GM: Live Green or Die
The lumbering, money-losing giant finally sees that gas engines are a
losing bet. But is it too late?
by David Welch
In April of 2005, General Motors (GM) Chairman and Chief Executive G.
Richard Wagoner Jr. convened his management team for a monthly strategy
session. Held in the boardroom at GM's Detroit headquarters, these
meetings can last a day as 20 or so executives mull plans for new cars
and product strategies. Meetings often kick off with a roundtable
format, and attendees are encouraged to pose new ideas and stray from
the agenda. That's when Vice-Chairman Robert A. Lutz spoke up. Lutz,
whose gravelly pronouncements routinely enliven auto shows and generate
headlines, has a certain genius for challenging conventional wisdom.
Maybe, he told GM's brain trust, it was time to build another electric
car—one that would use a giant version of the lithium ion batteries that
power cell phones and laptops.
It was a provocative suggestion—and Lutz knew it. Two years earlier,
General Motors had killed its experimental EV1 electric car and set off
a public relations furor. The environmental lobby was deaf to GM's
assertions that the EV1, leased to a limited number of people but not
sold, would never have earned its maker any money. And the greens
accused GM of pulling the plug to show policymakers that such techno
wonders were bad business.
By the time Lutz revisited the issue in 2005, Toyota Motor's (TM) quirky
Prius hybrid had turned the Japanese automaker into a poster boy for the
environmental movement and cast a greenish halo over the entire company.
By contrast, GM, at least in the popular imagination, had tunnel vision;
it was still making gasoline hogs like the Hummer and fighting
congressional efforts to boost fuel economy. GM executives were furious
Toyota was winning green cred despite making its own fuel suckers. But
no one at the meeting wanted to hear about electric cars. "We lost $1
billion on the last one. Do you want to lose $1 billion on the next
one?'" Lutz recalls one executive saying. "It died right there."
Myopia. Fear. Inertia. All had a seat at the table in Detroit that day.
And yet 20 months after the meeting, in January, 2007, Wagoner stood on
a stage at the Detroit auto show and surprised the world with a vow to
start developing a newfangled electric car called the Chevrolet Volt. It
would plug into a regular outlet, leapfrog the competition, and could be
ready in three years.
Why did Wagoner suddenly get religion? After years of avoiding the
future, he finally understood oil prices were not going to return to
earth, global warming was a de facto political reality, and Washington
was serious about imposing tougher fuel economy rules on his industry.
GM would have to live green or die.
Now Wagoner is racing the clock. Not only has he promised to get the
Volt ready by 2010, but he also must transform GM's entire fleet to meet
stringent new fuel economy rules that take effect in 2017. As many as
three-quarters of the company's 50 models may need to be fitted with
hybrid systems that combine an electric motor with a small gasoline
engine. Many other existing models will be shrunk or fitted with some
other kind of fuel-saving technology.
General Motors' green strategy is akin to a moon shot. It will cost
billions to get the Volt ready by 2010 and fill out the fleet with
hybrids, require GM's 22,000 engineers to stretch like never before, and
involve the top-to-bottom transformation of a culture wedded to big cars
and horsepower. Other automakers, of course, must also hew to the new
realities. Most, including GM's two crosstown rivals, Ford and Chrysler,
are rolling out hybrids, too. But the Volt is controversial in
automotive circles because the technology is so new and unproven. And
GM, bleeding cash and losing money in North America, is at a serious
disadvantage compared with well- financed Toyota.
Inside the company, meanwhile, there is debate about how to make cars
planet-friendly and desirable. And there is fear that Wagoner has
handicapped GM by waiting too long. Three years ago, Toyota was the main
threat. Now GM faces competition from Nissan, which announced its own
electric car on May 13, and a bunch of startups, some backed by Silicon
Valley money, angling to sell their own futuristic vehicles.
Does GM's CEO regret not moving faster? You bet he does. Wagoner wishes
he hadn't killed the EV1. And he acknowledges underestimating how the
emergence of consumer societies in China and India would help put a $100
floor under oil prices. Today all of that is beside the point. The
looming question is whether Wagoner can keep his promises. "It's the
biggest challenge we've seen since the start of the industry," he says.
"It affects everything we think about."
"START MAKING SOME CALLS"
Rick Wagoner is not a visionary. Like many Detroit execs he's a finance
guy and inherently cautious. But in 2005 rising fuel prices began
hammering sales of SUVs, long GM's main source of profits. That year, GM
lost $11 billion, and board members began signaling that it was O.K. to
make long-shot bets to get GM out of the ditch. Lead directors George
Fisher and Kent Kresa told Wagoner that, having worked at Motorola (MOT)
and Northrup Grumman (NOC), respectively, they understood that new
technology can take time to pay off.
That summer, Wagoner began asking his team for options. "We talk about
being a technology leader," one executive recalls him saying at a
strategy meeting. "But these days technology means fuel economy." Just
about every fuel saver was put on the table, from ethanol, clean
diesels, and hybrids to electric cars and fuel cells that run on
hydrogen and emit only water vapor. With no consensus, recalls GM-North
American President Troy A. Clarke, Wagoner stood up and said: "We may
not get the calls right. But we have to start making some calls."
In January, 2006, Lutz began pushing the electric car harder. The
75-year-old industry veteran is an unlikely champion for such vehicles.
He owns a collection of classic cars, and his fetish for horsepower is
legendary in Detroit's macho Car Guy culture. He has denied the
existence of global warming—so often, in fact, that Wagoner distanced
himself from Lutz's comments. But Lutz is a pragmatist who believes the
electrification of the car is the only way to preserve American car
culture. "We were agonizing over what to do to counter the tidal wave of
positive PR for Toyota," Lutz says. That month, GM came up with the Volt.
No one knew if something resembling supersize cell-phone batteries would
work in a car. And GM executives confess the Volt was originally
conceived as an image play (its original name: the iCar). But then
Hurricane Katrina sent oil prices soaring. For Wagoner, it was a sign of
how volatile the oil markets were becoming and a harbinger. Even the
much maligned energy policy of the Bush Administration was changing: In
his State of the Union address, the President urged Congress to impose
tougher fuel economy rules. By January of this year, the Volt had become
the centerpiece of GM's green strategy. Douglas Drauch, who runs GM's
advanced battery lab, was surprised to learn that management had moved
up the time line. His team had only three years to get the batteries
ready. "For five years, I came in and played with batteries," Drauch
says. "[Now] we're the ones with bull's-eyes painted on the backs of our
Wagoner finds himself on unfamiliar terrain: looking beyond return on
investment and placing bets on expensive, unproven technologies. But
there is no avoiding the future barreling toward him. On Feb. 4, Wagoner
and his team presented to the board a plan that would allow GM to meet
the tough new fuel standards. Thomas G. Stephens, chief of power train
development, warned directors to expect big costs over the next decade
as the company invests in the Volt and all those new hybrids—as much as
$6,000 per vehicle to get GM's biggest gas hogs to comply with the new
The first order of business was reorganizing GM to ensure that good
ideas hatched in the lab make it to the dealer quickly. It may be hard
to believe, but GM didn't have one group dedicated to hybrids and
electric cars. (Toyota set one up in the mid 1990s.) The team working on
hybrid SUVs that hit the market in January had to get approval from
people in different departments.
Now they talk to Robert A. Kruse, GM's recently named chief of hybrids
and electric cars. An electrical engineer who has worked on such
high-performance cars as the Pontiac Solstice, Kruse, 48, has the
friendly but intense demeanor of a high school coach. The framed Hot Rod
article touting a souped-up version of the Solstice in his office shows
where Kruse's passions lie. But he says GM gets way too little credit
for its green engineering. The company began developing hybrid buses in
2001, and he notes that they save more fuel carting people around cities
like Seattle than a slew of Priuses.
Kruse has real power and a decent budget. To free up resources, GM has
canceled several vehicles, including a new minivan and sedan. And even
though the carmaker is burning through $1 billion in cash a month, the
R&D budget is the biggest in a decade: $8.1 billion in 2007, up from
$6.6 billion the previous year. (On May 13, however, GM said if the
economy doesn't improve, it could be forced to borrow or cut spending.)
The next step is vaulting the technological hurdles. One of Kruse's
first moves was throwing a few million dollars at the battery lab.
Located at GM's sprawling tech center in the working-class Detroit
suburb of Warren, the lab is ground zero for GM's efforts to turn itself
into a green carmaker. Douglas Drauch and his team must figure out how
to fit batteries into a range of hybrid vehicles and create ones that
will propel the Volt 40 miles before a small gasoline engine fires up
and recharges the battery, extending the range to 600 miles. Remember
the laptops that caught fire because their batteries overheated? Imagine
if something like that happened while driving down the highway. And
because GM is racing to catch up, Drauch must cram 10 years' worth of
testing into two.
Fear of setbacks is a constant. This past Valentine's Day, Drauch got a
call at 1:58 a.m. His cherished lithium ion battery was running a
temperature. Heat had spiked in the stainless steel chamber where
computers run tests 24-7 on the 6-ft. tall, 400-lb. test battery. The
temperature spike prompted an automated call to Drauch's house. He
pulled on his clothes and raced to work. False alarm. Someone had left
on a 150-watt light bulb, heating the vault enough to trip the system.
Despite the tight schedule, Kruse says the batteries will be ready by
2010. "We're making history," he says. "Fifty years from now, people
will remember [the] Volt—like they remember a '53 Corvette." There are
plenty of doubters, however. Toyota engineers wonder privately whether
the battery industry, which currently isn't producing many lithium ion
batteries for cars, will be able to make enough by 2010 for GM to sell
the Volt in any real volume. One executive at Tesla, a California
upstart working on an electric sports car, also questions whether the
technology will be able to pass a 100,000-mile warranty test.
Even as the engineers toil to get the science right, Wagoner and Lutz
are pushing to change GM's culture. That's a daunting prospect. Had Dr.
Seuss depicted the company, he might have drawn a skyscraper in which
the CEO hands out an edict from the top floor and a pastel-colored arm
reaches out each window, passing the note 40 floors below to the rank
and file. Wagoner is not given to cheerleading or, as one executive puts
it, "Vince Lombardi-like speeches." But he has been making the rounds to
show he means business. In mid-April, the CEO dropped by GM's test
track, where the Volt team is putting the prototype through its paces.
Wagoner didn't issue a fiery proclamation; he just asked if the
engineers had what they needed. One likened the encounter to "the Pope
Lutz, meanwhile, is trying to make himself heard over the din of company
traditionalists. He says his marketing staff is still showing him
research that consumers want the gas-guzzling horsepower of a V-8
engine, or at least a powerful V-6. In late February, Lutz and his
marketing people met to discuss a new Cadillac sedan due out in 2011.
The marketers, Lutz says, insisted the car needed to be bigger and more
powerful. "They said: That's what those buyers want.' I said: It is now,
but it won't be in 2011.'" Lutz ordered the team to make the car smaller
and demanded 37 miles per gallon. "You people don't understand," Lutz
said. "Everything has changed."
Not all of Lutz's staff agree with his thinking. He wants to shrink cars
like the midsize Cadillac, but some engineers and designers say doing so
will make the cars less appealing to luxury buyers and families. A
better strategy, says one senior product developer, is to keep those
cars roomy while developing better subcompacts to compete with hot
sellers like the Honda (HMC) Fit and Nissan (NSANY) Versa. "Bob thinks
the world is being turned upside-down," says a product developer. "He
wants to shrink everything. That Cadillac is so small he can't even get
out of the back seat." (Lutz is 6 foot 3, but you get the idea.)
Getting the product mix right isn't the only worry weighing on Wagoner
and Lutz. GM also has a long way to go before it can make its new
technology cheaply enough. Toyota has cut the cost of its hybrid system
to nearly $4,000 a car, says consulting firm 2953 Analytics. Lutz
figures GM will be lucky to get the cost down to $10,000 per vehicle by
2010. Translation: GM will have to charge consumers a lot more for
hybrids. "GM, like everyone else, is serious about this because they
have to be," says a Honda executive. "But how many of their hybrids and
how many Volts will they sell? Their technology is very expensive." Then
there is the marketing challenge. Even Ford has been selling a hybrid
SUV for several years. GM, best known for the Hummer, will have a hard
time persuading consumers its cars are green.
On a more prosaic level, there is the execution issue. GM insiders fear
they could repeat the mistakes of the 1980s, when new fuel-economy rules
and a spike in oil prices forced Detroit to switch to cars with smaller
engines. That was a wrenching departure for a company used to big V-8s.
And the fumbling results helped precipitate GM's descent in the quality
rankings, which only recently have begun to recover. "When those '80s
cars stalled out, no one blamed the legislators," says a GM engineer.
"We won't let that happen. But there's a fear that as we're racing with
new technology, it won't work right." It's instructive that when GM
launched two hybrid SUVs in January, it sent dealers just one of each.
GM wanted to make sure there were no quality issues before ramping up
Can Rick Wagoner, after ceding the technology lead to Toyota, redeem his
company? Multibillion-dollar losses have a way of focusing the mind.
Insiders also say Wagoner may retire before he turns 60 five years
hence. In other words, the man has a legacy to consider. "We believe we
can be, and must be, a leader in this transformation of our industry,"
says Wagoner. "It's critical for our future."
Current thinking on the Volt
"We just can't decide whether GM (GM) is a genius or a dolt for
developing the Volt," wrote Wall Street Journal columnist Holman W.
Jenkins Jr. on Apr. 23. The electric car will lose money, he went on to
say. So why build it? His conclusion is that building the Volt at a loss
makes sense, but only if doing so helps GM meet stringent new fuel
economy rules while simultaneously selling more gas hogs than its rivals.