Rays of Hope at General Motors

Humiliated by a federal government bailout and a forced bankruptcy declaration, General Motors experienced the worst ordeal in its history in the past year. Yet just over two months after emerging from bankruptcy, there are rays of hope on the horizon:

Billions of dollars in liabilities have been successfully unloaded, and August 2009 month-over-month sales were up 21%. GM delivered 250,000 vehicles in August, spurred by the highly successful cash-for-clunkers program.

This past week GM announced that third shifts would be added at three Midwest plants, putting 2,400 employees back to work.

An ambitious advertising campaign has been rolled out with GM's new board chair, Ed Whitacre, playing the lead role. In so doing, Whitacre stamps his face and reputation on the GM brand (shades of Chrysler's Lee Iacocca in the 1980s).

GM is touting more advanced technologies and better cars in the works, including a new line of plug-in hybrids projected for 2010 release.

If GM re-emerges as a great automobile company, it will be due to the wise leadership of Chief Executive Officer Fritz Henderson and board chair Ed Whitacre, supported by unsung hero Steve Rattner, President Obama's former auto czar.

Finance Leaders Dominated the old GM For decades, I have been critical of GM leadership. Growing up in western Michigan, I witnessed GM's festering complacency. Success bred insularity, arrogance, and ultimately hubris at what was once America's largest employer. As ex-president Charles Wilson declared to Congress, "For years I thought that what was good for our country was good for General Motors, and vice versa."

Styling, size, and comfort took precedence over safety, quality, and fuel efficiency. When outsiders dared to propose innovations like seat belts, catalytic converters, air bags, and gas mileage standards, GM management rallied its loyal Michigan delegation to squash the measures in Congress. When consumer advocate Ralph Nader began his lonely crusade, he was viewed as merely one more roadblock on the interstate highway to GM's success.

GM was so successful financially that its board began a tradition of appointing finance leaders as CEOs rather than "car guys" who were experienced in design and manufacturing. These finance leaders hit their short-term numbers but moved GM steadily away from standards of operational excellence set decades before by legendary CEO Alfred P. Sloan.

Even the growing power of the United Auto Workers didn't sufficiently alarm GM management. Prior to the emergence of foreign competition, GM would negotiate sweetheart deals for union workers, and the other companies fell into line. Then they raised prices to cover added costs such as lucrative pension plans, 100% health-care coverage, limitations on outsourcing, and even a jobs bank that provided full compensation and benefits to laid-off workers.

Former chair and CEO Rick Wagoner inherited these traditions and associated legacy costs in 2000. Trained in GM's finance tradition, he focused on preserving the bottom line but couldn't acknowledge that GM no longer made the automobiles Americans wanted. As GM's market share plummeted from 54% to a mere 19% of the U.S. market, there were always excuses, like cheap Japanese imports, rising gasoline prices, and skyrocketing health-care costs. Meanwhile, no one ever got fired except for Robert Stempel, the one interloper from operations who lasted less than two years.

Bailout Shifts the Focus to Operations All this changed when GM was forced to ask the U.S. government to bail it out of bankruptcy last fall. With Obama's approval, auto czar Rattner unceremoniously fired Wagoner in March and promoted operating chief Henderson. Superficially, Henderson appears in GM's finance mould, but there the similarity ends.

Upon becoming CEO, Henderson faced the reality that he couldn't continue asking the government to absorb GM's losses—and that painful cost reductions, massive plant closures, and staff and executive cuts had to be made immediately. He terminated 30% of GM's dealers, dumped five major product lines—Pontiac, Opel, Volvo, Saturn, and Hummer—and began revamping GM to be more fuel-efficient and attractive to U.S. consumers. With Rattner's backing, Henderson gained support from UAW boss Ron Gettlefinger to make sharp cuts in wages and benefits, narrowly winning a majority vote from the rank-and-file.

Whitacre, Henderson's partner in rebuilding GM, became board chair in July. The former CEO of AT&T (T), he saved the original AT&T by successfully integrating it into his SBC in 2005. Aggressive and performance-focused, Whitacre came out of retirement to take on this massive challenge. No doubt he will transform the formerly complacent GM board into an active overseer of GM management. He also provides a buffer between Washington politicians and company management, ensuring the government doesn't overreach.

GM still faces uncharted territory. Never before has a company of its size and reputation fallen so far from prominence. But the pragmatic leadership of Henderson and Whitacre is precisely what the company needs to compete in the global automobile market. If they can restore this formerly great company, American taxpayers will owe them a deep debt of gratitude.

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