How To Keep GM Off The Disassembly Line

General Motors Corp. (GM ) CEO Rick Wagoner faces some of the toughest challenges in Corporate America: rapidly shrinking market share, restrictive labor rules, growing foreign competition, and a $1,600 per car cost disadvantage compared to Asian competitors, thanks largely to generous benefits for GM workers and retirees.

Moreover, all his strategic options seem messy. Should he anger dealers by culling weak car brands they don't want to lose? Or does he antagonize his unions by aggressively cutting the fat benefits they so treasure? No easy choices here. Perhaps that's why Wagoner has been desperately trying to maintain the status quo -- jazzing up a model here, closing down a plant there -- rather than face the inevitable need for seismic change. But half measures won't do at the $193 billion giant. Instead, GM must commit itself to a risky and costly transformation if this turnaround tale has any hope of a happy ending.

TUNNEL VISION. Owing to management hubris that tolerated sluggish responses to its threatened industry dominance -- everything from the rise of compact cars in the 1970s to today's surprising popularity of hybrid vehicles -- GM has found itself stuck in second gear for a quarter century. Dealers, eager to protect their own showrooms, have been loath to let the company shrink the number of brands it offers. Asian competitors gain an advantage by spreading development and marketing dollars across fewer nameplates. And United Auto Workers leaders, fixated on maximizing the take of their members, have helped saddle GM with work rules and benefit costs that make it unable to compete globally. The result of all this self-interest and tunnel vision: GM has effectively become a finance company that actually loses money making cars.

Just as all sides share blame for the current mess, they'll all have to sacrifice to salvage something from the looming wreckage. First, management has to give up the naive notion that it can survive by simply holding on until the retiree base begins dying off later this decade. That ignores the disturbing fact that, despite spending more than $3,000 in buyer incentives per car sold, GM has been losing market share for years. Management is paid big bucks to address such strategic challenges. If they can't or won't within the next two years, the board must take action to install leadership that will -- while GM still has time and cash to mount a comeback.

Second, GM dealers have to recognize that the auto maker's collection of me-too nameplates has to be trimmed. GM has 89 car nameplates across eight brands in North America; Toyota Motor (TM ) Corp. has only 26 nameplates across three brands here. Triage is warranted on one or two GM brands so the remaining ones can get the distinctive vehicles and marketing support they'll need to beat back competition from the likes of Toyota and Honda -- and eventually new entrants from China. Even with most showrooms already part of multibrand dealerships, killing weak brands won't be easy for GM dealers to stomach. But it's unavoidable if they hope ever to match the leaner selling structures of Asian competitors.

INEXORABLE CHANGE. Next, GM's unions must accept that the days of some of their most lucrative benefits, such as practically free health care and the up to 95% of take-home pay they receive during layoffs, have passed. Such changes will hurt, as they hurt millions of other American workers who have swallowed similar cuts since the 1980s. But because of GM's huge number of current and retired workers, small changes reap big savings. Having its 340,000 union retirees pay $100 a month for health care -- as do GM's nonunion employees -- would save the company almost a half-billion dollars a year. Besides, GM's unions need only look at the fate of their once-powerful brethren at outfits like Bethlehem (X ) Steel Corp. or Eastern Airlines to recognize the terrible price of ignoring inexorable industry change. That is simply not an option.

Finally, shareholders have a part to play. They must allow management to use some of its $19 billion cash horde to shutter up to four assembly plants, fund early retirement buyouts for thousands of workers, and speed up replacement of GM's aging car models -- all while probably cutting its dividend. That's asking a lot from folks who already have seen $38 billion in GM market value evaporate over the last five years. But if they don't aggressively push for transforming the behemoth quickly into a smaller and, one hopes, eventually more profitable company, they risk watching the value of their shares erode even further. Unless all sides share the pain, this American icon could easily find itself on a collision course with Chapter 11 in as little as five years -- even sooner if the economy turns sour. That's a race nobody wins.

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