Ed Whitacre Battles to Save GM from Itself
Apr 29, 2010
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.