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.
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.”
While all three domestic automakers are fighting lingering perception problems in quality and fuel economy, plus massive competition from all sides, and a huge cost disadvantage (from runaway litigation, over-regulation, and multiple layers of taxation) as a result of being based in the United States, how does GM figure to overcome its past mistakes?
“Yes, we didn’t make great products [for some time], and, yes, there is a perception problem,” Clarke admits. “But in marketing terms, there is awareness, consideration, and favorable opinion. I think the awareness is addressed. People today are aware that General Motors is back in a big way, with much better products … the kinds of products they want to put on their shopping lists. Then you move down to consideration. How do you get at that? With things like the possibility of a Chevrolet Volt, and the two-mode hybrid SUVs … full-size sport utilities that get city fuel economy as good as a four-cylinder Camry. One of the most important things we can do to sell Chevrolet cars is to someday have a Chevrolet Volt. It’ll create this can-do technology halo that says, ‘Wow, these guys went from being not No. 1 to leapfrogging the competition.’ It’s not one thing, but a handful of things that we need to work through.”
Not Just a Journeyman
Troy A. Clarke grew up in Waterford Township and attended Waterford Mott High School, where he ran track and played some football, but he was not a gifted athlete. Like others who gravitated toward engineering, his best subjects were math and science. Unlike most, he loved American history, which remains a lifelong hobby. His first car was a 1970 Pontiac Le Mans Sport, and he once worked as a bowling alley pin-machine mechanic.
His spacious office, around the corner from Wagoner’s, between Lutz’s and Vice Chairman and CFO Fritz Henderson’s on the top floor of GM’s Detroit Renaissance Center headquarters, enjoys a spectacular view of the Detroit River and Windsor. His desk and bookcases are piled high with papers and books, and the walls are adorned with automotive art, including paintings of streamlined land-speed-record cars. Sitting across a large round table, Clarke, 51, makes it a habit to look people directly in the eye. He also likes to lean forward to make a point, then sit back with his arms folded, to watch it sink in. Although he makes decisions that cost millions of dollars and is under tremendous pressure unlike anything GM has faced before, Clarke has kept a low profile and is little-known outside the company; he prefers the anonymity.
It was an accident that he headed for General Motors Institute (GMI) fresh out of high school in 1973. GMI (now the independent Kettering University) was then the corporation’s own best source of high-potential executives and engineers. Clarke’s childhood dream was to be a pilot. He qualified academically for an Air Force ROTC scholarship as a high school junior, but his physical revealed a disqualifying form of color-blindness. The scholarship offer was still good, but not as a pilot. His father, a machine repairman at a Pontiac assembly plant, suggested applying to GMI, which offered a tuition-free program, alternating six weeks of study with six weeks of work in a sponsoring facility. It was a free application, so he did, and that led to a plant tour and an interview at Pontiac.
“My dad had worked in a factory his entire life,” Clarke says, “but I had never been in a factory. And it was nothing like I expected. It was very engaging, a community all its own, and the whole process of how cars are built is one of the miracles of the modern age. I suddenly became very turned on that the auto industry, and manufacturing in particular, might be a neat place to be.”
Then fate tossed a giant lemon in the form of the 1973-74 Arab oil embargo and the resulting fuel shortage and auto sales slump. The Pontiac assembly plant, which had been cranking out hot-selling cars at a rate of 80 an hour on two shifts, suddenly shut down, laid off its workers, and stopped accepting new students. That limited Clarke’s sponsorship choices to one offering: the nearby stamping plant.
“So I went to work there and thought, ‘Hey, this might be an interesting place,’” he recalls. “There was a great group of about 100 engineers who took me under their wing and made sure I learned that part of the business, as did the skilled trades guys on the floor.”
Clarke graduated from GMI in 1978 with a bachelor’s degree in engineering and started as a junior die engineer in the stamping plant. His goal was to be a seventh-level die engineer, traditionally the most knowledgeable position in that field. “I dedicated myself to becoming an expert at how to form fenders and hoods and was perfectly happy doing that. It was, and still is, an extremely rewarding part of the business. That technology still fascinates me.”
He performed well and showed strong potential for more. “After that, I bounced around between engineering and floor assignments. You need production experience, so you go on a second shift as a supervisor, then a general supervisor, then back to engineering, then you end up in production management.” In his “spare” time, he earned a master’s degree in business administration from the University of Michigan, graduating in 1982.
“Then I had the opportunity to become the master mechanic at Pontiac, which is the head of engineering, skilled trades, and all technical elements of what we did … and from there, assistant plant manager.” Next came a job at Grand Rapids stamping. “Grand Rapids, at the time, was the premier stamping plant in all of General Motors, so being recognized as a real good sheet-metal guy, you get to go to Grand Rapids.”
After 3-plus years as assistant plant manager, Clarke was promoted to plant manager of GM’s vehicle assembly and engine complex in Ramos Arizpe, Mexico, then moved back north of the border to Kansas City, as plant manager of Fairfax Assembly. In 1997, he returned to Mexico as head of all manufacturing. Soon after that, GM de Mexico president Gary Cowger was transferred to Europe and Clarke replaced him. In 2001, Clarke came back to Detroit to take on a major new challenge as vice president of labor relations. The following year, he was promoted again to group vice president of labor relations and manufacturing.
Clarke’s time in Mexico and Asia taught him the value of relationships, he says. “You learn that people [of different cultures] really are different. I think it’s very North American to believe that people are similar to us but speak different languages, but that’s not the case from my experience. In the U.S., you can create relationships through transactions and interactions. Over 10 or 12 years, you and I may know each other well and be very fond of each other, but I may have never been to your home or know your wife’s name, how many children you have, or what your hopes and aspirations are.
“That’s possible here and, I think, in northern Europe. It’s impossible in Mexico, and probably most other places in the world. In Mexico, you would never buy a car from someone you don’t know. Working with Mexican dealers and their dealer association, that’s very important, so you spend your time a lot differently. You’re at their homes, or they’re at your home, and you know their families. It was very satisfying to understand that and develop those relationships, and some of my best friendships today are south of the border.
In Asia, Clarke says, there are more language and cultural barriers, and relationships are critically important. “If you view things in terms of negotiations, negotiation takes place in the world of the person with whom you’re trying to create a relationship. It’s best to try to walk in their shoes a bit.”
State of the business
So how would Clarke sum up the state of GM’s North American business today? “The vehicles we’ve launched in the last two years,” he says, “are reflective of this new culture — the way we want to design, develop, and go to market with our vehicles, so I have tremendous confidence that this turnaround is being led by our products and will continue to be.
“Our full-size trucks are industry-leading. The Enclave is basically sold out, the CTS is smoking hot, and excellent anecdotal evidence is starting to come in on our new Malibu. I got an e-mail yesterday from one of our dealers in Ohio … a guy in a Porsche followed a carrier to his dealership because there was a new Malibu on it. He couldn’t wait to get into it and look at it, because his intention was to buy that particular car as quickly as he could. Looking at that, you have to say that the turnaround is working. Are we done? No, we have a lot more to do.”
A huge piece of the cost problem will begin to dissolve as the VEBA Trust provision of the new UAW agreement assumes GM’s hourly worker health-care costs over the next few years and removes that future liability from its financial statements. The eventual savings are estimated at $1,000 per vehicle, most of which GM says will be reinvested in products.
“That gives us a basis to look forward to closing the cost gap between ourselves and foreign competitors,” Clarke says. “One piece at a time, we’re knocking this thing down. I certainly hoped that we would be done turning around by now, but I think we’re in a good position with the right products at the right time. And if we can get a little bit of a tailwind instead of a headwind, you’ll see a multiplier effect on the business results. We’re doing good things — the organization should feel good about that, and I believe wholeheartedly that our best days are ahead.”