Why GM May Not Be Dead

By Daren Fonda/ Detroit

When General Motors asked Bob Lutz to revive its product line in 2001, the thinking was that if anyone could do it, he was the man. The charismatic, brash ex-Marine fighter pilot had led the development at Chrysler of such hot cars as the Dodge Viper and PT Cruiser, and he wasn't shy about criticizing GM for cranking out the dullest metal in Detroit.

Many Americans have come to share that view, thinking of GM as a rusted, doomed giant that will never recover from decades of bad cars and better foreign competition. President George W. Bush said as much in JanuaryDetroit needs to build "relevant" cars. (Message to GM: Forget about a bailout.) But now that Lutz is looking at things from inside GM, he's telling a different story--and has some evidence to back it up. He likes to reel off the names of new GM models earning solid reviews, notably the Chevy HHR, Buick Lucerne and Saturn Sky. GM has made enormous leaps in quality too, so Lutz bridles at the notion that its vehicles don't stack up. "I can't find words that can be printed in a family publication to express my opinion of that view," he says in his office in downtown Detroit. "Our No. 1 problem is the perception gap."

If perception is reality, here's one Lutz might like: Wall Street is warming to the idea that GM isn't dead yet. After losing $10.6 billion last year, the company reported a first-quarter profit of $445 million, its first quarterly gain since 2004. Much of that was due to accounting optics -- and GM still lost $503 million in its North American auto operations. But in recent weeks the stock has rallied 42% from its 52-week low of $18.33. "There's more optimism than there was a month ago," says analyst Brian Johnson of Bernstein Research, noting "glimmers of hope" in strong sales of GM's new full-size SUVs despite high gas prices. Merrill Lynch and Deutsche Bank have raised their ratings on the stock, citing evidence that GM's cost-cutting plan is on track. "This is a salvageable situation," says David Cole, chairman of the Center for Automotive Research. "It's a crisis, but that's the good and bad news. Absent a crisis, I don't think they'd survive."

Decades of downsizing have turned GM into a retirement home with a car factory in back. Every active U.S. employee supports 3.2 retirees and surviving spouses, amounting to "legacy costs" of about $1,500 per vehicle and wiping out profits on all but the priciest models. Yet that dismal state also makes CEO Rick Wagoner's plan fairly straightforward: shrink GM to a defensible market share. Then wait for the retiree costs to go down, around 2010, as GM vets increasingly qualify for Social Security and Medicare. To bridge itself to 2010, GM is shedding factories and workers, offering buyout packages to its entire North American hourly workforce. It is also raising cash by unloading assets like a 51% stake in its GMAC finance arm, scheduled to be sold to a private equity firm, Cerberus Capital, for $14.1 billion. "We've made big moves in every area," Wagoner told TIME, adding that GM has "no plan, strategy or vision to utilize bankruptcy" to restructure.

GM is only now truly embracing the globalization strategy that Toyota has used for decades: sharing parts and platforms around the world and harmonizing production. Global product development is being centralized under Lutz. Result: expect to see more Asian- and European-designed cars in the U.S., including the next Saturn Ion, widely expected to be a rebadged Opel Astra from GM's European subsidiary. "We won't trim brands," Lutz says, referring to Wall Street calls to euthanize the Pontiac and Buick nameplates, which even Lutz has described as "damaged." Instead GM will pare some of its more than 70 models, many that trail the competition in quality scores and critics' reviews. "We're doing radical surgery," he says.

That includes the workforce, as GM eliminates 30,000 of 125,000 hourly jobs and shuts 12 plants in North America. Wagoner acknowledges the terrible toll on morale. "I'm not saying people haven't sacrificed," he says. He's not saying it's over either, which is why many plant workers are getting out. "The pressure they're putting on people is ungodly," says John Weizman, 45, who is taking a package. Weizman has been shuffled among plants in West Virginia, Ohio and Michigan and figures that, even with his seniority, he will be asked to move again. "It's not worth it for me to stay," he says.

In Saginaw, Mich., where 11 Delphi parts plants spun off by GM in 1999 are for sale, the mood is just as grim. "I worked for GM and Delphi for 34 years, and now they tell me my time is up," says Tom Basner, 52, chairman of United Auto Workers (U.A.W.) Local 699. Delphi filed for bankruptcy last fall, and the way Basner sees it, the company is using Chapter 11 to hire younger, cheaper workers. Delphi plants are hiring, even as they shed veteran employees. Basner has referred one of his sons to Delphi for a job, which is still better than working at the bagel shop. But he knows that such jobs are no longer a ticket to middle-class prosperity. "I'm an optimist," he says of his own chances of finding work. "But I feel betrayed."

Wagoner's job is on the line too. In February GM added a board member, Jerry York, who represents a large and restive shareholder: the Las Vegas real estate mogul Kirk Kerkorian. Since then, Detroit has buzzed that Wagoner demanded a statement of support from the board as rumors swirled that York had asked for his scalp. In a January speech, York complained that GM was not in "crisis mode" and prodded Wagoner to raise cash by selling assets such as Saab and Hummer. Ultimately, the board declared its "great confidence" in Wagoner, and Lutz says the sale of Saab and Hummer is off the table. Wagoner and other top execs nevertheless had to eat pay cuts, and the taste lingers. "I'm not going to characterize the impact of any single board member," he says tersely when asked about York's influence.

For Wagoner, the next 18 months will define his stewardship, if not GM's future. GM, Delphi and the U.A.W. are locked in a complex feud over how to restructure the partsmaker, whose fate is tied to the automaker's. GM has agreed to take back as many as 5,000 Delphi workers, and thousands more are being offered buyouts. But Delphi chief Robert (Steve) Miller has asked the bankruptcy court for permission to void labor contracts, which would allow him to slash wages if the unions won't concede--a move that could spark a strike. He also wants more financial support from GM. Delphi workers, for their part, are furious that the firm wants to cut their wages 40% while company lawyers ask the bankruptcy judge to approve $60 million in bonuses for salaried staff--on top of $36 million already approved for top execs.

"It's not easy stuff to see your way through," Wagoner says. The situation is complicated by the fact that Miller wants better terms for supply contracts with GM, while GM claims it pays too much already. The judge heard arguments over the labor contracts last week and is expected to rule this summer. GM CFO Fritz Henderson said, however, he expects to reach a settlement with Delphi and the U.A.W. within 60 days. GM, meanwhile, is stockpiling parts in case of a strike. "The consequences of our not addressing this effectively are big," says Wagoner. "Nobody wins with a long strike."

Keeping the labor peace is critical for Wagoner since he will soon have bigger issues to face: reaching a deal with the U.A.W. for a master contract to replace the one expiring in September 2007. Under the current contract, GM can close factories but can't lay off workers; they go into a "jobs bank" and collect wages and benefits even if they sit around and play cards. Wall Street estimates the program costs $600 million a year. "Clearly, it's an area of uncompetitiveness," Wagoner says. It's sure to be on the agenda. So too will GM's unhealthy U.S. health-care bill: $5.3 billion last year. Wagoner and the U.A.W. have agreed on $15 billion in long-term savings on retiree health care, but Wagoner needs rank-and-file concessions, and union officials are talking tough. "It was probably the most difficult backward step for us to take in the history of our union," says U.A.W. chief Ron Gettelfinger, referring to the $15 billion "giveback."

Could it be that Wall Street is in overdrive about GM's brightening prospects? Certainly, the case for survival looks a bit stronger. Analysts were encouraged by GM's first-quarter sales of full-size SUVs. Even if gas prices continue killing the segment, the thinking goes, GM could pick up market share. They like York's presence on GM's historically wimpy board. Analysts also figure GM will pay whatever it takes to avoid a Delphi strike. With roughly 6,000 blue-collar workers expected to be left at Delphi, GM "could easily afford to compensate those employees to avoid a labor disruption," notes Prudential Financial analyst Michael Bruynesteyn. And labor bosses know a strike would be mutually assured destruction. Says industry analyst Cole: "Everyone is scared to death."

Lutz's product revival, meanwhile, is yielding some decent cars with interiors that don't feel like Cracker Jack toys. The Saturn Sky won't save the brand but provides much needed zing. Edmunds.com calls it "Maria Sharapova at a tennis match full of middle-aged and badly dressed men." Lutz vows that design will no longer take a backseat to sales and marketing. A forthcoming Cadillac will be a model dreamed up by a design team and pitched to senior execs instead of the other way around. A 2007 Saturn sedan, the Aura, with an exterior designed in Germany, has already won acclaim for stylish looks.

Of course, any number of developments could puncture Wagoner's tires: oil hitting $100 a barrel or a recession in which auto sales tumble. Moody's recently warned of further downgrades of GM's bond ratings, already below investment grade, after GM said it may have to renegotiate terms for $5.6 billion in credit. Should GM's unsecured debt fall below a CCC rating, the GMAC sale would be in jeopardy. "We have to get the GMAC deal closed," Wagoner says when asked what could derail a turnaround.

Skeptics also question GM's books. The Securities and Exchange Commission is investigating the way GM accounts for retirement benefits and transactions between GM and Delphi. GM took a charge of $800 million last year to pay for factory closures, but that may not reflect the final cost of workers' opting for the jobs bank instead of retiring; analyst Bruynesteyn figures GM will have to book another charge for that in 2007. GM's various cost-cutting moves should boost the bottom line, resulting in net income of $1.6 billion next year, Bruynesteyn estimates. Yet the healthier GM's finances appear, the more difficult it will be to persuade workers to accept big wage and benefits cuts in the next contract.

Lutz is right about the perception problem: GM needs Wall Street and the media to stop mentioning the B word. Analysts say GM has lost one percentage point of U.S. market share in the past year -- about 170,000 vehicle sales -- as buyers shun its models, fearing a meltdown. Company execs stress that GM has ample cash. But bankruptcy is a psychological event as much as a financial one; Delphi sought Chapter 11 protection not because it ran out of money but because it ran out of credibility, sparking a run on the bank. "Someday, someone will be brave enough to say these guys aren't gonna die, that this place is on the cusp of a major turnaround," says Lutz. Someday. Maybe.

With reporting by Joseph R. Szczesny/ Detroit