Who is running General Motors (GM)? Is it Frederick (Fritz) A. Henderson, the GM veteran that the Obama Administration chose to replace Richard Wagoner Jr.? Or is it Team Obama?
This is a question worth pondering. Yes, GM needs a major shove to right itself, but too much meddling by the federal government could complicate a turnaround. "Henderson is going to have to stand up to the Treasury Dept.," says Sydney Finkelstein, a management professor at the Tuck School of Business at Dartmouth. "It would be a mistake if he thinks he can't make a decision without preapproval."
To a certain degree, Henderson has little choice. By the end of May, and with the threat of bankruptcy hanging over him, he must execute a plan shaped by the Treasury Dept. that is aimed at making GM viable. But Henderson, who is known for telling it the way he sees it, may feel compelled to push back if Obama's team asks him to implement strategies that are more aligned with long-term Washington policy goals than with selling cars. He also will need to educate a task force filled largely with auto industry neophytes. Henderson says his interaction with the task force so far has mostly involved "getting them up to speed" on a complex industry. "They were drinking from a fire hose," he adds.
In the coming weeks, Henderson, 50, will have to win his minders' trust. After all, he has worked at GM for 25 years and is a creature of the automaker's insular culture. As chief operating officer and Wagoner's heir apparent, Henderson executed several strategies that failed to turn around GM. His fingerprints are all over the restructuring plans the government deemed insufficient. And like Wagoner, Henderson wouldn't countenance killing any of GM's brands until the government suggested doing so.
A Hard Bargain
Henderson is already saying the "right" things, including an assertion that bankruptcy, once unthinkable inside GM, is now "more probable." But if he is to have real influence—not to mention keep the job he was groomed for—he will have to prove that he can wrest sufficiently deep concessions from the union and GM's bondholders. Henderson brings useful experience to the challenge. He helped negotiate a 2007 labor agreement that slashed wages for new hires and set up a health-care trust that would have put GM on a much sounder footing had the economy not imploded.
All the same, Henderson will be hard pressed to keep GM out of bankruptcy. First, he has to revise GM's sales projections (the feds thought they were too high) and then use a reduced, government-approved sales forecast to figure out how much debt GM can carry in the future. Since Treasury hasn't given GM a debt-reduction target, Henderson told BusinessWeek, he plans to keep negotiating it down until Obama's task force thinks he has cleaned the balance sheet.
It won't be easy. Just to get GM's debt down to acceptable levels, he will have to get the UAW to take in stock rather than cash roughly 80% of the $20 billion owed to its health-care fund, says Barclays Capital analyst Brian Johnson. The union balked at 50% in stock. Then he will need to get bondholders to agree to accept about 15% of the value of their notes in cash and the rest in stock. They, too, have rejected richer offers.
Even as he fights to keep GM out of bankruptcy court, Henderson will have to figure out when to say no to the feds. Obama has acknowledged that the government has a less-than-stellar record of running companies. Then again, he has also linked the restructuring of the U.S. auto industry to an ambitious effort to make cars more fuel-efficient and wean the U.S. off foreign oil. In the eyes of the Obama team, this isn't just about rescuing an American icon; it's about reshaping the economy for the 21st century. Already the government is pushing GM and other automakers to make cars that burn less gasoline.
So far, Treasury is not making product decisions, but it has plenty of suggestions. John F. Smith, GM's group vice-president for product planning, says the task force asked him if he could accelerate plans to trim GM's family of models from 48 to 36. It has also asked him if the company can rush the Chevrolet Cruze, a compact due out in a year, to market faster. In its report, Treasury also pointed out that of GM's "top 20 profit contributors in 2008, only nine were cars." While that is true, most carmakers have a hard time making money on small cars. Pushing more investment in passenger cars is needed, but GM will need to marry its car push with the realities of what Americans are buying. These aren't necessarily bad ideas, but it's clear that Treasury is interested in more than just GM's balance sheet.
End of the Line
After much dithering, GM agreed to ditch half of its brands, including Hummer, Saab, and Saturn, and to crunch Pontiac down to a few sports cars. Since then the government has wondered whether GM should go further. Henderson says the task force asked if the automaker should shrink itself down to just Cadillac and Chevrolet. That would have meant axing Buick and GMC, both globally big sellers. The new CEO says he squelched that in a hurry. "When we showed them our [vehicle-by-vehicle] profitability," he recalls, "that ended."
The Obama Administration has said Henderson is not an interim CEO, though of course he serves at the President's pleasure. But even if Henderson doesn't do everything the task force asks of him, the feds may think twice before pushing him aside. The new CEO is the only member of a long-ruling triumvirate still standing. At the end of April, the company's outspoken vice-chairman and product guru, Robert Lutz, will ease into retirement in an advisory role and in December will join Rick Wagoner on the sidelines.
The last thing the embattled automaker needs right now is a power vacuum at the top. "It's significant they didn't put some new guy in from outside, like they did with AIG (AIG)," says Wilbur L. Ross Jr., who has recently taken stakes in ailing auto parts makers. "It suggests they have not completely lost faith in management and realized this is not a time when you can have on-the-job training."
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