Shifting Gears

General Motors has turned the corner on profitability — aided, in large part, by a government bailout. But to get ahead, it can’t afford to repeat the mistakes of the past.
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Mark Reuss, president of GM North America, and his team have increased U.S. market share in recent months.

The midwinter sun has long since vanished, the glow from the casino across the river vaguely illuminating the ice floes drifting along the Detroit River. The secretaries and most of his senior management team have already headed home — the same place Mark Reuss would like to be on this chilly evening. But he has one more item to complete on his “To-Do” list.

Dialing the phone in his 39th-floor office, Reuss waits as it rings twice before a voice hesitantly answers. It’s a longtime General Motors customer, one of an all-too-rare breed of loyal buyers who could very well become the latest to switch to an import depending on the outcome of the conversation.

But the 47-year-old executive has no intention of letting that happen. It takes Reuss a minute to convince the customer he really is the president of GM North America. Tired but patient, he listens to the tale of woe: a bad transmission, a seemingly disinterested dealer, and a factory rep unwilling to step in. “No problem,” says Reuss. “We’ll fix it,” he says, confirming the customer’s details before hanging up.

“If someone takes the time to write to me personally,” says the man charged with pulling together the giant automaker’s core home market, “I find time to get back to them.”

It’s not the sort of thing buyers have come to expect from a major corporation, certainly not General Motors — which, the youthful executive admits, has earned a reputation for “arrogance.” Yet, this call is anything but unique. Reuss usually has to convince people he’s for real — and so is the “new” GM, which he insists cannot do business as it used to, not if it hopes to take advantage of the $50-billion bailout that kept it from joining so many other once-grand names on the automotive rust heap.

Since emerging from Chapter 11 protection in July 2009, General Motors has gone through some of the biggest changes in its more than 100-year history. As part of its court-ordered restructuring, it abandoned four of its eight North American brands, closed a score of assembly and parts plants, and slashed its workforce. The automaker might have also considered installing a revolving door on the executive suite at its Renaissance Center headquarters. It’s now on its third CEO in just two years (actually the fourth, if you include Rick Wagoner, the GM veteran unceremoniously dumped by the Obama administration during the run-up to bankruptcy).

Most of the management team is new — like Joel Ewanick, the global marketing czar, who made his “bones” as a Hyundai wunderkind. Indeed, many are new to the auto industry entirely. The most notable example is Dan Akerson, the Annapolis grad and longtime telecommunications industry executive who serves as CEO and chairman.

 

Of all the top GM executives who were in place before the financial meltdown, only one remains in a senior position today: Tom Stephens, who was recently appointed chief technical officer. But if the name Reuss triggers a sense of déjà vu, that’s understandable. His father, Lloyd, was himself a GM “lifer,” a commanding and charismatic figure who eventually rose to become the OEM’s second-in-command. But the father was sacrificed, two decades ago, as GM started sliding into an earlier financial crisis. It was a lesson the son has never forgotten — and one he has no intention of repeating.

Because of his father, Mark Reuss grew up in the auto industry. He has the usual educational pedigree one would expect of a senior manager — in this case, an engineering degree from Vanderbilt University and an MBA from Duke. But alongside his degrees, Reuss is likely to also display his racing license and his certification to drive on the legendary Nurburgring racetrack in Germany.

His name began to surface a decade ago as an engineer to watch, taking on GM’s first venture into the emerging crossover segment — SUV-like vehicles using more nimble, fuel-efficient car platforms. Reuss soon was put in charge of advanced vehicle development, where he barely concealed his kid-in-the-corporate-candy-store enthusiasm. But his career took an unusual shift. In February 2008, he was told to grab a passport and head Down Under, where he spent the next 18 months running GM Holden, the company’s large Australian operations.

Significantly, Holden is one of the few manufacturers still producing cars in Australia (another is Toyota). The position offered Reuss the opportunity to run an entire automotive company. It was “a powerful experience,” he says, albeit on a micro scale.

But there were, nonetheless, plenty of macro challenges. For one, GM’s plan to turn Australia into an export base — notably shipping the re-born, rear-drive Pontiac GTO muscle car back to the States — proved disastrous. The project scrubbed, Reuss had to restructure its operations and negotiate concessions from the federal government. “I had to do some pretty tough things there,” Reuss recalls. At the time, he had no idea how formative and timely the experience would prove.

Reuss got his return ticket stamped in July 2009, just as GM was emerging from Chapter 11. But few, Reuss included, might have suspected what would come next when, in December of that year, he was appointed president of North American operations.

Today, General Motors is a very different company from the time when Lloyd Reuss was president in 1990-1992. It is a much more global business, with foreign markets accounting for over two-thirds of GM’s overall unit sales — though a fair bit less of its total revenue. At the dawn of the ’90s, the giant OEM was still the world’s largest automotive producer, and although it had seen its U.S. market share plunge from 50 percent to just over a third, it was still a force to be reckoned with.

 

By the time it came out of Chapter 11, GM’s share was commanding barely 20 percent of the market, with half of its once-familiar brands set to be sold off or shuttered. It was anyone’s guess how much further it might sink. Discouragingly, just before the global financial meltdown in the fall of 2008, archrival Toyota had overtaken the king of the hill, displacing GM as the world’s largest automaker for the first time in three-quarters of a century.

That might have been the best thing to happen, suggests independent auto analyst Dan Gorrell. “Chasing the crown can be deadly,” he argues, forcing a company like GM to make moves that are, in the long run, self-destructive — like maintaining too many assembly plants, then pouring on the incentives to ensure they’re kept busy.

Akerson offered another, sobering perspective during an industry consortium following the 2011 North American International Auto Show in Detroit in January. “We could only break even at mid (economic)-cycle,” he acknowledged, “and make money at the high cycle.” Now, insisted the former naval officer, “We’re able to make money at the low cycle.”

The significance of that cannot be understated. Leading up to its bankruptcy, GM had lost money every year since 2004 — $78 billion, all told — even though that included some of the best years in the industry’s history. It’s no wonder the financial crisis triggered by the failure of Lehman Bros. helped push it into the abyss. What’s equally astounding is the billions in profits GM was able to report last year.

Yet those numbers are just a prelude, promises GM CFO Chris Liddell. Last fall, the former Microsoft CFO — yet another industry outsider — boldly suggested a resurgent GM could see profit margins approach 8 percent, or even 10 percent, during the next cyclical peak, with pre-tax profits of anywhere from $13 billion to $19 billion.

Investors apparently took that forecast seriously. Almost exactly 18 months after the “old” GM dragged itself into New York bankruptcy court, the restructured company staged its much-anticipated initial public offering in mid-November. In the weeks leading up to the IPO, GM had anticipated setting a price tag of somewhere between $23 and $26 per share. It ultimately carried a price of $33 for the common offering, which, when combined with GM’s convertible preferred stock, generated $23.1 billion — far outpacing the previous U.S. IPO record of $19 billion when Visa went public.

 

Most recently, Deutsche Bank projected GM’s share price could soon be pushing into the $50 range, yielding a handsome profit for initial investors. (Analyst Joe Phillippi of AutoTrends Consulting forecasts that, at that price, it may actually yield a profit for the remaining government-held shares of GM.)

To get there, senior management is promising a very different approach to doing business at GM. “We need to keep a lean balance sheet that can sustain the next down cycle,” contends Akerson. That translates into as little debt as possible, clarifies CFO Liddell. But there is a potential downside to such intense scrutiny, Reuss adds. It will take willpower not just to stay lean, but also to avoid managing the business to always deliver the best possible quarterly earnings numbers — even if that means losing some of its newfound discipline.

Nowhere is discipline more necessary than in the U.S. market, especially considering the ever-increasing competition. It was hard enough staring down Ford and Chrysler. Then came the Japanese. Now the Koreans are proving to be a force to be reckoned with.

Yet, the recent ascendancy of Hyundai and Kia actually offers a bit of hope for General Motors. While the larger of the two Korean carmakers set an all-time sales record last year, it wasn’t all that long ago that Hyundai was saddled with a reputation for poor quality and reliability, and for marketing weak, me-too products. It had sunk so deep into the doldrums it was seriously contemplating pulling out of the American market.

Considering Hyundai’s turnaround, few were surprised to see its marketing whiz Ewanick migrate to GM. For his part, the decidedly boyish Ewanick, recently promoted to global marketing czar, insists, “the majority of Americans are ready to root for the underdog.”

Reuss is quick to agree. “We’ve got a lot of work to do on perception,” he says, adding, “You don’t make an ad or two and call it a day. We didn’t go bankrupt in a day.” Ultimately, he insists the only way GM can ever hope to regain its former greatness is by delivering the sort of products that not only meet — but also exceed — those coming from the competition. “Competitive isn’t good enough,” he warns, adding, “We’re not going to put cars in the GM portfolio anymore if they are just competent.” Why, Reuss asks, would a satisfied Honda owner trade for a Chevrolet Cruze that was merely as good as the Civic they already own? To win buyers back, GM must once again set the benchmark, as it did in the days when it offered the biggest fins money could buy.

 

To help ensure new products live up to that bold decree, Reuss created what’s become known around the company’s product development circles as the “knothole process.”

In essence, every new model goes through an inspection gauntlet before it gets the go-ahead for production. That includes a review by “experts in every field of the car,” from design to powertrain to suspension, as well as quality and manufacturing, explains the GM president, who makes as many of the reviews as possible. Fall short of expectations and the project gets the thumbs-down.

To drive home the point, a small crossover, the Chevrolet Orlando, was cut from the North American product plan, Reuss reveals, because it didn’t meet expectations. Meanwhile, the company “delayed the Cruze because, in its first run through the knothole process, it wasn’t something we were proud of,” he says.

The six-month delay might have led to some unflattering headlines, but it ultimately paid off. Reviews since the compact sedan’s launch have been overwhelmingly positive, and many suggest the Cruze is the first domestic model in its segment to give U.S. motorists a reason to buy American again.

Reuss is stepping things up on the home front, as well. Senior management has made it clear in recent months that it is committed to its role as a Detroit corporate citizen. Among the most notable steps was December’s announcement of a $27.1-million commitment by the GM Foundation to improve education and graduation rates in Detroit public schools.

“I want to break the back of the cycle” linking poverty and a lack of quality educational opportunities for urban students, says an animated Reuss, a GM Foundation board member. “I am from here,” he declares. “I’m not going to abandon Detroit.”

While Reuss might prefer to speak, on the record, in his role as GM president, it’s clear his personal commitment doesn’t end there. Nor does his family’s. As a youngster, Reuss often tagged along with his father, who has had a long-running involvement with the multifaceted inner-city program Focus: HOPE. Today, the son is back with his own children, “like his dad, getting them involved in the idea of giving at an early age,” says William Jones, Focus: HOPE’s CEO.

 

Such leadership is critical, says Jones, himself a former Chrysler executive. “Leadership sets the tone — and Mark has clearly set the tone — that influences what people lower down in the corporation follow,” he notes.

GM’s support of the school system isn’t a one-trick pony — at least not if Reuss can influence the carmaker’s philanthropic efforts. “I’m committed, the company is committed,” he says. “We have to change the city. We have to drive a retail and tax base back into the city of Detroit.”

Of course, it will help to ensure that GM itself is a thriving employer and taxpayer. The good news is that after years of decline, after more than a decade of closing plants and slashing its jobs rolls, the automaker is starting to reverse course. It is adding shifts at plants producing its most successful products, and is even rebuilding its engineering base.

In December, the OEM put out the help wanted sign for 1,000 engineers and support staff needed to ramp up its nascent electric vehicle program.

Reuss concedes that the extended-range Chevrolet Volt is “very important to the company.” It certainly didn’t hurt that the Volt garnered the North American Car of the Year trophy in January. In fact, demand is so strong that GM is searching for ways to double production of the Volt at its Poletown plant to 120,000 units next year.

Of course, there are plenty of reasons to be cautious about GM’s future. Competition is getting tougher than ever at home, never mind abroad. Rising fuel prices also risk sales of the automaker’s profitable truck products — again. And the challenges aren’t limited to the U.S. market. A turnaround of the long-troubled European Opel subsidiary still lingers off in the distance.

But the new management team has shown a surprising ability to take advantage of the building blocks they were handed in the wake of the company’s bankruptcy. “You’re going to see some really creative things” going forward, insists Reuss — and a lot fewer letters from angry customers.

 

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