July 9, 2008

GM's defining moment.

By Peter M. De Lorenzo

Detroit. After writing about General Motors’ foibles and occasional triumphs - and its too many models/too many divisions/too many dealers conundrum - for nine years and counting, it’s remarkable that $5.00 per gallon gasoline has done what the executive brain trust at GM could never do during the modern era, and that is to force the company to face the reality that it must drastically and fundamentally change its organizational structure.

Why it has taken the cataclysmic event of a radical adjustment in what this country pays for a gallon of gas to trigger GM management’s decision to finally tackle its Achilles Heel that has crippled the company in this new global automotive world is beyond me, given that GM’s multiple divisional structure - a legacy from when it once controlled 48 percent of the U.S. market way back in the 60s - had become woefully obsolete easily fifteen years ago.

GM is on the brink of disaster today because its executive leadership – along with its embarrassing rubber-stamp board of directors – steadfastly refused to acknowledge the fact that the company could not function properly as a viable corporate enterprise while still configured to produce and sell double the market share that it actually has in the U.S.

And while GM managers sat back and watched that market share inexorably slip away over the last fifteen years as Asian and European competitors took huge chunks of its business away, they continuously postponed taking the steps necessary – when they weren't avoiding them altogether - to reconfigure the company for the future. And now, they're out of time.

What happened? How could a company with the kind of tremendously deep talent and brain power at its disposal that GM has be caught so out of position and be so out of touch with what’s going on to the point that it has now been left mumbling “woulda-coulda-shoulda” to itself while facing the consequences of their inactions and lack of foresight?

After years of writing about this industry and analyzing GM, I can safely say the answer comes down to a very simple realization, and that is that no one at GM – from CEO Rick Wagoner on down – ever actually believed that what was happening in the U.S. market was really going to continue, that somehow, some way GM would rise up again and return to its rightful place as the biggest car company in the world. In other words, a level of hubris is alive and well within General Motors that is absolutely breathtaking to contemplate.

I know because I have observed it up close. I have seen it in the way the company still treats its suppliers, for starters. But that’s not where the real trouble was and still is at GM. It’s the vast middle management layer - that gray morass of mediocrity that I have referred to with such contempt over the years - that has absolutely destroyed GM from within.

I have watched in horror as these bureaucratic middle managers functioned as if the world revolved around their little fiefdoms inside the company, while listening in stunned disbelief to their shockingly narrow-minded perspectives on the automotive world and their place in it. Their willful naiveté took on a life of its own, and their cancerous go-along-to-get-along mentality literally paralyzed the company at every turn, no matter how attuned or enlightened the leadership regime in place was at any given time.

But GM’s vast gray middle has always been a problem, even in its heyday, which means that ultimately the buck has to stop at the top - with the series of leaders over the years who allowed GM to wallow in its mediocrity and who ultimately are responsible for GM’s predicament today.

Yes, you can blame Washington for allowing the import manufacturers to run rampant in the U.S. market with none of the penalties, duties or restrictions that their governments slapped on our domestic manufacturers when they tried to compete in their home markets, but that doesn't account for the 15-year period (the late 70s to the mid 90s) when Detroit built piss-poor vehicles that turned a sizable chunk of American consumers away from buying domestic-built cars and trucks, and for good too.

And you can blame the cost-prohibitive contracts that the Detroit manufacturers entered into with their unions, based on the impossible notion that the good times would go on forever and that there would always be money to cover the bills at the end.

And you can say that the global economy brutally altered GM’s (and Detroit’s) fortunes at an accelerated rate that no one could have predicted, yet those same manufacturers were savvy enough in some cases to take advantage of those new markets, while blowing their position in this market to smithereens, which defies explanation.

And you can argue that no chief executive of a car company - foreign or domestic – had any idea that the price of gasoline would go through the roof in a three-month period, destroying much of their business overnight, yet these same manufacturers all did business in Europe where gas has been traditionally two and even three times as expensive as in the U.S., so none of that thinking ever crept into their future planning sessions here? I find it hard to believe, and frankly inexcusable at this point.

But there were definitive signs warning us of what was headed our way long before this spring. The aftermath of Hurricane Katrina and the ensuing gas price spike – along with the emerging economies around the world - should have given the powers that be at these car companies at least a clue that America’s gasoline “holiday” was about to be permanently brought to a close.

And the full-size SUV market was showing signs of deterioration long before $5.00 gas prices permanently disabled it. American consumers – a faddish lot, by every measure – had started to lose interest in the hulking trucks three years ago (I referred to it as the growing SUV “bubble” at that time).

But none of that hand wringing really matters now because today General Motors, once this country’s shining beacon of industrial might and a symbol of success around the world, is less than a year away from outright disaster and the distinct possibility that it will go bankrupt, or will have to consider an alliance with another manufacturer to survive. (I can’t even imagine where GM would be right now if it wasn’t for its Bob Lutz-led product offensive - Chevrolet Malibu, Buick Enclave, Cadillac CTS, etc. - which has kept the company afloat in these desperate times.)

With the dire straits that GM finds itself in today CEO Rick Wagoner is now being forced to act on a course of action that he has openly scoffed at up until now, which is to consider a wholesale reappraisal of divisional operations in favor of a company-wide retrenching around the two GM divisions that still matter – Chevrolet and Cadillac.

Once upon a time when GM controlled half the market, it needed all of its divisions to adequately cover the entire spectrum of market segments in the U.S. Now, with less than 20 percent of the U.S. market, GM can ill-afford to keep its eight divisional balls in the air. And as a result, GM management is finally admitting that Alfred Sloan’s divisional “ladder” model has reached the end of the line.

So what’s next for this once-proud company? At this critical juncture in GM’s history it will need lots of things to go its way if it is to survive as an independent entity. That includes its new product offensive, which can’t miss in any segment. When you’re fat and happy and on a roll, you can afford a product stumble once in a while, but when you’re in GM’s situation, a product misstep could be the difference between survival and bankruptcy. I see absolutely no margin for error here.

And GM’s dealers will finally have to accept the fact that what once was will never be again, and that whole parts of GM will simply go dormant until further notice. GM Divisions may continue to exist on paper, but unless you’re connected to a Cadillac or Chevrolet franchise, the future is bleak. A couple of Buick models will survive (Enclave and the next-gen LaCrosse), some Pontiacs (the 4-cylinder G5, G6, and Vibe), and GMC trucks will soldier on, but cars and trucks that don’t sell or don’t have the potential for success won’t be supported by any marketing efforts in the current environment.

Where does this leave Saturn and Saab? On the edge. And GM is already shopping Hummer to potential buyers.

But more important, where does all of this leave Rick Wagoner?

Though Wagoner did orchestrate GM’s expansion into emerging markets (discounting the Fiat fiasco), and he did make a brilliant move to bring Bob Lutz on board - which frankly saved the company in retrospect - he is, after all, the CEO who insisted on a huge, expanded push into the full-size SUV market just three years ago.

He is the CEO who flat-out dismissed the concept of GM “getting smaller to get better” so it could be more aligned with its shrinking footprint in the U.S. market as something that didn’t even merit consideration, but now he and his team are scrambling while being forced to contemplate just that – and to a radical degree too - by reacting to an idea that could have, and should have been acted upon to begin with several years ago.

He is the CEO who has presided over the most calamitous period in company history, with GM now worth just 25 percent of what it was when he took the reins as its chief executive and GM stock at the lowest point since the early 1950s.

Rick Wagoner is the one constant in any discussion of GM’s recent history and its current crisis, and yet he remains at the helm of the company with hardly a worry or query from GM’s logic-challenged board of directors. (How this board has managed to escape scrutiny for its blatant incompetence is beyond all comprehension and something that must be addressed if GM is going to go forward in a positive direction from this crucial point in its history.)

And if GM is going to go forward, now is the perfect moment for Rick Wagoner to step aside. He’s had some hits, yes, but the many misses will forever cloud his tenure as CEO of what once was the world’s largest and most successful industrial company.

On the precipice of GM’s Centennial year, the time is right for Rick Wagoner’s term to come to an end.

In his place, GM needs Fritz Henderson - its current COO and the executive already pre-positioned to succeed Wagoner - to take the reins of the company. No, Henderson isn't the greatest thing since sliced bread, but he is the right guy at this pivotal, defining moment in GM history. Henderson is a visionary (never Wagoner’s strong suit) and he will be more than willing to make the tough decisions necessary, and set about reconfiguring GM for its survival.

Then maybe, just maybe, GM might have a shot to be around for another 100 years.

Thanks for listening, see you next Wednesday.