The obvious question out there is whether General Motors is going to go into Chapter 11 bankruptcy. Are you?
I think we’ve got a good plan to get the business turned around. I think as we’ve sat back and looked at where we are this year as things turned south, I think we have pretty clear understanding of the areas that we needed to make significant progress in and I think we’ve documented some very important moves. We are now executing those, and we have a lot of confidence that we’ve also been driving hard on the revenue side.
I think a lot of the products that we have, both recently launched and coming out, are going help us on that side of the agenda. If we execute the plan as we intend to, we’re going to see that things will turn and I hope all of this conversation around Chapter 11 begins to subside.
That seems to be the direction that Delphi, your largest supplier is taking. Saying that Delphi did it, so why won’t everybody do it?
That’s just not the way we view the world. We think we’ve got a big responsibility to our shareholders and so it’s up to us to take the actions we need to, not just to quell those rumors but also to get the business moving in the right direction.
What’s it like personally to be in the eye of such a big storm?
This year has certainly had its challenges, but in a way it’s energizing. Because your time frame shortens up and we’ve shortened up the change of command here earlier this year. I stepped back into running North America and I found that to be a very energizing and focusing experience.
I mean I’d rather not be in the financial position that we’re in, but I would use an analogy from when I played sports growing up. Is it more fun to play in a game that you won by 40 points’ Or to play in one that your backs were against the wall and you really had to use all of your capabilities and assets and your teammates’ capabilities and get the game moving in the right direction’ The latter is clearly more energizing and focusing and more satisfying when you get it done.
Can you sleep at night?
I probably have had less sleep this year than I normally have but when I do, I sleep just fine.
Is the bid by Tracind’s Kirk Kerkorian, your single largest shareholder, to get a seat on your board for his associate Jerome York going to make your job easier or harder?
I don’t expect it’s really going to change my job. We get input from our larger shareholders and I’ve had a chance to talk to Kirk and Jerry from time to time and I like them both. We’re exploring possibilities with them but we haven’t reached a final conclusion. Obviously, Kirk Kerkorian’s track record as an investor is a very good one. And we know Jerry very well and he knows his business very well. So we’ll have to see how it plays out but our relations with them are good.
So what would you say now is the psychology at General Motors’ You were once seen as having an arrogant culture. Is it now a culture of urgency?
Excellent question. I would say, without necessarily validating your comment about the way the culture has been historically viewed, I would say that our people understand this is one of those few defining moments in the history of our enterprise. If you’ve been around 100 years, you have periods that are crystallizing as far as it’s being time for big change. If you do it successfully, then you can build. If you don’t, there are significant negative ramifications. I think our people around the world, and particularly here in the U.S., see this is a time of great change.
I meet face to face with employees. Those are obviously people from around here, or the U.S., and then we do these web chats globally. There is not a single view among the hundreds of thousands of GM employees around the world, but I’ve been inundated with e-mails and input through our websites. On balance, employees have been extremely supportive. There are a few that aren’t as happy, but I’d say on balance they’re very enthused about the direction we’re going.
How are you making people do their jobs differently?
We have historically run the business locally, then nationally, then regionally. Now, it’s becoming a global business. So we need to kind of re-jigger the way we run the enterprise. We made some big moves this year to run product development globally and run manufacturing globally and purchasing globally, and so I get on the web chat and talk to people in India, engineers in India and Europe and Brazil and they’re saying, Gee, we’re changing the way we develop products because we’re leveraging global resources.’ It’s not always easy, but when I ask is this the right thing to do’ Are we moving’ They say yes.’ What we need to do is move faster.
Similarly, I hear a lot from our dealers here in the U.S. in particular, I go out a lot, had a couple big dealer meetings in the last couple weeks, I get cards everyday. These guys are on our side. They say, You’ve got the best products you’ve ever had.’ This one guy said gees, I’ve got, he’s got a couple of different stores, but between Solstice, Impala, DTS, HHR, he said these are the best products GM’s ever made. He’s frustrated that we need to do a better job of getting people who haven’t bought our brands and products over the last 20 years, how do we get them into the showroom. That’s a real challenge, but we are staying focused on product and we continue, and this is unusual in my sense with the Company, we’re raising capital expenditures in ’05 and they’ll stay high in ’06 despite, frankly, negative cash flow. It’s unusual for us to have that discipline but we know we need to do that.
What are the crucial elements of your strategy?
First, we’re focused on product. I invite you to look at the next generation (sport) utility. The improvement is simply stunning. We need to keep that sort of pace going.
Second of all, we obviously have to step back and re-look at how we’re going to market from a sales and marketing strategy. That’s probably the long pole in the tent as far as converting over to this focus on product and value and trying to get off the incentive marketing–which has served us well but has run its course.
The third area is basically a frontal assault on all areas of cost to make sure we are driving to be the absolute most efficient manufacturer in the world. That’s hard because it’s meant significant capacity reductions and it means continuing to trim down workforces in the high cost countries, like the U.S. and Germany.
Fourth is the very challenging issue of addressing health care> We have really a breakthrough agreement with the UAW. It’s historic in its nature, but I would say it’s a very important first step to getting health care costs and particularly the legacy aspect of those under control. It’s a massive competitive disadvantage, which we simply as an enterprise cannot carry and at the same time achieve the objectives that our shareholders have for us and invest in the future of our products. We’ve got a spotlight on that this year. We’ve also made some changes in our salary plan and we’re going to need to keep working on health care. If you carry a $5 or $6 billion bill that your best competitors don’t, that’s a heavy burden.
When you look at your overall situation today, do you attribute it to decisions that were made internally or mostly external forces?
Well, it’s obviously a combination of both. I think it would be disingenuous for us to point to things like U.S. health care policy or trade policy and the exchange rates, things like that, and say they are the whole cause of the problem. The flip side, though, is that anybody who says they are not part of the problem just doesn’t have their feet placed in reality. Like it or not, if we pay $1,500 per car for health care and our cheap global competitors pay $200, that’s a disadvantage. And we don’t have that situation because we’re stupid–it’s been the U.S. government policy for us to pay that bill and we’ve been doing it. We’ve been good corporate citizens. It’s not that in the last 15 minutes, because it’s dragging our financials down, it was a bad idea and all our fault. We accept our responsibilities in getting those costs under control. Our unions understand the issue. I do think it’s disingenuous for outside critics and free marketers to say oh, it’s all the fault of the industry and these guys are incompetent.”
In fact, I could argue over the last 10 years, we’ve been trying to cover the cost of health care and other stuff and we have not spent as much as we need to on product and technology. So we’re doing that now. It’s painful. Have we been as aggressive on shifting our cost footprint out of the high cost countries’ Clearly you have to say, No, we haven’t been.”
This will be the first year that you’ve actually sold more vehicles outside the United States than inside. What are the implications of that?
The implications are good ones and bad ones. It’s good that we’re growing so much outside the U.S.; it’s bad that we are we’re selling less in the U.S. this year than we were last year by a small margin. That disparity is going to continue to grow. I want it to grow because we do well overseas. As the famous bank robber, Willie Sutton , said, You rob banks because that’s where the money is.”
A lot of the unit growth in our business is in China, India, Russian, hopefully Brazil, places like that, East Europe. We are going to play aggressively in those markets and, with an exception or two, are well positioned to do that. It doesn’t mean that we think we need to give up any sales here in the U.S. and we’re going to keep fighting for those because this is still the largest and most profitable market in the world.
When you say that you would like to have a level playing field” from Washington, what do you mean by that?
I would say the issue that have been particularly grating to us have been the long-term policy of allowing the Japanese government to manipulate the yen valuation to provide export advantages. Japanese manufacturers are very competitive on a global basis. They do not need currency manipulation to protect them. That policy has been followed for 20 to 30 years and it continues to be followed. It seems the U.S. government should be cracking the whip on them. Everybody’s running around excited about China. It’s fair that we should have the right kind of exchange rate policy out of China. But it all starts with Japan.
Why are we not hearing a drumbeat out of Washington about the Japanese currency?
I don’t know the answer to that. Start with the global trade balances of the countries. Japan has a massive positive trade balance. This is a fully developed country with the second largest economy in the world, and they have a massive positive trade balance. That’s relatively unusual, and a huge amount of that trade balance is in one area: vehicles.
China has a huge surplus with the U.S. but it is basically in total about balance with the world. I think a case could be made that a lot of the things that are purchased in China by the U.S. have simply slid to China from other countries, maybe from Koreat’ or other developing countries. China is sort of taking their place. So it is interesting to see the specific focus on China. To be honest, I’m not sure I can give you a logical reason.
Is easier to pick on them. China has begun to move on its currency and I think that’s the right thing to do. But what they’re doing is not unusual. Developing markets, including Japan, have ridden a relatively under valued currency as part of their economic development scheme. By any measure, China is still a developing economy. It is not developed by any stretch of the imagination. Japan is none of those things. It is a very developed and very sophisticated economy. I don’t see why they just give Japan a complete free pass. It just doesn’t make any sense.
Would changing the value of the yen have any impact on the transplant factories because, after all, they’re manufacturing in the United States?
Massive. They have huge imported content. Don’t forget that out of total transplant sales, a significant percentage, if not a majority, are exported into the U.S. If you look at their financial results, they acknowledge that a one yen move against the dollar moves their financial results hundreds of millions of dollars.
Are you saying that Washington is focused on the wrong target because Japanese competition is more important?
There are no Chinese automotive sales in the U.S. att this point. I’m not saying there won’t ever be but what degree of factor difference is there between China and Japan’ It’s a million to zero.
Where do you see the China market going?
Booming, booming, growing again this year. It won’t surpass Japan as the second largest national market in the world. But it will next year. You and I may not be in this business long enough, but at some point your successor and one of mine will be talking likely about China being the biggest market in the world. It’s getting on to 6 million units. It’s been growing at an annual rate, a very high annual rate, more like 20 – 30 percent over the last five, six, seven years. It’s going to slow down and probably be more like 10 – 15 percent growth.
What’s interesting is that it’s now shifting from a sprint into a steady gait that it can continue. Rather than this huge growth at the top of the market, which was going on for a while there, and that was driven by the role of state enterprises buying vehicles, now it’s moving to individuals buying cars. They’re just getting in retail financing. We haven’t had that in any substance until this year. So we’re seeing the economic growth and the rise in real incomes in the big cities and those people are beginning to buy cars.
It’s the only place in the world that could be for our industry what the U.S. was from the 1930s through the 1960s or 1970s. That kind of extended growth opportunity is what we see for China. We see domestic Chinese manufacturers coming up and being big players. But unlike in Korea and specifically Japan, we are able to participate in this growth because we were very skillfully sealed out in Japan during the growth period.
Back on the home front, what should be done competitively?
I don’t understand why the U.S. government isn’t more proactive on health care. Regardless of whether one believes in sort of the individual responsibility model or single payer system, there’s a lot of things that can be done to get the cost of health care and the quality of health care moving in the right direction. I think this is an area where strong leadership from the government could play a key role. Information technology is one possibility. Another is leveraging the buying power of the government, which is the biggest purchaser of health care under Medicare and things of that sort. They also could address the catastrophic issue, which is just killing small businessmen. I’ve got a friend who owns a lumberyard in the Pittsburgh area and he says his biggest problem is that health care is going out of control and it turns out somebody who worked for him had cancer and so all of a sudden the rates for the whole company go through the ceiling. The health care cost on a per person basis are really driven very high by the rare incidence of very, very high cost people to insure. If you happen to have one of those it can put you out of business. So this idea of catastrophic insurance on a national pooling basis is one that has a lot of attraction but is going to require some leadership from the government.
The other set of issues are policies that support manufacturing, and research and development. I wouldn’t say necessarily that the U.S. is anti-manufacturing or R&D, but other countries are much more aggressive in supporting it.
Could government action fix GM’s problems?
Those steps don’t fix GM’s ills today. We have things we need to do and we are taking tough medicine. We know we need to get that piece fixed.
People like to say, You either have to do one, say one thing or other. It’s our fault or the government’s fault.” I’m saying hey, there is a lot we need to do and there are certainly things that the government needs to do, not to help General Motors but to help the manufacturing base and the economic base of the U.S.
Some people say that because you can’t fix GM, you’re asking for a government bailout.
Right. That’s for people who don’t like to read more than the first line or the headline of a story. Any thoughtful person who looks at the facts would recognize that it is possible to talk about both. The company needs to improve and we will take the necessary actions. But if one looks at the fact that we’re in a global economy and people can move work in jobs to different environments and the flow of trade is more and more open, that the U.S. government has a responsibility to make sure that we have policies which enable us to compete on that global scale. The ramifications are clear. If we don’t have those policies, individual companies, one by one, will make decisions that will move those jobs elsewhere. Whether it’s high tech jobs or manufacturing jobs or whatever, there are a lot of jobs in the world that don’t have to be located in the country where their products or services are consumed. I think it’s in the U.S. interest to have that dynamic job base.
There’s a debate over whether should we fight the move to service based jobs’ No, that’s not a problem at all. Service-based jobs are excellent, but one shouldn’t forget that the reason that you have so many consultants and retail services and IT services is because they’re servicing manufacturing companies. Let’s not forget the heart that’s driving all this.
As things now stand, can manufacturing, as we know it today, survive in the United States?
I think it can. We have to be highly efficient, we have to have more flexibility in our labor contracts to respond to ups and downs. Maybe certain components like electronic components need to be made in low cost countries, in Asia, but then they can be shipped in more cheaply and assembled into other parts which maybe can be made more efficiently here. So I’d say there’s definitely a role and possibility for a continued strong manufacturing presence in the U.S. but maybe a higher degree of specialization. Shipping a car or an engine is expensive. Shipping electronics isn’t.
So then a new manufacturing model could emerge?
I think it is. The free market is working. We certainly see it in our industry. And so we, for example, buy over 80 percent of the parts that go into the vehicles that we assemble in U.S. and Canada we buy in North America. If you look at the transplants of Toyota or Honda, they buy a significantly lower percentage of the parts in the U.S. So maybe they have the new world model already. So if a Toyota has 40 percent local content and we have 80 percent, you know, is our model better’ I don’t know. Maybe buying more components outside the U.S. in order to be able to assemble competitively priced vehicles is the new model.
The last time we talked, you used the analogy of yourself being a player-coach” from your days in basketball. Recently, some of the members of your team are changing. John Devine is leaving as CFO and Mr. Henderson is coming in. Have you been playing with the right team these past four or five years?
I think our talent level is really quite good and our bench is good, to keep the analogy going on. When I recruited John to be a CFO, he signed a five year contract and I think he’s done an extraordinarily good job. Frankly, the workload is unrelenting and he and I talked and he said, You know, I’m not sure I want to keep up that kind of pace for the amount of time.” He recognized we’re going to be making some tough calls here over the next year or two and felt that it would be best to have a CFO making those calls who going to be around for a long time. We came up with the succession planning approach that we announced earlier this week and I think it’s good. I think it’s the best of both worlds. We get an extremely talented younger executive to assume the important CFO role and then John has agreed to stay on for up to a year to support that transition.
Sometimes, one of your starting players isn’t available and if you have a strong person on the bench and you can bring them on at the right pace you can keep the team up at high level.
What about your design chief Bob Lutz’ When he arrived, he was going to be the design wizard. Has he lived up to the potential?
We’re a long-cycle business and we don’t start every new product every day. We spread them out. So I think Bob’s impact will be seen best as we get out the next couple years. Bob has done a terrific job. He’s really worked hard to streamline our process for developing vehicles. He has globalized our process and integrated teams around the world into a global team, and that’s hard work. It’s coming very well. I’d say as much as anything he’s put a huge focus on the role of design and the important role of perceptual quality, as we call it. I saw this really the other night with the new Cadillac Escalade. The current generation has been a very successful product. But if you pull the two up beside each other, the exterior design of the next generation Escalade is a significant move forward. I mean impressive. You open the door and compare the interiors and it’s like moving generationally. There’s a whole team that did this, but give Bob Lutz some credit for the standards he expects on design and differentiation and quality of execution and particularly the standards he expects in interiors. So I think we are only beginning to see the fruits of his labors and leadership.
General Motors placed a high emphasis on light trucks as opposed to cars for the past 10 years certainly. Did you play the energy issue right do you think?
I don’t think the game’s over yet. I think the developments of the last what, four or five months, have certainly highlighted that it’s risky to build a strategy only around vehicles that are larger and consume relatively more fuel. Even if you don’t make any reasonable profitability on smaller vehicles, you have to play there as a strategy both marketing strategy and to provide a balance to your company’s portfolio. The other thing we see is the critical aspect of making sure in the segments you play you are a fuel economy leader, and in that sense we are quite well positioned, contrary to public views. But we have more vehicles that have high fuel economy, over 30 miles per gallon, than other manufacturers. If you stack up our models against the competition, for example, our large pick-up against Toyota, I mean we are radically better in fuel economy.
Did you miss the boat on hybrids?
We’ve invested heavily in fuel cells and continue to think that that is the eventual solution. We are investing heavily now in hybrids and that plan will continue to play out in 2006 and 2007. It’s a good technology. What we don’t know, and we can’t know really until we flow them out to the market, is how big it’s going to be and what’s the business around it. Now it’s a significant money losing business. Time will tell what’s the right strategy. Ours is going to be to continue to offer a full line of products in each category. We need to do it with technologies that don’t require people to give up performance, size, things of those sort.
What about diesel’ Is that coming?
It has come on somewhat. I think the crystal ball on that isn’t clear. This is a case where because we’re driving product development globally we have an insurance policy, which is we’re going to be developing and we are developing and we have today a lot of great diesels for products that go for sale to Europe, for example, particularly on the car and smaller vehicle side. We’ll continue to do that, and if necessary we’ll be able to use those diesel engines, those technologies in products here. I would say that the challenges in the U.S., other than larger vehicles or work type vehicles, the challenge is diesels are more expensive and the U.S. emission standards for diesels are significantly higher than Europe and they’re going to step up more, and so you get into the issue of the cost of doing that versus hybrids and/or displacement on demand, other technologies available for gas. So I would say this is an area where we expect some growth in diesel demand. Logically it would be more in the larger SUV and pick-up side of the business expanding out there and there’s a chance we could see more in smaller vehicles, although I think U.S. policies are not sort of biased to diesels like you would see in Europe. Plus the cost of diesel fuel in the U.S. vis-Ã¦nbsp;-vis cost of gasoline, big difference. Diesel fuel is getting to be quite expensive in the U.S.
What advice do you have for other CEOs who may find themselves in turnaround or recovery situations?
Three things come to mind. First of all, its critically important to focus on the few key factors that drive the turnaround. So you have to know what those are, and I think most CEOs know what the key factors are. But when times get tough, stay focused on moving those, even if they’re the hard things to move.
Second of all, do what’s right for the business. That sounds obvious, but sometime there are pressures to make big announcements about things that really aren’t necessarily getting at the core problems. So you really need to stay focused and do what’s right for the business short and long term, and that means making tough calls but make the tough calls in the right areas. The third area is the importance of effective communications.
I stress effective because you can over-communicate and you can under- communicate and you can communicate the right messages and the wrong messages, particularly within the company. People are always hungrier for information when times are challenging. The importance of communicating with key constituencies, in our case our dealers and our unions would be good examples, our suppliers, and certainly I’ve communicated a lot more with our board of directors this year. So I think effective communications is real important when you’re going through tough times.
Thanks, we need it. We could also use a dose of luck, which has been a little short this year. But it doesn’t always run against you. So we’ll come back one of these days.