Ed Whitacre Battles to Save GM from Itself

 
By David Welch
     April 29 (Bloomberg BusinessWeek) -- The 15 General Motors
dealers who flew to Detroit last September for a dinner with GM
management were not an easily rattled bunch. They had endured the
worst auto sales slide in 25 years, as well as the bankruptcy of
the iconic carmaker on which they had built their businesses.
Only three months had passed since GM accepted a $50 billion
federal bailout, announcing the retirement of four of its eight
brands and the shutting down of 1,900 dealers—a third of its
domestic retail network. These dealers were the survivors, some
of the more prosperous people in their towns, and they wanted a
little reassurance.
     CEO Fritz Henderson gathered the group in a private
conference room at the Westin Detroit Metro Airport and tried to
demonstrate that he had a plan, according to an executive in the
room who asked not to be named because he was not authorized to
describe the dinner. Henderson announced that GM was going on the
offensive with better models, new marketing, and a plan to remake
its sclerotic corporate culture. Then he introduced the other GM
boss in the room, the one the government had sent to keep an eye
on the company.
     Edward E. Whitacre Jr., a laconic, squinty-eyed,
six-foot-four-inch Texan, had been GM's nonexecutive chairman for
barely two months. He was typically blunt. "We're going to get
this turned around," Whitacre promised. And if current leadership
can't fix the company, he said, "we'll find someone who can." To
Duane Paddock, a dealer in Buffalo whose family has been selling
Chevys for 75 years, Whitacre's words weren't menacing, just
matter-of-fact. He liked hearing that Whitacre would find a way
to win. "We knew the world was going to change," says Paddock,
one of Chevy's largest retailers and often the top seller in New
York State. "We knew the personnel would change. But you don't
know who will be left."
     Not Henderson, as it turns out. Whitacre and the board fired
him on Dec. 1, ending his tryout on day 143. The board,
reconstituted in July with Whitacre and seven other new members
joining five from the old guard, had been skeptical that
Henderson, a GM lifer, was radical enough to change the company.
Whitacre—the former telecom executive who turned a broken Baby
Bell into the resurgent AT&T (T)—decided he was the man to fix
GM. "Fritz was moving to change things," says an executive with
direct knowledge of the decision who was not authorized to speak
about it. "But a lot more needed to be done."
     Ed Whitacre, 68, wasn't looking to live in Detroit. He has
made his home San Antonio for many years—his office there is
crowded with statues of cowboys, cattle, and horses—and is
involved in the vital affairs of his home state; he helped his
alma mater, Texas Tech University, hire Bobby Knight as its
basketball coach. His wife, Linda, stays mostly in Texas, but
Whitacre took an apartment in downtown Detroit and got to work.
     Within three months of Henderson's ouster, he had eased out
four other executives, reassigned 20 more, and brought in seven
outsiders to fill top jobs—a shock to an insular company that had
long been famous for paving over failure while compensating it
handsomely. The tide also swept out solid performers allied with
the old regime, such as Vice-Chairman Bob Lutz, who had overseen
the development of the Chevy Malibu, the Cadillac CTS, and eight
other vehicles that were beginning to sell well. Lutz was
marginalized by Whitacre and announced his retirement, effective
May 1. "In the past," says Lutz, "GM was accused of not enough
change. You have to find the balance between the pace of change
and trauma to the organization."
     People close to Whitacre say he would rather cope with
trauma than accept the status quo at a company that lost $84.3
million a day in 2008. Three days after taking over, he
reorganized sales and marketing, and then, after just three
months, let his deputy reorganize the departments again—a
restructuring of the restructuring that caused middle managers to
fear for their jobs and even question whether Whitacre had the
right disposition for his. Some say that fear has made them more
cautious when Whitacre wants them to take more risk.
     Whitacre isn't big on deliberation—or on talking to the
press. He refused several requests to comment for this story,
though GM did provide access to dozens of employees—from
Whitacre's fellow executives to assembly workers. Although some
refused to speak on the record, their comments create a detailed
portrait of a corporate culture in flux. "Ed's view is that the
business is more complicated than it needs to be," says
Vice-Chairman Stephen Girsky, a former Wall Street auto analyst
who has become Whitacre's right-hand man.
     Former CEO Rick Wagoner, who lost $88 billion between 2005
and 2009, used a dozen metrics to evaluate his executives.
Whitacre, who holds just one meeting per week with his 13-member
management team, has boiled it down to six: market share,
revenue, operating profit, cash flow, quality, and customer
satisfaction. He wants nimble managers who decide fast and
correct mistakes faster. Vice-Chairman and CFO Christopher P.
Liddell, who arrived from Microsoft (MSFT) in January, recently
remarked that 12 of GM's 13-person executive committee are either
auto industry rookies or new to their jobs. (The two men at the
top, Whitacre and Liddell, are the car company rookies.) The two
people tasked with remaking GM's image with consumers, North
America President Mark L. Reuss and Marketing Vice-President
Susan Docherty, are in their 40s and taking on massive
responsibility for the first time in their careers. "He realizes
that the biggest change GM needs is cultural," says Jim Kahan,
who was senior vice-president for corporate strategy under
Whitacre at AT&T. "It was always blaming the union, the
government, or the economy." Says Reuss: "What we were doing
didn't work. The time of providing for everybody, no matter what
their performance, is gone."
     By all accounts, Whitacre is a tough guy, but his job is
easier than Wagoner's was. GM's restructuring wiped out a
mountain of debt—from $46 billion before the bankruptcy filing to
$17 billion after, saving $1 billion a year in interest payments.
GM's 2007 deal with the UAW set up a trust fund to pay for
retiree health care, saving $3 billion a year. Add $6.7 billion
in savings from chopping brands and cutting plants and staff
during bankruptcy, and Whitacre's annual costs base is $10.7
billion lower than Wagoner's. Now Whitacre is rushing to take the
company public and recoup most or all of the Treasury Dept.'s $40
billion equity stake in GM. On Apr. 21, Whitacre announced that
GM had finished paying off $8.4 billion to the governments of the
U.S., Canada, and Ontario five years ahead of schedule. (To do
it, he used dollars from the Treasury Dept.'s purchase of GM
stock.) The U.S. still owns $2 billion in preferred shares, which
GM will buy back, and 61% of the company. Canada owns 11.7%,
while the United Auto Workers' retiree health-care fund holds
17.5%, and bondholders 10%. The IPO, possible by yearend
according to a GM executive familiar with the plan who asked not
to be named, needs to raise roughly $80 billion for these parties
to break even. JPMorgan Chase (JPM) analyst Eric Selle estimates
GM's current valuation at $68.6 billion—more than the company has
ever been worth. With 500 million shares outstanding, that's an
equity price of $137 per share. Selle says that's not
far-fetched. Whitacre's early payment of the government loans, he
says, "shows GM's confidence in a recovery."
     GM's $3.4 billion fourth-quarter loss masks real progress.
It had one-time costs totaling $3.1 billion, meaning that—thanks
to Henderson's restructuring and some hot models designed under
Lutz—it was within $300 million of breaking even despite North
American sales that fell 24% in the quarter. With sales up 18.4%
so far this year, even though Hummer, Pontiac, Saab, and Saturn
have been sold or closed, Whitacre and Liddell have both hinted
about a return to profitability in 2010.
     Henderson showed a sure hand during bankruptcy proceedings
but never had much more than a 50/50 chance of holding on to the
CEO job. When New York financier Steven Rattner, the head of
President Obama's Auto Task Force, fired Wagoner on Mar. 29 and
named Henderson as CEO, the new chief scrambled to avoid being
tagged as an interim boss, arguing that he would have no
authority if labeled a temp. He got his way, but knew the GM
board would select its own chief executive unless his moves blew
them away. Whitacre was recruited for the chairman role two years
after retiring from AT&T specifically because he had been the
leader of a large, consumer- focused, highly regulated company.
At first, Rattner says, he only knew Whitacre by reputation as a
"strong, no-nonsense guy who is tough and fierce and wants to
win. As I got to know him, he was all of those things and a nice
guy as well. He is also a man of few words. He believes that we
were born with one mouth and two eyes and should use them in that
proportion."
     The new board's first meeting was in September 2009, the
month Henderson decided to sell 55% of the Opel unit, which
produces 1.1 million small and midsize cars a year in Europe, to
Canadian partsmaker Magna International and Sberbank, Russia's
largest bank, for $750 million. Before the sale closed, three
directors with backgrounds in private equity—Girsky, Texas
Pacific Group co-founder David Bonderman, and Carlyle Group
Managing Director Daniel Akerson—decided it was a terrible deal
for GM. They also argued, and Whitacre agreed, that keeping Opel
was essential to GM's compact and midsize car engineering and
sales volume. When the board reversed the Opel decision at its
November meeting, it was the beginning of the end for Henderson.
On Nov. 10, Whitacre told Bloomberg News that "the board is fully
behind Fritz; he's working hard." Three weeks later, he told
Henderson he was done.
     With Whitacre as interim chief, the board looked at other
CEO candidates, hiring headhunter Spencer Stuart. There were few
with industrial backgrounds who were willing to consider the job,
so the board looked to Whitacre. Aside from him, three board
members had backgrounds in telecom. Akerson was CEO of Nextel;
Carol Stephenson was CEO of Lucent Technologies Canada; and
Patricia Russo was CEO of Alcatel-Lucent (ALU). They had seen
what he could do. The vote was unanimous.
     When Whitacre became chairman and CEO of Southwestern Bell
in 1990 after 26 years at the company, it was as anonymous as a
$20-billion-a-year telecom can be. An engineer by training,
Whitacre had worked his way up by showing strong results in the
company's Kansas operation, later serving in regulatory affairs
and finance before getting the top job. Then he set out to make
the company matter. Between 1995 and 2006 he spent $200 billion
acquiring eight telecom rivals, bolting them together atop
Southwestern (one of the seven Baby Bells created when the
government broke up the old AT&T) into a new behemoth called SBC
Communications.
     Building his telecom turned Whitacre into an accomplished
dealmaker and frontman. In May 1999, he spent $61 billion to
acquire Chicago-based Ameritech, one of the most troubled Baby
Bells. The company had neglected its phone lines and network to
save money, the service had deteriorated, and shortly after the
acquisition, the public utility commissions of Illinois, Ohio,
Indiana, Michigan, and Wisconsin summoned Whitacre to explain why
Ameritech was so unreliable. "It's my responsibility to fix it,
and I'll fix it," he told the panel. Whitacre spent billions on
upgrades over the next two years.
     Whitacre's signature move was his February 2004 purchase of
AT&T Wireless. (He was running the deal for Cingular Wireless,
which was jointly owned by SBC and Bell South.) He had been
increasing his offer in 25 cents-per-share increments when AT&T
Wireless went silent for five hours. Whitacre got a call at 11
p.m. that night from a deputy, Jim Kahan, who thought they'd lost
the bidding war to Vodaphone (VOD). Whitacre told Kahan to
increase the bid by a full dollar, to $15 a share—upping the ante
by $2.7 billion to $41 billion—and to warn AT&T Wireless that it
had an hour to accept. Whitacre called in his board, and by 1
a.m. they had the company. A year later he bought the rest of the
old AT&T—landlines, long-distance service, and AT&T labs.
Whitacre boosted ad spending as the reconstituted AT&T competed
with Sprint (S) and Verizon (VZ) for wireless customers. "He
believes in the power of advertising and rightfully so," says
Lutz. "He drowned them out with his ads." AT&T's Dallas
headquarters is now called Whitacre Tower.
     Not all of his big telecom moves worked as well. Just before
Whitacre retired in 2007, he cut an exclusive deal with Apple
(AAPL) to be the sole service provider for the popular iPhone. It
was a marketing coup for AT&T, but the company's network lacked
the bandwidth to support the iPhone's apps, especially during
peak hours in big cities. Now the company is flooded with
customer service complaints. "It's painful for Ed to watch this
from a distance," says Selim Bingol, GM's new vice-president for
communications, who worked with Whitacre at AT&T.
     Whitacre wants GM to take big risks, too. After the company
launches its Chevrolet Volt electric car in November, it hopes to
sell 45,000 globally in 2011, a huge number for a $40,000 compact
car that needs to be plugged in at night. Demand for electric
cars is unproven; less-expensive hybrids have grabbed only 2% of
the total market in a decade. Whitacre told GM staff that he
thinks the Volt will be a hit and wants them to boost production.
If he's wrong, the Volt (which is already unlikely to make money
because of its steep development costs and $8,000 battery) will
generate even more red ink.
     "I'm sick of Howie Long," Whitacre drawled in a meeting with
Lutz early this year. And with those words, Whitacre waded into
one of GM's most intractable problems: marketing. Chevy dropped
pitchman Long, a football Hall of Famer, in favor of its
audacious "May The Best Car Win" campaign comparing its models to
rivals. It's the kind of advertising Whitacre likes. At Cadillac,
Don Butler, the new vice-president for marketing, cancelled
television spots featuring little flying Cadillacs blasting out
of a birdhouse that looks like the brand's crest. Butler is now
making ads that show more cars and play up car-magazine
accolades.
     Marketing has been a mess for decades at GM—and Whitacre's
accordion-like staffing moves have only added to the churn.
Cadillac has had three marketing managers in a year. Buick has
had four since last June. Chevy, which accounts for almost 70% of
GM's U.S. sales, has had three in a year.
     In Whitacre's first months on the job he merged marketing
and sales—easing out the 78-year-old Lutz, putting Susan
Docherty, 47, in charge of both, and handing the North American
organization to Reuss. It took Reuss three months to conclude
Whitacre's new structure was a flop. Docherty, a stylish
hard-charger who raced up GM's ranks while working for Hummer and
GMC trucks, often told her staff that the new GM would demand
long hours. If anyone didn't like it, they should go, she told
Businessweek last year. Yet the job proved too much even for her.
After several meetings with Whitacre, Reuss split sales and
marketing again on Mar. 2. Docherty went from head of sales to
vice-president for marketing. Reuss also shook up staff at the
four brands. "Ed didn't make these changes. I did," he says.
"People in the company said outsiders would say we don't know
what we're doing. Ed backed me."
     Whitacre realized that all of the change had rattled the
workforce, so on Mar. 31 he sent a companywide e-mail, obtained
by Bloomberg Businessweek. "A smart company changes and adapts to
the needs of the business. So, while there will always be
individual moves within GM, I want to reassure you that the major
leadership changes are behind us."
     It will take more than e-mails to prove GM is stable. Few
believed Whitacre's letter, says a senior GM product developer
who requested anonymity because he doesn't want to anger the
boss. Everyone is on pins and needles, he says.
     From here, Whitacre will likely stick with his team. He
doesn't have much choice; GM tried to hire away two high-profile
marketers from outside, according to two executives with
knowledge of the job search. Between the challenge of shining up
battered brands and the pay limits imposed by the government (CFO
Liddell makes $750,000 a year, half what his predecessors made)
Whitacre couldn't find any takers.
     So the job is Docherty's. It took her two tries to get the
Buick campaign right. Her first attempt, "Take a Look at Me Now,"
featured a foppish movie director shooting the LaCrosse while a
makeup crew fussed over the car. Lutz cancelled the ads,
complaining that they told buyers nothing about the cars. "When
you're asking for $30,000," says Lutz, "you'd better say
something about the product."
     A new set of ads, brainstormed by Lutz and Docherty and
rolled out last fall, calls Buick "the New Class of World Class"
and focuses on the latest models, the LaCrosse sedan and Enclave
SUV. Scattered marketing aside, the LaCrosse has been a hit, and
Buick, with only three models, has seen sales soar 59% this year,
compared with a 17% rise for the entire U.S. car market. Chevy
sales are up 39%, Cadillac sales are up 25%, and GMC sales have
risen 32%, all beating the overall market.
     With Saturn, Hummer, Pontiac, and Saab gone, those four
brands are all GM has in the U.S. (Overseas, it owns
Opel/Vauxhall, Holden, and Daewoo.) Whitacre sees Cadillac's CTS
as a notable underperformer. On Mar. 3, the day after Reuss shook
up sales and marketing, Whitacre phoned Ken Batchelor, a San
Antonio Cadillac dealer he has known since they were in the Army
Reserve together more than 40 years ago. Whitacre told his
quail-hunting buddy that he was not pleased with Cadillac's
results, Batchelor says. "Ed is of the belief that the CTS needs
to be marketed better. He thinks we should be selling twice as
many."
     That's a tall order for GM's midsize, $36,000-and-up sedan.
If Cadillac doubled CTS sales, it would rival competing models
from BMW and Mercedes, something no other luxury brand does. The
German carmakers lease to about half of their customers; they own
their finance companies and can craft attractive lease deals. GM
no longer controls GMAC and thus cannot order it or other banks
to sacrifice financing profits in order to help Cadillac move
cars.
     GM has a herd of new cars coming. This year, showrooms will
see Buick's Regal sedan and the Chevy Cruze compact, a
replacement for the Cobalt, which has been outsold by the Ford
Focus. "GM didn't reach far enough with the Cruze," says John
Wolkonowicz of IHS Global Insight. Next year brings Buick's
Verano compact and Chevy's Aveo subcompact. And 2012 sees a new
Malibu and, later on, Cadillac's flagship XTS sedan. The new
Malibu's styling, according to Wolkonowicz, isn't as
sophisticated as the current model's.
     Whitacre wants to roll out the cars faster, but some product
developers say he's naive about how long it takes to bring a
product to market. After nine months inside GM, he will still
stroll up to a clay model and ask why it can't be in showrooms in
a year, griped one designer, who asked not to be named. It
typically takes three. Whitacre can't change that—and he knows
better than to micromanage the car guys. He doesn't attend
Vice-Chairman Tom Stephens' Thursday morning product development
meetings; he lets Stephens and chief designer Ed Welburn come up
with models, then approves funding.
     In his race to get GM ready for an IPO, Whitacre has
delegated a lot to Reuss. His mission is to build sales without
pumping up profit-eating incentives. For years, says Paddock, the
Buffalo Chevy dealer, GM built as many cars as it hoped to sell
and strong-armed the dealers into taking the inventory. If that
didn't work, GM would lay on heavy rebates and give away profit
to get the sales volume.
     At the same time, dealers complained they have to subscribe
to an outside service to track the incentives GM is offering on
various models. GM gives the dealers that information, but in
reports so complex that many dealers have trouble deciphering
them.
     On Whitacre's orders, Reuss is trying to demystify the
process. In March embattled Toyota (TM) spent a company record
amount on incentives to lure back wary consumers, offering 0%
financing and other discounts. Reuss refused to get pulled in,
dropping GM's average incentive from last year by $1,200 a car,
to $3,500. GM's market share tumbled to 17.6% in March from 19.4%
during January and February. But Reuss kept prices up and beat
his sales goals. As March was coming to a close, Whitacre looked
at the numbers and said: "This looks like we're headed toward
growth in a positive way," Reuss recalls. "That's good."
     Whitacre had his prairie charm working in March, when he
paid his first visit to a GM assembly plant. At the Malibu
factory in Fairfax, Kan., he walked the assembly line in jeans
and a plain black sweatshirt, stopping to shake hands with
workers and ask them what they did. He even tried to hang a body
panel on a Malibu. "They nearly threw me out of the building," he
joked later to workers and reporters. One worker said that in 25
years on the line, he had never seen a GM CEO.
     Whitacre then held a series of "diagonal slice meetings"
with employees from all levels of the factory. Some liked that he
didn't come at them with edicts about boosting production.
Instead, says Dave Robertson, a 29-year line worker who attended
one of the meetings, he just said GM needed to "sell more cars."
He told the workers they could help by building quality vehicles,
and that if they needed anything, they should say so. "We're all
in this together," he said, promising to come back in a month to
talk about "the future of the plant."
     "He seemed like a country guy," Robertson says. The workers
liked him even better when he returned to Fairfax as promised on
Apr. 21 to announce that GM had paid off its government loans and
would be investing $136 million in the plant, making it the
primary factory for the redesigned Malibu.
     That bit of news got Whitacre an ovation. He is pouring $3
billion into the plants, enough to keep the United Auto Workers
happy for now. If he can just figure out how to sell more
cars—returning GM to long-term profitability, growing its market
share for the first time since 2002—the workers will be ready to
carve his name on the door of GM headquarters. Then Whitacre
could look back at his career and say he had gone two-for-two.
Until then, he won't be saying much.
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