General Motors is reeling. America's biggest automaker is bleeding cash and asking for up to $37 billion in emergency federal loans to avert bankruptcy. Many Americans feel the feds should simply pull the plug. But in Why GM Matters: Inside the Race to Transform an American Icon, financial journalist William Holstein argues that GM deserves the chance to turn itself around. I spoke with him about GM's current condition, the beleaguered U.S. auto industry, and Toyota's vulnerabilities. Excerpts:
You argue that GM is vital to the U.S. economy. Explain why. GM is the backbone of our industrial economy. There are all sorts of linkages into the high-tech sector. It's the largest private sector purchaser of information technology in the country. It's a huge player in logistics. It spends hundreds of millions on advertising and marketing, and part of that supports the sports world. Including its suppliers, GM represents 1 percent of the nation's GDP.
Do you understand why there's so little support for bailing out GM? Part of it is the self-interest of Senate Republicans who have transplant factories [owned by foreign-based automakers] in their states. We're seeing the rise of transplant power. They're fighting for their regional interests and they have surprised GM with their political clout.
There's also a deep gap between the heads of manufacturing companies, and other elites in the financial, journalistic, and political world. People who celebrate the service sector think we don't really need to know how to make things anymore. That we can just designate others to make things. Well, we can't. We need to have a manufacturing sector. It drives productivity. It's the defining characteristic of a First-World economy. The American people seem to want GM to fail. They seem to think of that as a kind of economic justice, which of course it isn't.
What would happen if GM declared bankruptcy? Thousands of suppliers feed into GM, Chrysler, Ford and the transplants. If GM were to go out, the whole supply base would be devastated.
[See why Ford is veering closer to a bailout.]
But some people have argued than an orderly or " preplanned " bankruptcy would be far less chaotic, and wouldn ' t necessarily wreck the entire auto industry. It might work if they could have five or six of the main interest groups all in a room at the same time making the decision. But that's unlikely. The idea that if GM can't do it, you can just let Toyota take over doesn't cut it. There may be 10 other jobs dependent on that one assembly line job that gets eliminated. Many of those jobs are highly paid jobs in design, engineering, or CAD/CAM. These are exactly the kind of jobs that America wants. It's myopic to say we can just shut down some assembly lines and solve the problem.
So what should we do? We need the right balance, a way to keep GM alive while at the same time driving down the cost structure and encouraging it to keep restructuring.
Hasn't GM already done a lot of that? They've cut the unionized work force in half, taken $5,000 out of the cost of every vehicle, and revitalized design. They're investing a billion dollars in developing a lithium-ion battery for the Chevy Volt. They ought to be allowed to complete that process of transformation.
How do you think it should work? What kind of role should the government have? The Obama administration is trying to figure that out at this very moment. The government should be an investor but not overplay its hand. The danger is some kind of national panel telling them how to build cars. That won't work.
CEO Rick Wagoner has been heavily criticized. Even Obama has suggested he needs to go. You seem to feel otherwise. Many people don't realize that Wagoner has been a change agent of sorts. He's restructured management, broken the pattern of the United Auto Workers getting more in every contract negotiation since the 1950s, brought in Vice Chairman Bob Lutz, and given the green light to OnStar, which is now profitable. If he has one flaw, it's that he hasn't done it all fast enough, that he might not be enough of a sonofabitch.
[See the 12 most important cars of 2009.]
Wagoner was also in charge when GM laughed off hybrids like the Toyota Prius . Now all of a sudden GM is cultivating this green image. GM was severely embarrassed by the Prius. It galvanized them to take back technological leadership. They're coming back with a real vengeance on this.
You mean the Chevy Volt, the electric plug-in car due in 2010? The lithium-ion battery GM is developing for the Volt threatens to leapfrog where Toyota is with their nickel metal hydride battery. If they pull off the lithium ion battery, they will have leapfrogged Toyota .
What about other technologies GM is developing. Hydrogen, for example. I don't think hydrogen is the wave of the future because of infrastructure issues involved with getting hydrogen out to the national road system, at tens of thousands of gas stations, for example. But they've got other small cars coming, like the Chevy Cruze. I think they're committed to the proper path.
GM used to define its success partly by how big it was. There were market share targets. How does GM need to define success today? Profitability. They could make it by 2010 or 2011. If they can return to profitability, I think they'll surprise a lot of people by showing they have the right products at the right price.
Does Toyota have vulnerabilities? Toyota has lost a key asset in the person of Jim Press [former president of North American operations], who went to Chrysler. He bridged the U.S. and Japanese managements and had deep knowledge of both. And I expect more missteps like the Toyota Tundra. Japanese managers just didn't listen to American engineers telling them they had to make the truck more rugged, and it cost them. Another new factor is that they are undergoing a management shift at the top. The new CEO, Akio Toyoda, is not a proven leader, plus they have the challenge of the yen, which is strengthening against the dollar and could strengthen further. That drives up the cost of making their cars. The yen problem is not overwhelming for Toyota , but there's a window of opportunity that could help GM get back on its feet.
[See why falling behind Toyota is good for GM.]
GM's Vice Chairman Bob Lutz is finally scheduled to retire. He oversaw a lot of the new products. How much of a loss is that? In the short-term, it's not that much of a blow, because the cycle for introducing new vehicles is three to five years. So any fallout will be three or four years down the road. But it's a loss. Wagoner is such a diplomat, and Lutz was his alter ego. The organization listened to Lutz. He could say what he really thought, and he knew what mattered. That resonated with people.
Does GM still attract top talent? Lutz put a lot of good people in place. And there's a lot of talent all around the world. I've met Koreans and Nigerians and Australians and all sorts of others who are very good. GM design has recaptured the magic. They're really tapping into the global design movement. I think they are very hot.
Examples? The new Cadillac CTS. The new Camaro was designed by a Korean guy, Li Sang Yup. They're attracting top talent from around the world. And I just love the Pontiac G8, which may be the most power for the money available today.
How do you see the future of Detroit? The new GM, if it survives, will be a lot smaller and will not have the same impact on Detroit as the old GM. Its not going to help Michigan recover. The area really does need to develop new industries. If Detroit and Michigan are waiting for GM and Ford to bring them back to life, it will be a long wait.
What about Chrysler? They're also getting a lot of bailout money. I hate to say it, but Chrysler is not managing itself to be a car company that's competitive in the long-term. They've closed their advanced design studio in California and cut new products. It's a financial play at this point. They're dressing up the balance sheet in preparation to be sold.
Could that be good news for GM? It depends how it's done. If Chrysler declares bankruptcy without shutting down thousands of suppliers, then maybe it would be positive for the whole industry. It's better to have two healthy automakers than three partly healthy ones.
What should the government do about Chrysler? Chrysler is a wounded company. I don't think the Obama people should treat GM and Chrysler like they're similar. They're very different companies. With Chrysler, I think the government should send a very clear signal that they better merge with somebody else sooner rather than later. I'd go to Cerberus [the private-equity firm that owns the majority of Chrysler] and say invest more of your own money in the company. If they say no, I'd begin making an orderly plan for liquidation.
How do you foresee the domestic auto industry in five years? I think two of the three will survive. And they'll surprise a lot of critics by being a lot more competitive than they are now.