The Tragedy of General Motors

The Detroit giant is a weird, scarred combination: a carmaker doing poorly, and an insurance company engulfed by its obligations. It's heading for a wreck -- which is why CEO Rick Wagoner has the toughest job in business.

By Carol Loomis

March 10, 2006

[Continued, page 3]

That's proved by the halting course of events since early last summer, when Wagoner let it be known that GM proposed to unilaterally change its health plan for retirees so as to cut $20 billion off its liabilities. Legally GM may have been within its rights to do this; at least, that's what some court precedents say. The UAW, though, predictably protested, claiming that the benefits were vested and citing precedents of its own. To have sorted out this argument in court would have taken years that GM didn't have. So a compromise was reached: The UAW would hire Lazard to come into GM (at GM's expense) to determine just how bad its financial condition was. Lazard, whose work was led by Jim Millstein, head of its restructuring team, sent in about 20 people and took months to do its work.

GM wasn't given Lazard's report to read. But one executive thinks he has a good idea what it said. He is Steve Girsky, who until last summer was an all-star auto analyst at Morgan Stanley (where he ridiculed GM's incentive programs), and who then made a high-wire leap into working for GM as Wagoner's roving aide-de-camp. Says Girsky: "Usually the union's perception is that management is making things look worse than they are. This time, when Lazard came back to the union, I think it may have said, 'Management is not exaggerating; in fact, things may be worse than it thinks.'"

So the union did a "giveback," agreeing after some deadline-packed weeks to an intricate change in the retiree health benefits that will hurt the retirees moderately but also require the actives (who ratified the deal) to chip in by giving up some cost-of-living raises they were due. GM gets relief of only about $15 billion in its liabilities, not $20 billion. And its expected cash savings of about $1 billion a year will arrive only slowly. A further stickiness is that the agreement is not yet final. Its fairness must be okayed by a judge, who at a hearing scheduled for March can expect to be asked by at least some retirees why in tarnation they didn't have a say in all this.

Beyond any savings that the new plan ultimately delivers, it provides GM with a psychological lift: A union that detests deadlines and mid-contract negotiations stepped up when pressured and gave something back. Doesn't GM's success here suggest that it could perhaps erase its whole retiree health problem by driving ahead with unilateral actions and dragging the union along? No, says Girsky, absolutely not: "If you have to push to that extreme, you'll be building cars with three wheels. At the end of the day, these guys you're dealing with are the ones who build your products."

Wagoner is impatient with people who want GM to blast ahead on the union front, pushing hard to gain cost savings. "Excuse me," he says he asks them, "were you around in '93, '94, '95, '96, '97, and '98 when we took 16 strikes?" (It sounds as if he might know the exact dates of those strikes as well as he knows the birthdays of his three sons.) He quotes the critics further: "Well, you dolts, don't you know how to deal with the union so it doesn't go out on strike?" And Wagoner grits his teeth and answers, "Gee, I thought the assignment was to get competitive." His bottom line about union negotiations: "There's an art to this thing."

Right now, he and GM are working their art at auto-parts maker Delphi (No. 63 on the last FORTUNE 500 list), in whose arcane crisis GM is inextricably--and dangerously--entangled. The distilled story here is that GM split off Delphi in 1999, retaining an incestuous relationship with it and sticking it with GM-sized wages and benefits that exceed those paid by Delphi's competitors. Delphi ultimately floundered under this weight and hired have-gun-will-travel Robert S. "Steve" Miller as CEO. Out of bullets, Miller put the company into bankruptcy last October and quickly started talking about ways to exit with competitive costs. He then called on the UAW to accept lower wages--for example, he wanted to cut pay for skilled workers by 54%, from $27 an hour to $12.50. (These figures do not include benefits.) Later he took that proposal off the table. But the UAW had by then become so infuriated with both the man and the plan that it refused to negotiate with him.

GM, though, was always in this picture, because it and Delphi are virtually joined at the hip. The separation agreement back in 1999 included deals between GM and the union that made GM contingently liable for post-retirement benefits (mainly pensions and health) owed to certain employees if Delphi ever failed to provide them. With Delphi now in the soup, GM is on the hook--though for how many dollars is uncertain, because other Delphi/GM transactions figure in too. At the latest oracular word on Delphi, GM was estimating a total cost between $3.6 billion (an amount indeed taken as a special pretax charge in 2005) and $12 billion, with the most probable figure toward the low end of that range. Whatever the cost, most of the need for cash will hit GM slowly, because it will be liable for the retirement benefits only as they come due.

In the meantime, the bankruptcy court has told Delphi, GM, and the union to come up with a plan by August for getting Delphi out of bankruptcy. "This is three-hand poker," says Wagoner with a small grin, and the stakes for these struggling parties are way beyond Vegas. Delphi wants to emerge fit for competition; GM wants to hold its bailout costs to a minimum and also extract better prices from Delphi; and the union wants the highest pay possible. Talking about the cardholders at this table, Steve Miller allows that he, Wagoner, and the president of the UAW, Ron Gettelfinger, have the three toughest jobs in Detroit. His listener waits for the kicker, and it's surprising. "The job that's the toughest," Miller says, "is Gettelfinger's, because he has to get elected."

That's technically true--there's an election this June--but UAW incumbents seldom lose. Nevertheless, the whole Delphi affair has so angered the UAW that it could at some point haul off and order a strike. That is a true peril for GM. It cannot stand a strike. GM is hugely dependent on Delphi parts, buying well over $10 billion of them a year. Were there a strike of any duration, GM would not be able to move fast enough to line up alternative sources of supply. A strike would be a killer, enough to push it over the bankruptcy cliff.

That would not be good for the union, whose members would be threatened with cuts in wages, pensions, and above all, health benefits. But unions have called strikes before that didn't make sense, and it could happen again.

There are people who assert that GM should just get the suspense over and file for bankruptcy, thereby paring its liabilities to a manageable size and meanwhile continuing to sell its products. When he is asked about this scenario, Bruce Clark, a senior vice president of Moody's and its lead automobile analyst, turns very serious. "Bankruptcy would have significant costs, which any company would want to weigh," he warns. This is not the airlines, he says, where the dollar risk is a plane ticket, worth maybe a few hundred. With car companies, in sharp contrast, you have big-ticket items, $20,000 and more. "And you have buyers," says Clark, "to whom the warranty period is very important and who have a general expectation that service will be available." In other words, a buyer just might avoid any company in bankruptcy. And avoidance is hardly what GM needs; it's already had enough of that.

There is the big question, naturally, of whether some sort of extraordinary intervention might save GM from bankruptcy. Should it care to make the effort, the UAW would have the means: massive givebacks. Does that sound likely? No.

Then there's the U.S. government, whose bailout ability has been proved often. Clearly Washington could at some point decide that a GM bankruptcy was a nightmare it couldn't face and could step in with a massive infusion of money that would buy the company time--to shrink back, perhaps, to a viable size. Beyond that, what is Washington to do? Urge its citizens to pick up a Malibu with their tax refund? Pass national health insurance with the snap of a finger?

Certainly it won't be President Bush pushing the GM cause. He gave American auto companies the back of his hand in January, telling the Wall Street Journal that they needed to both deal with their costs and come up with "relevant" products. That no doubt mainly referred to hybrids, to which GM is a Johnny-come-lately. There's an implied message in what Bush said--"W to GM: Drop Dead." Which it probably will.

There's a note to be added about our old friend "urgency." It turns out that GM has a program, mentioned in last year's proxy statement and still extant, through which it will match up to $5,000 given by any of its 140,000 U.S. employees (and its directors as well) to a college or university. Matching-gift plans, especially big, splendid ones such as that, are admiringly welcomed by many people in the U.S. But when you are a company running on empty--and GM is--does not the continued existence of that program say that somebody never exactly caught on to what a sense of urgency is all about?

That raises a point made by a fellow--you will see why he doesn't want his name mentioned--in the GM dealer organization: "I can't really believe," he says, "that the people who got GM into this mess are going to be the people who can get GM out."

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