Whistling in the dark graveyard?
The worst is over for GM
NEW YORK (Fortune) -- In its 99-year history, no year at General Motors was
worse than 2006. It started off with talk of bankruptcy following a $10.6
billion loss for 2005, got worse as GM was forced by shareholder Kirk
Kerkorian into alliance negotiations with Renault-Nissan's Carlos Ghosn, and
ended with renewed talk that GM soon must relinquish its position as the
world's Number One automaker to Toyota.
But while GM (Charts) is still on the critical list, it is at least sitting
up and taking nourishment. It is making money everywhere in the world except
North America, has taken a massive bite out of its cost structure, and is
getting a positive buzz from its newer cars and trucks. One top GM'er
bragged that German and Japanese auto executives at the Detroit auto show
last week were sliding underneath some of GM's models to get a closer look.
2007 will present its own challenges, with slower sales expected and the
United Auto Workers contract expiring in the fall. But in an interview at
the Detroit auto show with Fortune's Alex Taylor III and other journalists,
a feisty Chairman and CEO Rick Wagoner expressed a surprising amount of
What will you do if Toyota (Charts) passes you in worldwide sales this year?
If we are sitting here next year and I've lost, I'm not going to like that.
[But] we're not giving this thing up just because somebody got a calculator
for Christmas and punched in the numbers. This is going to be a dog fight.
We're going to give up sales that don't make money, so we are not going to
act like a company that is going to be drunk and disorderly. But it doesn't
mean we have to lose the game because of one player.
One year does not a battle make. If we lose, we lose, but we're going to
keep fighting them.
What were your biggest accomplishments in '06?
The basic move on structural cost is a big one. We started that process in
'05, when we were at 34 percent of revenue. We said we wanted to get to 25
percent by 2010. We are relatively farther along on that [29 percent -- 30
percent] , but we need to do more work on our cost disadvantage here. We
made a nice step on health care, but we haven't fixed it by any stretch.
How are you coming in increasing GM's revenue?
The revenue side has a longer tail on it. From a product perspective, if you
are enhancing the products that you execute, the more you execute at higher
levels, the more momentum you get. There is an image aspect of that too,
which, by definition, has a delayed fuse on it.
A little more subtly, but just as important, is the sales and marketing
strategy. Initially it costs you sales and costs you revenue, but there is
no question that what we did last year [reducing marketing incentives] was
the right thing. Over time we expect it to yield us more revenue - I hope I
don't get too old waiting for that to happen.
What is the value of higher residuals? It shouldn't take from today to
tomorrow to realize it, but it shouldn't take two years to realize it,
either. What is the value of less incentives and longer warranties? We
obviously believe the longer warranty has value, but it doesn't play from
one day to the next.
How long do you expect your turnaround to take?
I think it is pretty long runway on the turnaround. People ask when is the
business profitable and our objectives have to be much bigger than that. It
is not an issue of can you make a nickel - that doesn't do anything for
anybody. We need to get good profit and then it is very important that we
generate good cash flow.
We need cash flow to invest in the future and pay the shareholders a fair
return, and cash flow to rebuild the balance sheet. We've taken a lot of the
cash on the balance sheet to restructure the business and build up a strong
liquidity position. Over time and this is a long way out, get the credit
rating restrengthened. So there is a lot of work to do.
Rule of thumb - Never attribute to malice that which can be adequately
explained by stupidity