The Long & Winding Road

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Photograph By Joe Vaughn

On July 10, 2006, Fortune magazine ran a story, “How Would Ghosn Fix GM?” The longtime world’s largest automaker had posted a (restated) loss of $10.4 billion in 2005, its costs were out of control, its once big-profit truck sales were slumping because of rising fuel costs, its passenger cars were mostly boring and uncompetitive, and its U.S. market share was sliding past 24 percent and counting. Media and analysts were brandishing the dreaded “B” word, calling for CEO Rick Wagoner’s head, and pushing for Renault/Nissan CEO Carlos Ghosn, who had turned around the failing Nissan, to take the reins at GM and save it, as well.

That was barely nine days after Troy Clarke had returned from China to take over GM North America from Wagoner, who had been wearing that hat in addition to his CEO responsibilities since launching a massive turnaround plan the previous April. Among many other measures, the plan globalized product-related operations under strong functional leaders, including Vice Chairman Bob Lutz (Global Product Development) and Group Vice President Gary Cowger (Global Manufacturing), and established four regional presidencies — North America; Europe; Asia Pacific; and Latin America, Africa, and the Middle East. Prior to that, Lutz and Cowger had been running GM North America as chairman and president, respectively.

“What in the world have I gotten myself into?” Clarke thought. Despite the swirling media scrutiny at the time, Clarke accepted the position because he knew from internal reports that the turnaround plan was well under way and showing good results, though the advances were still invisible outside the company. “It’s a plan built on product excellence,” he says. “We needed to enhance our investments in new products, do them faster, improve quality, and lower costs … the hard things that ultimately drive success in this business. The resources were aligned, and it had gained a lot of traction. Rick said, ‘We’d like you to come in, grab the handlebars, and keep steering it forward.’”

What’s more, shortly after the news about Ghosn’s bid went public, GM’s board gave Wagoner a much-needed vote of confidence, and he granted Ghosn a courtesy meeting but made it clear that GM’s situation was under control and there wasn’t much it would gain from a Renault/Nissan alliance. The financials picked up to a $2 billion profit in 2006, Lutz got the product purse strings pried open (“I’d rather invest more money in the products up front than lay it on the hood later,” he said), and the company launched a string of highly praised products, beginning with all-new full-size SUVs and continuing through the Saturn Aura and Chevy Silverado, the 2008 Buick Enclave, and the redesigned Cadillac CTS and Chevy Malibu. Despite a $39-billion third-quarter 2007 write-off, GM’s product offerings were starting to raise eyebrows.

Challenges remain

Still, for all the apparent success — results are still measured by consumer sales, and it’s a tad early to declare victory — GM’s improved cars and trucks are arriving just as the U.S. market is heading south. “Our biggest challenge is that the market has become weaker and continues to become weaker for several reasons,” Clarke says. “We guide ourselves by retail sales — real sales to real people, and as the retail market has [grown] distressed, the mix has shifted away from products that are more profitable for us and also happen to be products that are new in their life cycles, [such as] our full-size utilities. Fortunately, we also have our new crossover utilities.”

Another important aspect of GM’s fledgling turnaround is a drop in rental fleet sales. For years, GM and its two Detroit rivals would build or sell off excess inventory in a bid to maintain market share. But rental sales don’t produce sizeable profits, and can create a supply-and-demand dynamic that erodes residual values. Historically, when the retail market is off, the automakers promoted rental sales. But in recent months, GM has reduced them. It’s tough medicine, but Clarke says it was necessary.

“It was the right thing to do, and we’ve seen the benefits,” he says. “Our residual values have improved and, interestingly enough, despite the fact that we’ve raised prices to the rental companies — that’s how you reduce sales to them — they still want our vehicles. I think that’s a testimony to the caliber of our vehicles today. But it’s been tough for me to get up and tell my folks on a quarterly basis, ‘We’re selling fewer cars at this time this year than we did last year, and part of it is the market, but the other part is that we chose to walk away from some rental fleet sales.’ But I think we’ve done a good job of helping everyone in the company understand why that’s the right thing for the future.”
 

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