Halfway Up The Hill At Gm

Was that a sigh of relief coming from G. Richard Wagoner Jr.'s office on Jan. 31?

That morning, General Motors Corp. reported that its core North American auto operations (NAO), which Wagoner has headed for barely six months, made $690 million. It was the unit's first profit since 1989 and a far cry from the anemic third-quarter results that Wall Street greeted in October by pounding GM shares down 12%. This time, GM's stock jumped 1 1/2, to $38 7/8. "We celebrated here this morning for five minutes," says Wagoner. "Now it's back to the salt mines."

That's just as well: NAO, GM's problem child, still has a long road to real recovery. Its 0.7% net profit margin of last quarter seems absurdly low compared to Wagoner's goal of 5%--a target he concedes will be tough to hit before the next recession. Meanwhile, GM must scramble to erase its pension-fund shortfall, restore its sunken credit rating, renew its aging product lineup, and dramatically lift productivity. One extra complication: The United Auto Workers likely will continue to pepper NAO with work stoppages. Says PaineWebber Inc. analyst Stephen J. Girsky: "At General Motors, it's a race against time."

"SMOOTH SAILING?" In the year ahead, though, Wagoner is likely to start seeing considerably higher profits at NAO. After putting one-sixth of factory capacity through lengthy model changeovers and other major renovations last year, the unit now has little downtime scheduled. That means more output, higher productivity, and less costly overtime and premium freight expense. "It should be smooth sailing at NAO for at least the first half of the year, barring labor interruptions," says Wertheim Schroder & Co. analyst John A. Casesa, who expects NAO to earn $2.85 billion this year.

GM's latest financial results, which exceeded analysts' expectations, provide further encouragement. NAO's fourth-quarter revenue-per-vehicle jumped nearly $1,100 from a year earlier, to $18,176, Girsky figures. One reason: NAO is building more high-margin trucks, up to 40% of total units from 38%, though still lagging the industry's 44% average. And NAO has fattened its bottom line by curbing low-profit sales to rental-car fleets and by trimming rebates and other marketing incentives.

GM's results still pale next to Ford Motor Co., which on Feb. 1 reported that its fourth-quarter U.S. auto profits had doubled, to $3 billion. But GM may gain some competitive advantage from the economy. The Federal Reserve's series of interest-rate hikes appears to be cooling off red-hot auto sales. If that brings a longer, flatter sales plateau, GM will have more time to cut costs and clean up its balance sheet. The nagging fear, of course, is that the Fed could actually choke off the recovery. Indeed, slower January sales have raised fears that the auto sales boom may be waning before most analysts expected. "The big gorilla for GM is still the [economic] cycle," says analyst John V. Kirnan, of Salomon Brothers Inc.

Boom or no, Wagoner must prove he can lick NAO's persistent problems. Strikes have crippled output six times since the beginning of 1994, and the new NAO chief hasn't yet shown he can placate GM's contentious rank and file. And NAO's launches of crucial vehicles such as Chevrolet's Lumina family sedan and Cavalier compact have been plagued with costly delays. As a result, GM's already anemic share of the U.S. light-vehicle market edged down three-tenths of a point to 32.9% last year. And NAO missed its goal of a 9% gain in manufacturing productivity, improving only 5% for the year.

STILL SLOW. Such is the challenge for Wagoner, 41. He was a star in GM's New York treasurer's office, where he was hired in 1977. Named NAO's chief financial officer in 1992 after a string of overseas postings, he won GM credibility by adopting more conservative financial methods. Within NAO, the unpretentious, straight-talking executive is well regarded, though griping persists about his relative youth and lack of engineering or manufacturing experience. Already, he has reshuffled top managers and combined four car groups into two, yoking Saturn closer to other units.

Wagoner's main frustration, says one GM insider: "Nothing is happening as fast as he'd like it to." GM's North American unit remains an unwieldy, slow-changing elephant. Enough with the champagne. Back to the salt mines.