doesn't pay off. But he's probably not wrong to walk away from this deal if that's what he decides.

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