GM Gets a Fresh Start

The new, government-owned General Motors is starting to take shape.

GM emerged from bankruptcy on Friday, July 10, and with it came a slew of changes. The company will have far less debt, fewer brands, and a leaner management team. GM also has a new chairman, former AT&T (T) Chairman and CEO Edward Whitacre, and a new board to oversee the sweeping changes being made by CEO Frederick A. "Fritz" Henderson.

GM's trip through Chapter 11 bankruptcy happened at lightning speed, requiring just 40 days to strip away the unwanted brands, plants, debt, and other liabilities to release a smaller, cleaner GM into the world. "Today marks a new company," Henderson says. "The last 100 days showed that a company not known for moving fast can do things very quickly."

It will be even more impressive if GM can master the next phase. The company has to reverse years of decline and start winning back U.S. car buyers who have fled to competitors over the past several decades. Henderson and Whitacre will have to change GM's culture and keep launching new models that will turn heads. GM also needs to get consumers who have shunned the company to give those models a chance. "Perception is the biggest challenge," says John Wolkonowicz, analyst with IHS Global Insight in Boston. "GM products are better quality and more exciting than the consumer believes."

To get all of that done, Henderson and Whitacre are reorganizing the company and trying to change how it does business. One-third of management will be shown the door, including some high-level executives.

A Bigger Job for Lutz

Just as important is who is staying: Henderson brought Robert A. Lutz, GM's head of product development for the past nine years, back from the verge of retirement, as BusinessWeek reported earlier. Lutz will get an expanded role, overseeing not only product design but also marketing and communications.

GM holds 19.6% of the U.S. car market so far this year, down from nearly 30% at the start of the decade. And it is selling a majority stake in its European Opel unit after a decade of failure there. So Henderson and his team will have to prove they can use GM's lower costs and clean balance sheet to make and market successful cars.

It will be tough. But Henderson at least starts off with far fewer retiree liabilities and debt than his recent predecessors. That's in large part because GM got the government and the United Auto Workers union to accept stock instead of cash for big chunks of debt. GM also wiped away nearly $28 billion in bond debt. "Fritz gets rid of a lot of stuff that we talked about for years but couldn't do," says Robert Stempel, the former GM chairman who was pushed out by the board in 1991. "Legacy costs were an issue for many years. It crept up on us. The push now is to get away from the doom and gloom and get down to the business of selling cars."

Henderson will be working with more manageable debt. GM had more than $70 billion in debt before filing for bankruptcy protection. But using bankruptcy to ditch most of $28 billion in bond debt, and getting the union and government to take an ownership stake in lieu of cash for their debt, wiped most of that away. GM emerges with $10.5 billion owed to the U.S. There is some other international debt, but the company's total debt load will be less than the $17 billion GM predicted before the bankruptcy filing, Henderson says. "They have substantially cleaned up the balance sheet and are in the position of becoming a fierce competitor," says Patrick Dreisig, an attorney with New York law firm Butzel Long, which has worked on bankruptcy cases for auto parts firms.

Pension Worries

GM does, however, have a pension plan that was underfunded by some $12 billion at the end of last year. If the stock market, and hence GM's pension-fund investments, don't rebound enough, GM could have to contribute billions to the plan in three or four years. Including those pension obligations, debt, predicted future warranty claims, and non-union health-care plans, GM has $48 billion in liabilities.

To make decisions faster, Henderson has made the organization leaner. Two major decision-making boards, GM's North American Strategy Board and the Automotive Strategy Board, will be combined into one. Fewer executives will staff those boards. Henderson says that should speed up everything from product decisions to broader strategic actions.

He has also eliminated GM's regional management layers. Instead of an executive to run each of the North American, European, Latin American, and Asian business units, Henderson will oversee North America and one executive, current GM-Asia-Pacific chief Nick Reilly, will oversee the global businesses.

That leaves open what will become of some long-standing GM executives. On Friday, Henderson would not discuss the fate of GM-North America President Troy Clarke, Latin America chief Maureen Kempston-Darkes, or GM-Europe President Carl-Peter Forster. He did say that some of those executives and others will either retire or be reassigned.

Henderson says he and his remaining managers need to get out of the office more. He plans to travel once a month to meet with dealers and consumers to get their feedback. And he will push other executives to do the same. He is trying to get the company focused on what consumers want, instead of pushing discounted cars to meet debt and union obligations.

Getting Closer to Customers

Toyota (TM) executives call it genchi genbutsu, which means go and see. Henderson says he has always believed in getting closer to customers and says now is the time to do so, with bankruptcy and most of the restructuring done. "I have always been a believer in genchi genbutsu, and I don't speak Japanese," he says.

Henderson will have a shot at making money if sales rebound. (In the U.S., GM used to require a 26% share—in a car market totaling 16 million vehicles—to make money. After scrubbing away some retiree liabilities and a lot of debt in bankruptcy court, not to mention closing many factories, GM says it can make money with an 18.5% share of a 10 million-vehicle-sales market.

The government will own 60.8% of the new GM, a health-care trust covering union workers and retiree medical benefits will own 17.5%, the Canadian and Ontario governments will own 11.7%, and 10% of the stock goes to the old GM, which is still in bankruptcy court. The old GM holds shuttered factories, a nine-hole golf course, and 10% of the stock in the new GM, plus warrants for 15% of new stock later on.

GM's bondholders and some tort claimants, who have sued GM in product liability cases, will both have to fight it out in bankruptcy court to collect any value on their bonds or legal claims. The stock and assets will be liquidated, but bondholders will take a big haircut.

Changing Perceptions

GM is sticking to its plan of selling vehicles from just four brands: Buick, Cadillac, Chevrolet, and GMC. Pontiac is being killed. Saab, Saturn, and Hummer are being sold, with the new GM getting proceeds from the sale.

Lutz says GM will go about changing perceptions by rebuilding those surviving four brands. He plans to integrate design, marketing, and communications to build brand image from the product and push that influence into advertising and marketing. Says Lutz: "Design will have a powerful influence on marketing and communications."

Lutz, who had been acting as an adviser since April, planned to leave at the end of the year. But GM's new board wanted him to stay, and the prospect of working on new models without the financial burden of years past reignited his interest. Says Lutz: "With all the burden that we have historically managed all gone, I don't see how we can fail."

GM has made cocky proclamations like that in the past, of course, only to go ahead and fail. But Henderson has something to say that is very un-GM. He says it's time to forget about GM's historic sales leadership and sheer mass. "It's not about size," he says. "It's not about bigness. It's about creating value and doing something special."

Now that the playing field is even, he has a once-in-a-lifetime chance to prove GM can do that.Return to the General Motors' New Landscape and Auto Bailout Special Report Table of Contents.

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