Why Booting Wagoner Won’t Solve GM’s Woes

6 huge problems the automaker must solve, no matter who the CEO is.

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By most accounts, Rick Wagoner was never really the problem.

It’s self-evident that he presided over the demise of General Motors since taking over as CEO in 2000. The company has lost money for four years straight, and is only alive now thanks to government aid that could grow to $40 billion in total.

But GM is in a hole that took decades to dig, and Wagoner has helped position the company to crawl out. Someday. He’s cut billions in costs, closed 12 factories, slashed payroll by more than 100,000 workers and overseen a restructuring plan that calls for winding down half of GM’s eight divisions. “If he has one flaw, it's that he hasn't done it all fast enough,” says William Holstein, author of Why GM Matters. “He might not be enough of a sonofabitch.”

[See 6 upsides to a GM bankruptcy.]

The Obama administration is looking for somebody who is. So with the government poised to pledge billions more to GM, Wagoner is headed for an early departure, signaling the end of the old regime. His resignation gives President Obama the chance to install fresh management less captive to a bureaucracy so hidebound it could rival the Pentagon’s. And it gives Obama a bit of cover for investing more taxpayer dollars in a company whose own auditors doubt its ability to survive.

But turning GM around is one of the hardest jobs in America right now, and putting a new driver behind the wheel won’t make the road ahead any smoother. Here are the most daunting challenges Wagoner’s successor will face:

Getting labor unions and creditors to make historic concessions. Each group is fighting to protect a stake that’s rapidly falling in value. GM wants its creditors to exchange $28 billion in bonds for stock that would be worth about one-third as much. And it wants to fund a healthcare plan for retirees with stock instead of the cash it’s obligated to pay now. Both groups have dug in their heels - partly because any stock they receive could end up worthless if GM declares bankruptcy. The government has made future aid contingent on GM getting those concessions, leaving the next CEO with a thorny set of negotiations that must be addressed the moment he walks in the door.

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Drastically shrinking the company. After resisting for years, Wagoner finally agreed to sell or close the Hummer, Saab, and Saturn divisions, while transforming Pontiac into a niche nameplate. By 2012, the company plans to close another 14 plants and cut another 20,000 U.S. employees. But even that may not be enough. Some critics think GM is still relying on unrealistic projections for a rebound in car sales, and for stabilizing its U.S. market share at about 20 percent, just a point or two below where it is now.

If so, new management may have to cut even further, perhaps killing Pontiac altogether and possibly targeting Buick as well. But it’s very expensive to kill divisions and close factories, and the new boss will have to figure out how to take huge additional writeoffs as cash flow dwindles.

[See the cars that drove Detroit's customers away.]

Shedding dealers. GM has too many dealers, too. Some have been in business for decades and are no long in desirable locations. In some cities, overlapping outlets effectively leave GM competing with itself. The automaker is trying to cut its dealer network from 6,000 stores to about 4,700 by 2012, but that too is a complex process, since many states have franchise laws that protect dealers and make it hard to shut them down. The alternative is to buy them out – with money GM doesn’t have. This problem may turn out to be even tougher to solve if the new boss decides GM must shrink more aggressively.

Protecting quality. One bright spot for GM has been a steady improvement in the quality of its new models, with vehicles like the Buick Lacrosse, Cadillac CTS and Chevy Tahoe earning high marks in the latest J.D.Power dependability study. With intense cost-cutting, quality could easily slip. GM’s financial troubles have already made it a damaged brand. If that trickles through to GM’s cars, it could be disastrous.

[See why GM got a boost recently – and Chrysler got dinged.]

Keeping up with technology. The Chevy Volt plug-in could recapture a bit of technological leadership for GM – if it works as advertised and the automaker doesn’t cut corners. Even under the best-case scenario, however, GM will face intense competition from Toyota and Honda – which already dominate the market for hybrids – and other automakers hoping to gain an edge with electric cars, hydrogen-powered fuel cells, and other technologies that could power cars in 10 years. Deep cuts in R&D could leave GM even further behind in a decade than it is now.

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Reassuring buyers. Consumers don’t need GM. No GM vehicle enjoys a monopoly or anything like it. If GM disappeared tomorrow, its customers could buy similar models from Ford or Toyota or Nissan and be no worse off. GM already faces huge hurdles luring buyers back into showrooms. If consumers sense any more disarray at the staggering giant, they’d have good reason to spend their money elsewhere. So GM’s next CEO doesn’t just need to be a turnaround whiz, he also needs to be a supersalesman. And maybe a magician.


TAGS:
General Motors
Wagoner, Rick
  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.

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